- Career Counsel
The Lawyer's Guide to Personal Finance: Legal Tender
Ana Vermal is a 28-year-old second-year associate at New York's 550-attorney Proskauer Rose. Vermal was born in Argentina, grew up in Germany and Spain, attended law school at the Sorbonne in Paris, and then earned her LLM at the University of San Diego before joining Proskauer. (No wonder she practices international arbitration.) She chose a Manhattan firm, she says, because as happening world capitals go, "Paris is good, but New York is the best."
Vermal started at Proskauer in January 2001. Like all of the firm's first-years, she earned a salary of $125,000. As a second-year, she rakes in a tidy $135K-before bonus. But here's the catch. Vermal is not what you'd call the next Warren Buffett. On a scale of 1 to 10, she rates her personal-finance acumen "a three." That's where Jungle comes in. To help Vermal-and you-manage money more effectively, we asked the attorney to bare her financial soul, from how much she makes to how much rent she pays to how much (if anything) she saves. Then we asked a team of personal-finance experts to analyze her situation and offer wealth-enhancing advice. On the following pages, an eight-point plan for getting rich.
1. Know where it goes
When she's dealing with a client's money, Vermal accounts for every last penny. But when it comes to keeping track of her own scratch, she says, "I'm disorganized. I never stop to add it up." She knows exactly how much she makes-her salary is her one source of income. But on the expense side, she has only a rough idea of where her money goes.
Having a vague idea of how to spend your money is better than no idea at all, says Ric Edelman, a financial planner and the author of The Truth About Money (HarperCollins). But to truly master your finances:
Track your expenses for six months, says Edelman. Make a dozen or so expense categories-housing, food, clothing, transportation, and so on-and assign every purchase to a category. The more categories you make, the more detailed your picture will be.
When you've gathered half a year's worth of data, total each category, note how much you spend per month, and calculate the proportion of your monthly spending each category represents. Simply looking at how much you shell out every month may lead you to cut back, says Edelman.
Look for specific problem areas (twelve hundred bucks a year on lattes!?). The point isn't to deprive yourself, says Edelman. The point is to make conscious decisions about where to splurge and where to scrimp.
Resources: The Budget Kit: The Common Cents Money Management Workbook (Dearborn Trade Books) is a comprehensive guide to budgeting.
2. Stow it
Vermal has no formal savings plan, but she monitors her accounts, she says, and when she sees they're growing and not shrinking, "I know I'm saving." Her current checking balance is roughly $5,000. Her current savings balance is about $30,000.
It's great that Vermal manages to save informally, says Deena Katz, a CFP whom Worth magazine has called one of the top money pros in the biz. But there are better ways to put away money:
Have your firm's payroll department automatically deposit a portion of every paycheck into a dedicated savings account. "It's called paying yourself first," says Katz. "You'll save before you have a chance to spend."
Keep only enough money in your checking account to cover monthly expenses. Devote the rest to savings.
Keep your savings in a money market account, rather than a simple savings account. In exchange for a minimum investment (typically $1,000 or more), money market accounts offer significantly better interest rates than savings accounts. Consider this: If Vermal were to get an average current money market rate of 1.7 percent on her $30,000 in savings instead of the .75 percent she's getting now, the difference in interest over three years would be $855. That's no king's ransom, but it is a pair of plane tickets to South Beach or a nice new suit.
Your number-one savings goal should be to tuck away three to six months' worth of expenses in case you lose your job or get sick.
Resources: Both banks and brokerage houses offer money market accounts. compare money market account interest rates at Bankrate.com.
3. Debt smart
Are you sitting down? Vermal has no student loans to pay off. "In France, schools are paid for with taxes," she says. What's more, Vermal received a scholarship to get her LLM , she doesn't have car payments ("I take taxis and subways"), and she applied for a credit card a year ago but was turned down because she didn't have adequate credit history. In other words, she has no debt, period.
It's magnifique that Vermal is debt-free, but what if you weren't educated in a socialist society? No worries. There's good news for you, too. The silver lining of the weak economy, says Jeffrey Hanson, the director of debt management at the Access Group Inc., a leading provider of private law-school loans, is that interest rates are at historic lows. Student-loan rates are currently in the 4 percent range. So?
