14 Places for Young Lawyers to Save
Executive Summary
When people talk about saving money, they assume that the only place to save is a savings account. Savings account can be used for savings, but they are not the only option. When evaluating any account as a place to put savings, it is important to always remember SLY: Safety, Liquidity, and Yield. Savers likely cannot find a place to save their money where each of those criteria are high, so prioritizing these criteria by order of importance is critical. By understanding what an ideal savings account needs, lawyers can better evaluate the best place to save their money.
Saving is more important than investing when you are a young lawyer. It is advantageous to begin investing early in your law career, but if you invest before saving, you risk facing an unexpected expense without any savings to pay for it. The shortfall in savings may force you to sell investments which affects your future net worth.
When you sell investments to pay for current expenses:
It can take a few days before they sell, and the proceeds are available to make the payment
If the price of your investments decline before you can sell, it increases how much you need to sell
You will owe taxes on any growth in the investments
Selling and withdrawing money will affect the compounding growth of your investments
It is typically advisable to save up to a certain amount before investing more than the percentage it takes to earn your maximum employer 401(k) match. Beyond the max employer match, savings should be the primary destination of roughly 15-20% of each paycheck. Lawyers should prioritize saving until establishing an emergency fund of 3 months of fixed expenses. After lawyers have three months of expenses, they can begin dividing their 15-20% savings rate more evenly between investing and saving until they save six months of expenses. After that, lawyers can invest all of the 15-20% of their paychecks.
A lawyer makes $100,000 per year at a firm with a 3% employer match, and this lawyer has no savings at the moment but spends $4,000 a month on expenses. Ideally, their saving plan would contribute 3% to their 401(k) to maximize their employer match. The lawyer intends to save 20% of their income each year. They would transfer 17% of their paychecks to their emergency fund until reaching at least $12,000 in savings. After $12k in savings, they may decide to put 10% towards their emergency fund and 10% towards their investments (including their 3% 401(k) contribution) until reaching a savings goal of $24,000. Then their future paychecks can put 20% (including their 3% 401(k) contribution) towards their investments or saving for other things like buying a home.
Once a lawyer recognizes the importance of savings and determines how much to save, the next logical step is to figure out where to put their savings. The most common place to save money is a savings account, but that is one of 14 places a lawyer can put their savings. Below you will see each savings vehicle and its considerations.
Be SLY with Your Savings
Each option below will appeal to different lawyers in different financial situations. To help you determine which account to invest in, remember to be SLY with your savings. SLY is an acronym to remember the three criteria for a savings account and the priority for these criteria when considering your savings: Safety, Liquidity, and Yield.
Safety: The highest priority for your savings is safety. Your savings are your financial security. If your savings can lose money in the future, your financial security is at risk. While nothing is guaranteed to be safe, guarantees made by the U.S. Government come as close as possible to 100% guaranteed.
If your bank is Federal Deposit Insurance Corporation (FDIC) insured, the U.S. Government insures up to $250,000 per depositor per account ownership category. If you have a $50,000 emergency savings account with an FDIC-insured bank that is robbed or closes before you can withdraw your money, the U.S. Government will ensure you can still withdraw your $50,000. Credit Unions have similar protection through the National Credit Union Administration (NCUA).
Saving your money in accounts that are FDIC or NCUA insured is one of the highest forms of protection you can have for your savings.
Liquidity: The second highest priority for your savings is liquidity. Liquidity is financial jargon for converting something into cash without changing the price. If you only own a $400,000 house and need $10,000 tomorrow for an emergency medical operation, you likely will not be able to sell your home for the price of $400,000 in 24 hours. You may have to wait for the right buyer to offer $400,000. You could probably sell it quickly for $10,000, but that would be a drastic price change. A home is an illiquid investment.
A home is different from a savings account, where you can go to a bank and withdraw $200, and the bank will hand you $200. You do not lose any money in the withdrawal, and you have your cash in seconds.
Liquidity is critical because when unexpected expenses or opportunities arise, you need to access your savings quickly without affecting the amount of savings you have.
