Let’s be honest. Law school didn’t teach us a lot about personal finance. We barely covered the law and many corporate lawyers would probably say the skills we learned related mostly to litigation. But then you’re thrust into a career, with a ton of student loan debt, and you realize you have a second job (whether you want to or not) managing your money. Let’s make sure we’re doing it right. Here are some of the top financial mistakes lawyers make:
1. Inadequate savings rate
Lawyers need to have a higher savings rate than the general population. You must save more than 5-10% to be successful.
Why? Because lawyers get a late start in the workplace. A typical college-grad expects to spend 43 years in the workforce. A typical lawyer might spend 35 years working.
Not only do lawyers start saving later in life, but before they can begin saving for retirement they must contend with significant student loan debt.
In other words, if you have student loan debt it will take some time before you reach net worth zero, which puts you even further behind. To catch up, you should be both reducing debt and saving for retirement.
For these reasons, lawyers need to be saving significantly more than 5-10% of their income. How much should be saving? The math is surprisingly simple. You need to save 25 times your desired annual income in retirement. Think you would be fine living off $100,000 a year? You need $2,500,000.
Keep in mind that your spending in retirement will almost certainly be substantially less than your current spending. You won’t be saving for retirement, nor will you be paying for most insurance products (e.g. life, disability, etc).
Also, your taxes are likely to be lower, particularly if you’re working in an expensive city like NYC or San Francisco. Retired people also have a lot of free time, so you won’t be spending money for prepared meals, cleaning services or someone to fold your laundry.
2. Over-entertainment
Lawyers work long and often unpredictable hours and unwind late in the evenings with colleagues and friends. Hight stress jobs have a mentality of “work hard, play hard”. The result is that it’s easy to over-consume entertainment, alcohol and food.
The financial and physical cost of such over-consumption cost be high, but more importantly to you, it’s unnecessary. Unless you’re keeping track, most people will only have a fuzzy idea of the total amount they’re spending on entertainment each month.
If you’re trying to cut back, ask yourself how many times you need to go out each week? Do I need top-shelf alcohol for every drink? Do I need to be spending $80 at a restaurant 2 times a week plus have brunch with friends? What about movies/shows/sporting events? Do I need more entertainment or do I need more sleep? What about my cable bill? If you take some time to audit your entertainment expenses, it’s easy and painless to cut unnecessary expenses from your life.
I’m willing to bet you’re paying for things right now that you don’t use or enjoy.
3. Being unaware of firm benefits
I’m always surprised when I discover a lawyer that isn’t aware of the firm’s entire benefits package. From large firms to small firs, nearly Every employer provides a bonanza of benefits for the taking.
If you’re in Biglaw, the firm will probably pay for meals after a certain hour or taking a car home .
If you’re at a small firm, you may have a high-deductible healthcare plan, which gives you access to the Health Savings Account. You might also be able to participate in taking transit deduction. All you need to do is take some time to understand you firm’s benefits.
Firms often also pay for things like bar membership, attorney registration fees and sometimes travel for conferences. They pay for professional development and continuing legal education. Firms subsidize your mobile phone bill. They even provide you with corporate discounts on your mobile plan (just enter your email and save 15%). Dust off the new hire packet and see what you’re missing.
4. Poor tax management
Financially successful lawyers manage their taxes and use tax-advantaged accounts. They use tax-advantaged accounts before investing in taxable accounts.
For many high-income lawyers, every dollar put into a tax-advantaged account saves around $0.40 in taxes. Because a lawyer’s marginal tax rate is always higher than his effective tax rate, by contributing to retirement accounts he can save his marginal tax rate today and pay his effective tax rate tomorrow in retirement. This tax arbitrage will add thousands of dollars to your savings.
What types of tax-advantaged accounts are available? Start with a 401K. Then learn about Backdoor IRAs. Once those are funded, max out your Stealth IRA (HSA). Then read a book about taxes. Once you have a basic tax understanding, you realize that it’s more important to change your tax behavior throughout the year than it is to focus on taxes on April 15th. Planning your tax strategy for next year will likely save you thousands of dollars.
