Laying a Foundation for Financial Success
Ready or not, the fall of 2006 has arrived! And if you’re among those new associates who have largely avoided managing your personal finances after a frugal life in law school, this may be the perfect time to establish a little fiscal discipline.
Manage Your Money
We’re not exactly talking about the b-word. (Dare we say, budget?). But, it’s worthwhile to at least have some idea where you spend your money. You can start by keeping a diary of the “big” expenditures.
If you want to get serious about tracking where it all goes, there are several inexpensive, easy-to-use, but surprisingly powerful, money management programs available. Set up the categories you want to track, like housing, car, food, etc, and you can produce all sorts of colorful charts that tell you how much you spent in each category.
You might be surprised where your money goes. And if you decide you don’t like what you see, having a record of your spending will give you the opportunity to re-prioritize your spending.
Save and Invest Early
If you’re not already earmarking a portion of your earnings for investment, consider it. Financial advisors call these your “wealth-building” years. It’s simple math—a dollar saved and invested early in your career will grow significantly, thanks to the magic of compounding interest and dividends.
One easy way to save is through contributory retirement plans, such as
401(k)s. Your firm may make matching contributions, but even if it doesn’t, a 401(k) is one of the best investment opportunities you’ll ever have. Talk to a few older associates. They’ll convince you that you can’t afford not to take advantage of this valuable investment vehicle.
If your firm has a 401(k) plan, you should consider setting up your own individual IRA. There are several options that allow you to tailor a plan to specific requirements.
Tend to Your Student Loans
Many law school graduates apply for student loan deferments for the first six months of their employment. In most cases, interest accrues during the deferment, resulting in students owing more on their loan than when they graduated. At current rates, a new associate who opts to defer a $50,000 loan for only six months will add more than $2000 to the loan balance.
If you already have a loan deferment, try to at least make the interest payments on the loan to keep your balance from growing. Even partial interest payments will help.
If you have a large student loan debt, you can also do what many people do with the monthly payment on their home mortgages. After you make your next full payment, send one half of a payment 15 days later and then the remaining half on your regular due date. Continue this for the life of the loan. You will save a considerable amount in interest and pay off your loan early. Review an amortization table to determine just how much you can save. What you see will be very persuasive!
Consult with a Financial Advisor
There is a lot of good financial information available in the press, in books and on the Web. Take advantage of it to broaden your understanding. But before you take any big steps, talk to a professional about your personal situation. Finance, taxes and investments are complex and the rules are constantly changing.