Yield: The least important factor for your savings is yield. It is not referring to the yield sign at the nearest intersection. Instead, it is short for interest yield. Interest yield is also financial jargon for the growth your money earns while being saved. Banks and credit unions will pay savers for the amount they deposit. This amount is typically small. In 2020-2021, most savers probably received less than 0.50% interest a year on their savings accounts.
Yield is lowest when your money is safe and liquid. If money is less secure and illiquid, investors demand a higher interest yield to justify the risk. Receiving a low amount of interest on your savings is not a flaw in the system. It is a feature of the system.
With your savings, yield is the least important. You can focus on it for your investments, but you should avoid chasing higher interest rates for your savings at the expense of your safety and liquidity.
Now that you know about SLY, you can confidently evaluate your savings options based on those three criteria.
Common Savings Options
1. Savings/Checking Account
Safety: High, Liquidity: High, Yield: Low
Lawyers can open a savings or checking account at a bank or credit union, even with a low initial deposit. Lawyers should look for savings/checking accounts with minimal or no maintenance fees. These accounts receive less interest than almost any other saving option, but they are highly liquid and have FDIC/NCUA insurance protection.
2. High-Yield Savings Account
Safety: High, Liquidity: High, Yield: Low
A high-yield savings account is commonly available through online banks or online credit unions. Online banks offer higher yields and sometimes lower fees because they do not have the costs of traditional brick-and-mortar banks. A high-yield savings account should still be with an FDIC or NCUA insured institution. High-yield savings accounts can be an option for young lawyers who are comfortable with online banking.
3. Certificates of Deposit (CDs)
Safety: High, Liquidity: Medium, Yield: Medium
Certificates of deposits (CD) allow savers to deposit money for a set amount of time to earn a higher interest rate than high-yield savings or traditional savings accounts offer. CDs are also FDIC or NCUA insured, making them safe investments. A CD can be as short as one month to as long as five years. Typically the longer the CD is for, the higher the interest rate. Lawyers should be aware that CDs are best for savings that lawyers don’t expect to need over that time. Withdrawing money from a CD before the agreed-upon maturity date will result in an early withdrawal penalty. This reduces the liquidity of CDs.
U.S. Government Bonds
Both FDIC and NCUA are government-backed insurers of customers’ deposits up to a specified amount. The U.S. Government also allows savers to buy saving instruments directly from the U.S. Treasury. The payments on government bonds have the backing of the full faith and credit of the U.S. Government. This backing means that the U.S. Government commits to always paying the amounts they owe, making them one of the safest investments available to savers. The interest from U.S. Government bonds is also not taxable by state and local governments.
Savers can purchase these bonds directly from the U.S. Treasury through Treasurydirect.gov.
4. Treasury Bills
Safety: High, Liquidity: High, Yield: Low
Treasury Bills are short-term U.S. Government bonds ranging from a few days to 1 year. They typically offer lower interest rates than U.S. Government bonds with a longer timeframe. Unlike traditional bonds, Treasury Bills (T-Bills) sell at a discount, so the interest rate is implicit in the sale. If you were to buy a T-Bill with a 1% interest rate, you would pay $990 for the T-Bill, and then in the future, the U.S. Government will pay you $1,000. T-Bills are liquid because they can quickly convert into cash through a broker or a bank.
5. Treasury Notes
Safety: High, Liquidity: High, Yield: Medium
Treasury Notes have years until maturity instead of weeks like Treasury Bills. They typically offer higher interest rates than T-Bills. Treasury Notes are for 2, 3, 5, 7, and 10 years. They pay interest every six months until the note matures. At maturity, the saver receives the final interest payment plus the face value of the Treasury Note. The market for Treasuries is one of the most active markets in the world, so these instruments are highly liquid.
6. Treasury Bonds
Safety: High, Liquidity: High, Yield: Medium
Treasury Bonds mature over 20 or 30 years. Like Treasury Notes, Treasury Bonds pay interest semi-annually until the bonds mature. T-Bonds have a long maturity but are still highly liquid since they trade in one of the most active markets in the world.