Keep in mind that you don’t have to learn the entire tax code. All you need to understand is the tax code that’s relevant to you. Luckily, that’s a significantly smaller part of the overall tax code. If you learn only a couple of things a year, but the time you’re five years out of law school you’ll be a tax master.
5. Poor debt management
It’s no secret that many lawyers graduate law school with substantial debt.
Often, poor debt management begins during undergraduate years and compounds during law school. I’ve been there. Law school debt is funny money and it’s easier to spend it than when you incurred your first $1,000 of credit card debt.
For new lawyers, the debt manifests in student loan debt, credit card debt, vacation debt and sometimes mortgage debt. The cumulative interest paid on these debt becomes a major financial drag. The truth: your debt works harder than you. It’s working 24/7 and 365 days a year generating interest that you have to pay back. The sooner you destroy it, the better.
Earlier in your career, you’re likely to be overwhelmed by many competing demands, such that it’s easy to put things on auto-pilot (like your student loans).
Big mistake.
If you’re planning on paying off your student loans (i.e. not pursuing student loan forgiveness through a plan like PSLF or IBR/REPAYE), refinancing your students loans is a no brainer. You’ll save tens of thousands of dollars.
Holding a $150,000 debt at 6.8% a year generates a staggering $10,200 in yearly interest. Cutting that rate to 3.4% will save you $5,100 a year. That’s a hard return to beat for a few hours of work.
I’ve negotiated cashback bonuses with the student loan refinancing companies, so that you can get a bonus and pay off your student loans even quicker.
6. Investing too aggressively or too conservatively
In 2008, hedge fund manager Ted Seides made a $1 million bet with Warren Buffett on whether the S&P index fund would beat a portfolio of hedge funds over the next ten years.
How’s the bet going?
Warren Buffett has consistently advised making monthly investments in a low-cost index fund. On page 20 of his 2013 letter to Berkshrire shareholders, he writes:
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
Because lawyers start careers later in life, there can be pressure to be overly aggressive with investments. This is foolhardy.
The greatest portfolio returns are achieved by matching the market returns through a low-cost index fund. It’s a counterintuitive proposal that the best return is to be as close as possible to average but it’s a proposal that has borne out time and time again.
As Vanguard founder Jack Bogle said, we are collectively the entire market anyway. Splitting the returns between you and the “helpers” just leads to lower returns for you.
This may be hard to accept. Lawyers might think that they are smarter than the general population, so it’s reasonable to think they can beat the market. But, financial professionals themselves cannot beat the market (as evidenced by Warren Buffett’s $1M bet). It’s too risky, too complicated and too much trouble to try and select winning investments. Take a billionaire’s advice. He probably knows what he’s talking about.
Plus, while you’re building wealth, the most important number is your savings rate anyway. Too many people are focused on chasing returns when they barely have any assets anyway.
7. Not knowing how to get rich
It turns out that living below your means is the only way to build wealth. Building wealth has two variables: income and expenses.
Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery. – Wilkins Micawber from David Copperfield.
Most Biglaw associates have a fixed income. Make sure you qualify for the annual bonus, but otherwise, your salary is set and so there is not much you can do to increase income. However, you have great control over your expenses. Focus on increasing your savings rate. Related: See my sample 1st Year Biglaw Associate Budget.
8. Not having a written financial plan
An Investment Policy Statement (IPS) is a statement that defines general investment goals and objectives. It describes the strategies that are used to meet these objectives and contains specific information on subjects such as asset allocation, tax rates and financial goals. Having an IPS provides the foundation for all future investment decisions made by an investor and serves as a guidepost for your financial goals.
Your IPS need not be complicated or lengthy. An IPS can easily be 2-3 pages. If you do not have a written policy, day-to-day events will influence your financial decisions. This leads to chasing short-term performance that will impact your long-term goals.
Your IPS will be a short document answering basic questions like:
- Where are your financial assets located?
- How much is in tax-advantaged accounts versus taxable accounts?
- How much will you be contributing to these accounts?
- What are your short-term and long-term financial goals?
- What asset classes will you use to meet these goals?
- What is your effective tax rate?
- What type of insurance policies do you have and what type of coverage do they provide?