If you have a loan, refinance, or "consolidate," it, says Hanson. Contact your lender for details, but most consolidation plans allow you to convert your student loans into a lower-rate loan and lock in that rate for the lifetime of the loan. Say you're currently paying 8.25 percent on a $20,000 loan over 10 years. All things being equal, dropping to a 4 percent interest rate will save you more than $5,000 over the period of the loan.
What about credit card debt? There's nothing good about that, says Ralph Alvarez, a certified credit counselor with Greenpath Debt Solutions, a nonprofit debt consolidator. Borrowing money for law school is an investment-it pays dividends down the road. Borrowing money for a flat-screen TV doesn't earn you squat. Worse, interest rates on credit cards are typically 13 percent to 15 percent. If you carry a $5,000 balance on a card with a 14 percent rate, you'll be handing Visa or MasterCard about $700 a year. Ouch.
A smart credit card strategy, says Alvarez, is to shop around for a card that offers airline miles or another benefit based on how much you spend, then pay the balance in full every month. You'll be taking advantage of the credit card issuer instead of the other way around.
Resources: Get a Financial Life: Personal Finance in Your Twenties and Thirties (Simon & Schuster) offers information on student loans and other forms of debt. comparison shop for credit cards at Cardweb.com.
4. Stock up
Vermal knows that stocks and bonds tend to yield superior returns to money market and savings accounts, but, she says, "I'm busy, I don't know much about it, and I don't like much risk."
"Consider the risk of not investing," says Karen Altfest, a New York-based financial adviser who counts young lawyers among her clients. Historically, only stocks and bonds outpace inflation. That means you'll be falling behind if you don't invest in securities.
Mutual funds are the best way to get started, Altfest says. Pools of money gathered from groups of investors to purchase securities, mutual funds usually require a minimum investment of $1,000. In return, they offer professional oversight (they're run by experienced managers), low costs (you'll typically pay about 1 percent of your total investment per year), and high liquidity (you can buy and sell easily).
First, identify your goals. Generally speaking, Altfest advises young investors to be aggressive-not too aggressive, but aggressive. (The younger you are, the more years you'll have for the historically long-term upward trend of the market to work its magic.) An ideal mix for young lawyers, says Altfest, might include four different types of funds: those that emphasize small companies (though risky, they have significant growth potential), international companies (they're also somewhat risky, but many investors see them as another major growth source), midsize companies (a nice balance of safety and growth), and bonds (highly safe and typically modest in growth).
To choose specific funds in each category, look for those that meet your objectives and have at least a three-year track record of outperforming comparable funds (be sure to reevaluate your funds against the competition at least once a year).
How often should you invest? A little at a time at regular intervals; "dollar-cost-averaging" helps smooth out market ups and downs. What share of your total assets should you invest in securities? One hundred minus your age is one widely used rule of thumb. Doesn't the stock market stink lately? Four words: Buy low, sell high.
Resources: Morningstar (morningstar.com), the independent mutual fund analysis firm, describes fund objectives and tracks performance relative to competitors using a "stars" system.
5. Buy land
Vermal shares a two-bedroom East Village apartment with her boyfriend (rent: $3,500). For the time being, Vermal prefers the flexibility of renting, but ultimately she'd like to buy an apartment: "Instead of throwing money out the window, I'll be the owner."
Home ownership is indeed a worthy goal, says Deena Katz. The interest on the mortgage is tax-deductible; you accrue equity instead of throwing away money in rent; and you may well be able to sell your home one day for more than you paid for it. Plus, mortgage rates are extremely low right now (around 7 percent for a 30-year fixed-rate program), making borrowing more affordable than it's been in decades. Two essentials to keep in mind:
Don't buy a home unless you're prepared to stay in it for several years. The transaction costs and hassles are substantial.
To buy a home, you'll need a little something called a down payment. Most lenders require 10 percent or 20 percent of the purchase price, although first-time buyers are sometimes allowed to put down less. In other words, start saving now.
Resources: Home Buying for Dummies (John Wiley & Sons) is a comprehensive guide to purchasing property.