7. Treasury Inflation-Protected Securities (TIPS)
Safety: High, Liquidity: High, Yield: Low
Treasury Inflation-Protected Securities (TIPS) are government investments that protect savers against inflation. TIPS pay interest twice a year at a fixed interest rate and mature over 5, 10, and 30 years. But unlike the Treasuries above, the redemption amount changes with the inflation rate measured by the Consumer Price Index (CPI). If you buy $1,000 of TIPS with a 2% interest rate, you will receive interest payments twice a year based on the interest rate of 2% and the $1,000 face value. If CPI says that inflation rises 2%, the principal value of the TIPS is now $1,020. So the next year of interest payments will be based on the interest rate of 2% and the $1,020 principal amount. TIPS are not as liquid as the Treasuries above, but because they have the backing of the full faith and credit of the U.S. government, they are still liquid.
8. I-Bonds
Safety: High, Liquidity: Medium, Yield: Medium
I-bonds are another U.S. Government security backed by the full faith and credit of the U.S. Government. I-bonds mature over 30 years, and investors cannot sell I-Bonds for at least one year after purchasing them. This feature makes I-Bonds illiquid for the first year. I-Bonds can not be bought or sold in a market. Instead, only the U.S. Treasury can redeem them. One year after purchase, they are liquid, but savers who redeem their I-bonds within five years will forfeit interest from the previous three months. Therefore, I-Bonds are best for savers who plan to save the bonds for more than five years.
Unlike TIPS, I-Bonds have a variable interest rate based on a fixed principal amount. As stated above, TIPS pays a fixed interest rate based on a variable principal amount. The I-Bond annual interest rate is a fixed rate set when it is purchased and a semiannual inflation rate. Interest on I-Bonds adds to the bond’s value every month rather than being paid to savers. The investor does not receive the added interest until they redeem the bond with the Treasury. If a saver purchases an I-Bond with a 1% fixed rate and the semiannual inflation rate is 4%, then the I-Bond will add monthly interest based on a 5% annual rate until the semiannual inflation rate changes. Over time the I-Bond continues to add interest until the saver redeems the bond in the future. At redemption, the saver receives the value of the bond plus all of the added interest.
Alternative Saving Options
While most savers will decide to place their savings in a savings option like a savings account or high-yield savings account, these are not the only options available to savers. Below are some other options that investors may consider.
9. Money Market Funds
Safety: High, Liquidity: High, Yield: Low
Money market mutual funds are low-risk investments that offer growth similar to T-Bills. The difference between Money Market Funds and T-Bills is that Money Market Funds are not backed by the full faith and credit of the U.S. Government or FDIC/NCUA insurance. Meaning that they can lose money, but it is not likely since the investments are low risk. Savers should look at the history of performance for the fund and the fees for the amount they are planning to deposit before contributing.
10. Money Market Deposit Accounts
Safety: High, Liquidity: High, Yield: Low
Banks and credit unions offer FDIC and NCUA insured money market deposit accounts. These are not the same thing as a money market fund. Money market deposit accounts usually require a minimum balance and limit the number of monthly transactions. Exceeding these transactions or going below the minimum balance can result in penalty fees. These accounts will provide savers with a debit card they can use to withdraw or spend their savings, so it is a liquid savings account. Since the savings are liquid and safe, the interest rates on money market deposit accounts are low. Usually lower than the interest rates of certificates of deposit (CDs).
11. Roth IRA
Safety: Medium, Liquidity: Medium, Yield: Medium
Roth IRAs are traditionally retirement accounts. It allows investors to contribute after-tax money into the account where it is invested and can grow tax-free. Later it can be withdrawn tax-free after meeting certain conditions. But some savers can use the Roth IRA as a savings account too. The Roth IRA allows a saver to take out only contributions tax-free whenever they need to. So savers can place their money in a Roth IRA, invest it in low-risk investments if they intend to use it for savings, and still have the ability to withdraw their contributions. Unlike savings accounts or money market deposit accounts, savers may have to sell their investments before transferring the money to a bank account. Only then can savers spend the proceeds. This process makes the Roth IRA less liquid than other investments. Since Roth IRA contributions have numerous available investments, savers can potentially generate a higher yield than other savings accounts with no tax implications. Also, since a Roth IRA is an investment account, it is not backed by the federal government or FDIC/NCUA insurance. So contributions are not safe from losing money.