9. Expensive investments
The price you pay for investment advice has a significant impact on your overall wealth.
Many mutual funds charge an expense ratio for investing in their fund. If your fund has an expense ratio of 1%, then that means that for every $10,000 you have invested, the fund will take $100 each year to cover its expenses (regardless of whether the fund makes or loses money during the year).
Rather than debiting this money from your account, the expense ratio is baked into the fund’s annual returns. If your fund returns 4% over the year, the real return was 5% minus the 1% expense ratio.
As you can see, a 1% expense ratio may not sound like much but can be quite expensive. In the above example, a 1% expense ratio represented 20% of your total gains for the year paid over to the fund manager!
10. Assuming you’ll have more money in the future
Lawyer salaries are weird. Biglaw associates are promoted each calendar year automatically and receive a corresponding salary increase. There are no opportunities to negotiate the raises, yet you know in advance your salary for the next year.
It makes it easy to assume that you’ll always be making more money in the future, which allows you to artificially inflate your lifestyle now. It also makes it easy to put off saving.
Yet at the same time many Biglaw associates do not know if they will be employed at a firm within five years. Many lawyers leave during their 3rd or 4th year (my assumption is that the large salary increase from a third to fourth year associate is an attempt by firms to retain associates during those years).
The reality is that outside of law firms there are no guaranties for large salary increases each year. Therefore, it seems much better to assume your salary is fixed and simply bank the raises. This helps you grow into your lifestyle slowly.
After all, making even $100,000 straight out of school is a huge windfall. If you set your salary at the latest biglaw salary scale, you will be able to save a substantial sum of money as your salary increases.
11. Buying a house/apartment
Many Biglaw associates live in high cost of living locations. Therefore, they may be less likely to buy an apartment or home than a doctor living in Kansas. Still, many associates focus on purchasing real estate early in their career. The prevailing notion that “you’re throwing your money away on rent” is prevalent. But it doesn’t always work out well.
It may be easy to make a profit on the sale of a home, but lose money overall. This is because the cost of owning a home is high and often not included in the calculation when someone casually mentions that they “bought a condo for $600,000 and sold it four years later for $700,000”.
Plus, investments tend to go up as well. The person who bought a condo for $300,000 twenty years ago and sold it for $1,200,000 sounds like a genius but probably would have done better in the stock market with index funds.
Also, consider the outcome if you had bought a condo in NYC in 2006 right before the Great Recession. A lot of lawyers lost a ton of money during that time. If you’re considering purchasing a home, make sure to run your numbers through The New York Times Rent vs Buy Calculator.
Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Empower keeping track of his money. He’s also maxing out tax-advantaged accounts like 529 Plans to minimize his taxable income.
Nice article. I agree with the point “Over-Entertainment”, it is true that lawyers spent a stressful life, but they can check unnecessary expenditure like this.
Exactly – it’s so easy to over entertain yourself. That’s not to say that entertainment is bad, but you’ve got to think about the marginal utility of the next entertainment $1 you spend. We all have a certain point where no more entertainment spending is needed and we’re still having a good time.
I think you have this sentence backwards: “Because a lawyer’s marginal tax rate is always higher than his effective tax rate, by contributing to retirement accounts he can save his effective tax rate today and pay his marginal tax rate tomorrow in retirement.”
Should be “…he can save his MARGINAL tax rate today and pay his EFFECTIVE tax rate tomorrow in retirement.”
100% correct. Thanks for catching that and leaving a comment to let me know. I’ve fixed it in the post.
I recently discovered this blog – great first article. Just one thing to point out on retirement accounts and taxes. You save at the marginal rate when you contribute and pay at the marginal rate when you withdraw. Any tax analysis should be done using the marginal rate, not the effective rate. The article below gives a thorough explanation with examples (warning – the article is technical).
https://www.kitces.com/blog/understanding-marginal-tax-rate-vs-effective-tax-rate-and-when-to-use-each/
The benefit of retirement accounts is that you don’t pay tax on interest and dividends each year that you otherwise would in a taxable account.
Thanks Eric and apologies if I’m the source of the confusion with the original typo.
