Financial PlanningLegal

Financial planning for young lawyers

There is an old joke say that financial planning for attorneys is simple because you are dealing with only three assets – a partnership interest, a retirement plan and a vacation home. It is easy to poke fun at stereotypes. The reality, especially for younger attorneys today, is much different.

Following are just a few issues I’ve noticed affecting young attorneys.

Education debt

The path to financial success for young lawyers actually starts even before entrance to law school. The amount of education debt from undergraduate school plus the law school debt is the largest early indicator of financial status.  It can be a serious obstacle for the first decade of a career. Those who postpone repayment or do not make the payoff an early priority risk feeling dogged for decades with compounding debt and repayment burdens.

Automating the paycheck allocation

The single most important key to financial success for young attorneys is automating the allocation of each paycheck. The same allocation formulas apply to attorneys as everyone else; the only variable is whether or not the attorney chooses to accept the disciple of automated discipline of salary-deducted and direct deposit allocations.

Medical costs

It is not uncommon for a young family for face uninsured medical expenses exceeding $10,000 per year today. In other blog post I calculated that more than a third of my family’s $24,000 annual medical expense was paid either through a Health Savings Account, supplemental insurance or directly out-of-pocket. Health care simple needs to be at the center of financial planning today.  If a Health Savings Account is available, make every effort to maximize the contribution.

Disability income insurance

An attorney faces a singular decision of whether to spend up to 4 percent of total lifetime earning on insurance to protect those earnings. The fact is that some percentage of attorneys will not realize financial success due to an impairment caused by a health or medical problem, including cognitive or mental health issues. When speaking with clients, I phrase it this way: “picture yourself a few years out; would you rather have a $100,000 salary or a $96,000 salary that was insured in the event that you couldn’t come to work. This is a personal decision. Personally, I’m not a fan of disability insurance for self-employed professionals and I would support a client’s decision to skip this insurance. In my experience, young attorneys are almost evenly split on the issue. There is nothing wrong with choosing to be uninsured as long as the severity and scope of the risk is understood. In that case, it makes sense to allocate more toward savings and make sure that emergency funds remain available.

Life insurance

Life insurance is an easy decision for most attorneys. Most attorneys I’ve worked with choose to have at least some amount of permanent life insurance through a top-tier carrier. We notice that attorneys tend to gravitate toward a few large mutual companies, probably because those firms market heavily to the young attorney market. Permanent life insurance policies tend to have inadequate coverage amounts in the event of premature death so a combination of permanent and tem coverage is most common, Attorneys tend to recognize the tax benefits of cash value life insurance more that most other professionals. Coverage can be supplemented with term life insurance through a group or individual plan.

Tax planning

It is relatively easy to reduce income taxes with tax-advantaged investments like real estate and business partnership interests. That doesn’t make these tax-advantaged investments a wise first choice. It makes more sense to approach financial planning in a logical order and address tax strategies when other priorities are covered.

Second opinion

Since the financial service representatives serving most young attorneys tend to be paid as a percentage of assets recruited or some other production-based compensation method, it makes sense to get an unconflicted second opinion. I am pleased to perform a single-purpose engagement as a second opinion on financial planning strategies.

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