7 Financial Goals for Young Lawyers
Executive Summary
Lawyers are uniquely goal-driven professionals. You likely have many personal and professional goals. But an often neglected goal category is financial goals. It’s not common for people to take time and actually think about all of their goals. Sometimes our goals are more of a feeling or a vague idea of what we want. To help lawyers better define their goals and maybe even inspire them to commit to some new goals, this blog is a list of some great financial goals to consider.
What are some good financial goals for young lawyers?
Lawyers, by nature, are goal-driven. You didn’t get to where you are today without setting goals for yourself. You likely had goals for your LSAT scores, which law school you attended, and passing the bar. These were some major goals just to start your career.
Once you begin working as a lawyer you likely set new goals for yourself. Yet you probably have more goals than just professional goals. We also set personal and financial goals.
If you were asked right now to name all of your goals, could you?
If you are like most high-performing lawyers, you have a lot of goals and maybe you can’t remember all of them right now.
You may also have an idea of some goals you want to have but you have never taken a moment to clearly define these goals.
The best part about goals is that they are always changing but when you do accomplish a goal, it materially improves how you feel about your life.
To help you think of financial goals to set, here is a list of 7 common financial goals that young lawyers have. I hope they help you in defining your goals and maybe the list will even introduce a new goal for you to pursue:
#1 Fully fund an emergency fund
This is the most important financial goal. Just 39% of Americans can cover a $1,000 unexpected expense and 40% of Americans would not be able to pay a $400 unexpected expense. These two statistics are startling.
The future is uncertain but you can be certain that you will have unexpected expenses. Having an adequate emergency fund will help you avoid taking on debt, selling a possession, or just not paying for the unexpected expense. Establish an emergency fund to protect yourself from:
Unexpected expenses
Paying your bills if you lose your job
Emergency financial needs
The rule of thumb is to maintain 3 months of expenses if you and your partner are both working. If you are single or have your finances separate from your partner then you should have 6 months of expenses saved up.
This emergency fund should placed in a savings account or other bank account where the money can be quickly accessed (no more than 24hrs) in an emergency.
#2 Max out your 401(k) and/or IRA
This is a lofty goal for some lawyers but regardless of your income, maxing out these retirement accounts will set you up for future financial security.
The rule of thumb is to save 10-15% of your income for retirement. Both a 401(k) and IRA are investment accounts that can help you accomplish this.
In 2021, you can contribute $19,500 to a 401(k) (not including employer match) and $6,000 for an IRA.
If you are currently only contributing a portion of your contribution limit, here is a trick. Each year when you receive a raise, increase your contribution percentage too. If you received a 3% raise, then increase your contribution percentage by 1%. Your take-home income will still increase by 2% and you’ll be contributing more each year. Keep doing this until you max out.
#3 Reach $100,000 in investment assets as quickly as possible
That seems like a lot to save and it is! Investment assets include your 401(k), IRA, brokerage accounts (traditional investment accounts), and any other retirement accounts. Emergency funds and home values do not count.
This goal has two benefits. The first is it helps you avoid lifestyle creep. Lifestyle creep is when your expenses grow as your income increases. It happens to everyone but if it’s not controlled, it can leave you with so many regular expenses that you will live paycheck to paycheck even with a high-paying lawyer salary.
If you make it a point to get to $100,000 quickly, then you will be saving more as your income grows. This will establish the habit of holding off lifestyle creep, which will make it easier to continue saving well after reaching $100,000.
The other benefit is that it allows you to capitalize on compounding growth. When investments grow, the annual returns compound on themselves. If you have $100,000 in investments at a young age, then the power of compounding will hopefully turn those investments into a much larger amount over your lifetime.
If you already have $100,000 then congrats! Set a goal for an even higher amount: $250,000, $500,000, or even $1 Million.
#4 Pay off law school student loans
Nearly 3 in 4 graduating law students graduate with student loans. Often the loan balance upon graduation is well over $100,000. This is a significant amount of money for anyone to owe. These loans also carry high-interest rates.
Depending on your repayment plan, these loans can take anywhere from 10-25 years to pay off fully. Once you decide which repayment plan to pursue, do your best to stick to the repayment schedule.
Paying off your student loans is an amazing feeling. It provides you more freedom to make career changes, more take-home income that you can save or spend, and it will improve your credit history.
#5 Retire early
Some lawyers see themselves working for the rest of their lives in some capacity. Others want to retire the day they start their first job as a lawyer.
If you want to retire early, your retirement decision will depend upon how much you have in retirement savings. The rule of thumb is that your retirement savings should be large enough that you only need to withdraw 4% of your retirement savings to fund your annual living expenses.
If you spend $100,000 a year to live a life you want to live, then you should aim to have $2.5 Million saved.
I think 3% is a better number because the worst thing that can happen to you is that you run out of retirement savings. It never hurts to save a little more for a better chance of not running out of money.
Once you have this goal in mind, you can begin to see how much you will need to retire. When you compare this amount to the amount you have currently saved, then you will have an idea of when you can retire.
#6 Give to charity
Philanthropy is a great way to give back to your community. Find a charity that has a mission you find important and decide how much to donate a year. You can also donate to more than one charity.
2021 is a great year to give donations because you can deduct these donations on your federal tax return up to $300 if you are single or $600 if you are married from your taxes even if you take the standard deduction. Benefit your community and save on taxes, seems like a no-brainer goal.
Donating money isn’t the only way to give back, many charities also rely on volunteers to operate. Just taking one day out of your year to volunteer can add a lot of value to your life. You’ll also meet other volunteers who share similar values.
Lawyers are unique because they can also offer pro bono legal services to charities they care about. Your firm may even count some or all of these hours towards your billable hour goal.
#7 Make partner
Many law firms are built based on the Cravath system. Meaning you either move up in the firm or you move out. This allows those committed to their firm to quickly advance their careers until they make partner.
For many lawyers, this is the pinnacle of their career. Making partner opens you up to many opportunities and high compensation.
If this is a goal you want to pursue, not only do you need to make career choices that help you stand out from your peers but you also need to prepare financially for the partner buy-in.
The average partner buy-in is over $100,000 and sometimes as large as $500,000. You can buy-in with either money you have saved for this purpose, taking out a loan, or a combination of the two. By saving up for a buy-in, you have the flexibility to choose which is the best way to buy in.
Goals are fundamental to you living the dream life a lawyer deserves to live but it can be challenging to figure out the best way to achieve them. The Developing Financial Process is built specifically to identify the goals you want to achieve and tailor a financial plan that puts you on the path towards success. Schedule a Meet & Confer meeting today to see how together, we will achieve the financial goals that deliver you the dream life you deserve to live.
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.