For retirement accounts, you should use the marginal rate when calculating your savings for contribution and you should use the effective rate when calculating your savings for withdrawals.
That seems counter-intuitive doesn’t it? If you save a dollar today by putting it in a retirement account, you save at today’s marginal tax rate. I think everyone will agree that this makes sense. If I’m taxed at a 45% marginal rate, if I reduce my income by $1.00 I will save 45 cents.
On the flip side, when I’m in retirement and withdrawing money from a pre-tax account, it’s true that the last dollar I withdraw from the account will be taxed at my marginal tax rate in retirement. For example, if my marginal tax rate is 25% in retirement and I withdraw an additional $1.00 from a pre-tax account, I will expect to pay 25 cents in taxes.
But what about all of the other dollars I withdrew during retirement? I paid significantly less taxes on the dollars as I filled up the tax bracket buckets. For the first few dollars, I paid no taxes at all (thanks to a standard deduction and a personal exemption). After that, I paid taxes at the 10% and 15% rates before I made it up to the 25% tax bracket.
For that reason, I need to look holistically at my tax burden in retirement to understand the taxes I’m paying, which is why using your effective tax rate in retirement is the right metric.
Let me see if one example will clear this up. Let’s say that your marginal tax rate today is 45%. If I contribute $18,000 to a retirement account today, I’ll save $8,100 in taxes. Let’s further say that in my first year of retirement I have no other income. I withdraw $18,000 from my retirement account. Although that will put me in the 10% tax bracket (my marginal federal income tax rate), I’ll only pay $744 in tax for an effective rate of 4.13%! So by contributing today, I save $8,100 and pay $744 in the future.
Hope that clears it up.
This is not correct. I’m sorry to push on this, but I am a CPA who specializes in helping clients determine whether a Roth (after tax) or Traditional (pre tax) retirement contribution is the correct choice (just want to give you some credentials). Generally we recommend Roth contributions to clients at the beginning of their career who expect to significantly higher income (and thus significantly higher tax rates) in retirement. Under your calculations, it would never make sense to make a Roth contribution, because your effective tax rate at retirement will always be lower than your marginal rate when working (because the tax code is progressive). This is not accurate.
Let’s say in a similar example to one you proposed, that we make $18,000 in taxable income today. Our marginal rate is 10%, so if we save $1,000 now, I save $100 in taxes today. Let’s say when I retire, my taxable income is also $18,000 before retirement distributions (with same marginal rate). If I withdraw an additional $1,000 from my retirement account, I will pay an additional $100 in taxes (marginal rate, NOT effective rate). The savings difference you discuss is because the marginal tax rates are lower in your example because income is lower. This is why if tax rates when contributing are the same as those when distributing, a Roth and Pre-tax contribution give the same result. You can re-do this calculation at any level (e.g. $200,000), and you will get the same result.
Just to further clarify, when you cross tax brackets or are dealing with exemptions and deductions, you WOULD use an effective tax rate, but only the effective rate on the marginal income or deduction, not your effective rate on all income. In your example, because there is no other income at retirement, the effective rate on all income = the effective rate on the marginal income.
I think there’s a serious flaw in your argument. You’re assuming a retirement income of $18,000. Where did that income come from? If you’re like most lawyers, you will have a significantly lower income in retirement than you will during your peak earning years. A lawyer making $400,000 today would need a portfolio of $10,000,000 being withdrawn at 4% to generate that kind of money. If that ends up not being you, well that’s a good problem to have but I wouldn’t plan for that scenario.
In choosing Roth over Traditional, you’re also ignoring the state tax implications. Many lawyers are working in big cities with high state and local taxes (like NYC and SF). They may retire to sunny climates like Florida or Texas with no state income taxes. If that’s you, it’s another strong argument for taking the tax break today since you’ll never pay those city or high state income taxes.
There’s a few more reasons to pick a Roth 401(k) over a Traditional 401(k) but I don’t find any of them convincing. That said, the main challenge is just to get people to max out the accounts.
Related:Revisiting Roth Contributions
My argument was not regarding the merits of a Roth vs Traditional contribution. In fact, I agree that most high earning individuals will be better off making a Traditional contribution because they will have a lower income and thus lower tax rate in retirement (and also possibly because of moving to lower tax states).