Note: Young lawyers may make too much money to contribute to a Roth IRA. A single lawyer with a Modified Adjusted Gross Income (MAGI) over $144,000 in 2022 cannot contribute to a Roth IRA. For married lawyers, a MAGI over $214,000 means you cannot contribute to a Roth IRA. If your annual income is within $20,000-$30,000 of these amounts and you are considering contributing to a Roth IRA, consult with a tax or financial professional before contributing.
12. Cash Management Account (CMA)
Safety: High, Liquidity: High, Yield: Low
You may have uninvested deposits in a cash management account if you have a taxable investment account, also known as a brokerage account. Cash management accounts are not designed for savings, but they can be used as a savings account. One benefit to Cash Management Accounts (CMA) is they may offer FDIC insurance above the typical FDIC insurance limit of $250,000. Some CMA’s will also provide savers with the ability to write checks, pay bills, and transfer money. These features make them highly liquid. A CMA will typically have a higher interest rate than a standard savings/checking account, but it is still not a high-interest rate due to its high safety and liquidity. This money can also be invested in the future once a lawyer saves an adequate amount.
13. Under Your Mattress
Safety: Low, Liquidity: High, Yield: None
Stuffing money under your mattress or hiding in a sock in your closet is not a common savings strategy, but it isn’t always a bad idea to leave some money in your home in case of an emergency. The problem with saving too much money at home is that it leaves your money vulnerable to a disaster like a fire, flood, theft, or other damaging events. It also does not earn any interest. While many savings accounts earn a little interest in today’s low-interest-rate environment, they still receive some interest, which is better than cash at home. The one benefit to keeping money under your mattress is that it can be quickly accessed if you need it. The cons still likely outweigh the benefits when the savings exceed a few hundred dollars.
14. Stablecoins
Safety: Medium, Liquidity: Can be High, Yield: None
Stablecoins are cryptocurrencies that underlie many of the cryptocurrency transactions that take place. These coins aim to maintain a stable price for an asset like a dollar. For dollar-backed stablecoins, savers can exchange one stablecoin for one dollar. The stablecoins with high volume and high market cap can have relatively high liquidity for savers, but it may require more steps than traditional savings accounts to obtain cash. While stablecoins are more stable than other cryptoassets, they do face risks to the safety of deposits. Stablecoins do not have the backing of the full faith and credit of any government or FDIC/NCUA insurance. Stablecoins also exist in wallets that depend on the owner to keep safe. Also, stablecoins rely upon a reserve of assets to support the stablecoin. Reserve assets like the dollar are considered safe, but stablecoins rely on many counterparties. These counterparties include banks holding the dollars and the issuer of the stablecoins to maintain the price security. Reserve risk and counterparty risk make it more likely to lose money than more traditional savings accounts. Finally, because these stablecoins aim to maintain a specific price relative to an asset, savers will not receive interest on their stablecoins unless they use the stablecoins in lending protocols which carry additional risks.
Final Takeaways
Young lawyers have different options when it comes to saving. When evaluating the options, lawyers should compare how each one addresses the three factors of SLY. An ideal savings account will offer the safety of deposits, liquidity, when needed, and yield to grow the savings.
Implementing a savings plan is a critical part of a financial plan for any young lawyer. Savings are the foundation of a strong financial life. There are many places where young lawyers can save, but first, it is important to understand how much to save and how often. The Developing Financial Process offers a savings plan analysis as part of the ongoing financial planning solution. It analyzes a lawyers’ current financial position, future expenses, and future goals to build a savings plan that aims to maximize your financial security without sacrificing your current standard of living. If you are interested in learning more, schedule a free Meet & Confer. This 30-minute meeting is an opportunity to talk with a financial planning professional who works with young lawyers to talk about saving as well as any other financial questions or concerns you might have. Sign up now!
Disclaimer: Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.