6. Plan (way) ahead
Proskauer offers a 401(k) retirement plan, but, again, Vermal says she's too busy and "doesn't know enough about it" to sign up.
Saving for retirement is crucial, says Mark West, a retirement specialist with the Principal Financial Group, which manages retirement savings plans. Suffice to say that if you want to retire and live anywhere near the way you did before you retired, you're going to need-let's see, start with X, multiply by Y, divide by Z-a buttload of money. The only way to get that is to start saving right away.
The best retirement savings tool is a 401(k) plan. Designed to encourage people to save for their own retirement, the plans offer three advantages: Deposits into your 401(k) can be made before taxes are taken out; any interest or dividends you earn from the investments you hold in your 401(k) are not taxed until you retire and withdraw money from the funds; and firms often match employee contributions.
Companies typically give employees the opportunity to sign up several times a year. If you opt in, you'll be asked to choose from among a variety of investments-stocks, bonds, mutual funds, money market accounts. Just as you would in putting together a mutual fund portfolio, identify your goals and select a diverse mix of appropriate investments, then reevaluate your choices regularly.
Given the powerful advantages of 401(k) plans, your goal should be to invest the maximum allowable amount. The catch to these plans, however, is that you can't withdraw from them until you reach retirement age without paying substantial penalties (there are exceptions; see your plan administrator). The bottom line: Put as much as you can into your 401(k), but don't lock up funds you'll need for more immediate purposes, such as buying a home.
Resources: The Wall Street Journal Guide to Planning Your Financial Future: The Easy-to-Read Guide to Retirement (Fireside Books) offers excellent information on retirement planning. Your firm's human resources department can provide materials on your 401(k) plan.
7. Talk to a tax pro
Vermal uses an accountant to prepare her taxes. In her first year at Proskauer, she asked colleagues for the name of a good one, then she called him two weeks before April 15.
Vermal is smart to use a tax professional, says Manhattan-based certified public accountant Joseph Calvo, whose clients include lawyers young and old. A sharp-penciled CPA can save you time and money.
A tax preparer's main goal is to help you find deductions. For instance? Deducting state and city taxes alone could save you thousands. Meals out may be deductible as business expenses. If you work at home, that can lead to still more deductions. Calvo has some advice about law firm bonuses too: "Defer them into the next calendar year. Tax rates will be falling every year for the next five." But don't wait until two weeks before tax time to contact a CPA, says Calvo. Arrange to meet with an accountant right away, and ask what you can do now to save money next April.
Resources: Word of mouth is as good a way as any to find a CPA. Ask a friend, a colleague, or a banker. If you prefer to prepare your own taxes, Quicken.com offers helpful tax-preparation software.
8. Earn more
Vermal doesn't really think of her career in terms of maximizing her earnings. "At a law firm, you basically know what you're going to earn every year until you're up for partner." Even if she wanted to make a lateral move (she doesn't), she says comparable firms "pay pretty much the same." Overall, she says, she knows she makes a good living, and she anticipates earning enough in the future to afford the life she wants.
No one says you should be greedy, but that doesn't mean you can't think about ways to up your income, says Stephen Pollan, a partner at New York's Warshaw Burstein Cohen Schlesinger & Kuh and the author of Die Broke: A Radical Four-Part Financial Plan (Harper Business).
Always be looking to get a raise or a promotion, says Pollan. Do the math: With just 5 percent compounded interest, a $10,000 salary hike this year will be worth $28,000 two decades later.
For sure, earning more can be difficult for lawyers because of lockstep pay systems. But it's not impossible. Make your resumé available to headhunters, and tell them you are looking for a raise. There may well be a firm willing to pay it. If you don't want to change firms, identify and improve the skills that can lead you to a partner's paychecks down the line. Rack up the billable hours. Please the client. Explore how to develop new clients. Consider, too, ways to make money outside of the office. Be a career consultant to law students. Write a novel about associate life in a law office. Lecture on your area of expertise.
Ultimately, money is a reflection of your talents, skills, and ambition. Develop new talents. Learn new skills. Be ambitious. And if you make more money, remember who taught you everything you know.