I assumed a retirement income of $18,000 to match what you used in a previous response to my comment. I then used the same income of $18,000 while working to show that Traditional and Roth contributions give identical results at retirement if tax rates are the same. There is no inherent tax advantage to the Traditional IRA.
To circle back to my original point, you use the marginal tax rate at retirement and not the effective tax rate to analyze which type of contribution is better. If this is not clear to you, I recommend confirming this with other financial professionals. While this statement may not invalidate your argument that Traditional contributions are preferable for most attorneys, it is not an accurate statement. I think this is a good blog that can really help out its readers. I don’t want you to have an inaccurate statement regarding what is one of the most important financial considerations – retirement account contributions. An attorney with knowledge of taxes would pick up on the mistake regarding marginal vs effective tax rates.
Sorry for the 2nd comment. Just to add another reference to my post, the Bogleheads wiki on Traditional vs Roth (which you reference in other posts) states:
“The main reason to prefer one type of account over the other is the comparison of marginal tax rates. If your marginal tax rate now is higher than your estimated marginal tax rate at retirement, then the traditional account is better; if it is lower, then the Roth account is better. ”
https://www.bogleheads.org/wiki/Traditional_versus_Roth
I still think you’re missing the boat here, although it now sounds like we agree that pre-tax is the right choice for most high earners. If there is a big point of disagreement, maybe we should turn it into a Pro/Con article. I’m sure readers would find it interesting.
The fact is that absent any other income in retirement (you still didn’t answer where that $18,000 came from in your example), your marginal tax rate is 0% on the first dollar you earn. If your first dollar of income is from a pre-tax account, you’ll pay $0 in taxes on it.
As you fill up the tax brackets, that marginal rate will increase since the tax rate is progressive. So yes, if your point is that in thinking about each particular dollar, you should compare marginal rate saved today vs marginal rate paid tomorrow, I agree with you.
But to look at it that way would a massive example of missing the forest for the trees.
What an investor really wants to know is if I save today at my marginal rate, what will be the average tax rate I’ll pay in retirement on the dollars I withdraw (i.e. the effective rate). The tax arbitrage is real, thanks to the need to fill up the other brackets.
Here’s an example of why you use the marginal rate at retirement rather than effective. You have a partner who made $500k a year at her peak. She maxed out her 401k each year and puts some additional amount away in a taxable account. She also gets a pension from the law firm (not sure if big law firms do this like the Big 4 CPA firms do). Between her 401k, taxable account, pension, and social security, she projects that she will have $250k of taxable income when she retires at 62 (Federal marginal rate of 33%, effective of 27%). She’s 57 right now and decides she has enough saved and wants to ease into retirement. She cuts back to part time and has taxable income of $150k a year (Federal marginal rate of 28%, effective of 23%). Her analysis of whether to make Traditional or Roth contributions comes down to comparing the marginal rate at retirement of 33% to her marginal rate now of 28%. Therefore, she chooses to make a Roth contribution. She does not compare her marginal rate of 28% now to her effective rate of 27% at retirement.
The statement that you save at the marginal rate and withdraw at the effective rate may be a useful mental shortcut to most of your readers to emphasize WHY their marginal rate will be lower at retirement (because there are lower tax brackets to fill up) , and thus why they should make Traditional contributions vs Roth. It’s just not technically accurate, and that’s why you won’t see that argument being made on the Bogleheads forum or another technical website.
The simple argument that is used is that you will most likely be in a lower tax bracket at retirement than you are while you are working, because your income will be lower. As long as that is the case, it is better to make a Traditional contribution.
I understand that you are trying to make the argument that Traditional contributions will be better than Roth, which I agree with completely for your readers. However, the “save at the marginal rate, withdraw at the effective rate” argument is an oversimplified (and not technically accurate) way of restating the main consideration in the analysis, which is marginal tax rates now versus marginal tax rates at retirement. From what I see in your article regarding the Traditional vs Roth analysis, you are interested in getting the technical details correct (ex. effectively higher contributions in Roth).
