The first years following law school can be overwhelming and managing your finances can take a backseat to focusing on your career. With five must-know money tips, you can take charge by paying down debt, saving for future goals and preparing for life’s milestone moments.
Pay off and/or refinance debt.
The average law school graduate borrowed $112,776 to finance their degree. Until it’s paid off, that debt and interest add to the total cost — and the time it takes — to become debt free. Many graduates also carry hefty credit card balances and auto or mortgage loans. Not all debt is created equal and adopting smart strategies can reap great rewards.
- First, pay off high-interest debt. Credit cards, for instance, tend to accrue interest at a higher rate than other loans. Eliminating these balances can free monthly cash flow and give you a boost of confidence to tackle other debts.
- Refinance student loans to take advantage of the lowest interest rates available or the right program for you. You can reduce your monthly payments, the time it takes to pay off your loan, or both — a winning combination. Some benefits like government-sponsored deferment or loan forgiveness programs may not be available through refinance programs, but those may also be less important for some people at this point in their career.
- Make lump sum payments. When possible, channel an annual bonus or tax refund toward an outstanding loan balance to expedite the payoff and reduce the total interest paid over time.
By paying down your debt, you may increase your credit score, which lenders use to evaluate your creditworthiness for things like mortgages or small business loans. Paying off debt will also help position you to achieve your financial goals sooner.
Focus on the long haul.
A young attorney has a full financial plate, and it is difficult to predict 10 years into the future, let alone 20 or 40. Even so, large life goals — such as marriage, children, home ownership or a partnership buy-in — require preparation. Articulate your aspirations early, so you can plan and make steady progress. Successful long-term savers have time and compound interest on their side.
A great way to approach long-term goals is to get advice from a team. This may include a personal banker and, if needed, a financial planner or tax attorney who you can go to for guidance on how to plan for the future.
Whatever the long-term goals, don’t neglect saving for retirement. Take advantage of workplace retirement plans to set aside pre-tax dollars. Pay close attention to whether your employers will match employee contributions to a 401(k) or other defined contribution plan. This should be the first place you put your savings dollars to get that additional matching money free. Set aside at least enough to benefit from your employer’s generosity and build contributions over time for faster growth.
Prepare for the unexpected.
Life happens fast. An unexpected job loss or illness are just two events that could shake a solid financial foundation. One effective way to cope is to keep emergency funds on hand.
An emergency fund should cover at least three- to six-months’ worth of expenses and should be kept in a checking, savings or money market account that can be accessed without a penalty. Define what constitutes an emergency for tapping funds to avoid raiding accounts for spontaneous purchases.
Put your savings goals on autopilot.
Many people spend more than they think and therefore struggle to accomplish their financial goals. One way to avoid this is to put your savings goals on autopilot. Set up direct deposits or automatic transfers into savings or investment accounts to ensure saving is a priority. This will help you stay disciplined toward your goals, while giving you confidence to spend the remaining money appropriately without derailing your long-term financial strategy.
Safeguard against risk.
One of the greatest assets young professionals possess is their potential to earn a high income for decades. That’s why many young attorneys choose to participate in wealth-building strategies that can safeguard that asset. For instance, disability insurance protects a worker and his or her family if an accident that impacts earnings capability should occur.
Additionally, a term life insurance policy can help preserve a certain standard of living for a spouse and children if a primary income earner dies. No one wants to contemplate a worst-case scenario, but some foresight and planning helps alleviate stress associated with an unexpected loss and gives you peace of mind to focus on building your career.
In the end, life is like studying for the bar: Those who are dedicated and plan well are likely to come out ahead. Thankfully, just a small investment of time — and some solid financial guidance — can establish a financial strategy that helps achieve major life goals.