Sorry, didn’t see the Bogleheads link until just now. Thanks for posting it. Clearly we’re both into this stuff since we’re devoting an entire Tuesday morning to the discussion. I hope the readers will find it interesting!
Here’s the quote you posted from the Bogleheads:
“The main reason to prefer one type of account over the other is the comparison of marginal tax rates. If your marginal tax rate now is higher than your estimated marginal tax rate at retirement, then the traditional account is better; if it is lower, then the Roth account is better. ”
On this, we absolutely agree. With respect to the marginal dollar, if your marginal tax rate now is higher than your estimated marginal tax rate at retirement, then the traditional account is better. But if it’s the reverse, go with the Roth.
The problem with this quote out of context is that it doesn’t take into consideration all of the other dollars of retirement income. Those dollars had much lower marginal tax rates as they filled up the buckets.
I’m surprised you didn’t quote some other parts of the article, which on an initial read appear even more damning. Here’s more from the article:
“A common misunderstanding about traditional accounts is “contributions are taken from the top while withdrawals come from the bottom”: in other words, that one saves a marginal rate when contributing but pays only an average rate (starting at 0% for the first dollar withdrawn) when withdrawing.”
Yikes, I hate to disagree with the Bogleheads but this seems to undercut what I’ve been saying through this thread. Luckily, I won’t have to make a counter-argument because immediately after the author wrote the above sentence, he or she says:
“That is true in a limited sense – limited, that is, to the very first traditional contribution one makes. After that, subsequent contributions will be withdrawn on top of the withdrawals due to previous contributions. One must therefore calculate the marginal withdrawal tax rate due to those subsequent contributions.”
Those sentences don’t make a lot of sense. I suggest the Bogleheads clean them up. You shouldn’t say something is a common misunderstanding and then immediately say that the common misunderstanding is in fact true. Plus, the couple of sentences on subsequent contributions don’t really clear anything up and just add to the confusion.
Since you’ve been so kind to reference Kitces and the Bogleheads, I figured I should return the favor. First, we’ll start with The Finance Buff (an important Boglehead himself).
He starts with the standard line:
“If the marginal tax rate is higher now than in retirement, one is better off contributing to a Traditional 401k. If the current marginal tax rate is lower, one is better off contributing to a Roth 401k.”
But then he makes the critical point (emphasis his):
“But that applies only to the marginal dollar, which is the last dollar you can shift between Traditional and Roth 401(k). It is not necessarily the case for the entire contribution or the average dollar.”
And then he repeats the “common misunderstanding” that is in fact true:
“Because the way a Traditional 401(k) works, the dollars they contribute come off from the top, in the highest tax bracket for their income. After they retire, the dollars they receive from their Traditional 401(k) pour into an empty or shallow bucket.”
Concluding:
“Even if we assume their marginal tax bracket in retirement will be higher due to tax increases, a large portion of the 401(k) withdrawal may still be taxed at a lower rate than what it was when they contributed the money.”
https://thefinancebuff.com/case-against-roth-401k.html
Next, we’ll look at Jim Dahle, who wrote the chapter on retirement accounts in the Bogleheads book.
He says:
“The most important consideration in the Roth vs Traditional debate is your tax rate and how it will change when you retire. Most importantly, remember that your contributions are made at your MARGINAL tax rate (i.e. the rate at which the last dollar you made is taxed) but withdrawals may be taken at much lower rates.”
He then gives examples of those withdrawals being taxed at lower rates as the fill up the buckets.
And concludes (emphasis mine):
“Obviously, if you are saving taxes at 33% when you contribute money, and paying taxes at 33% when you withdraw money, then it doesn’t matter which account you use. But thanks to the fact that not only are you likely to have a lower marginal rate in retirement, but also the fact that you contribute at your marginal rate and withdraw at your effective tax rate, most doctors in their peak earning years are going to be better off deferring taxes whenever possible.”
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
Looks like we posted at the same time. Thank you for the very detailed and thoughtful comment. It seems we are mostly on the same page. The difference is mostly with regards to precision – see my last comment.
This is really very useful article for the lawyers & law students. 100% true. amazing article. Thanks for sharing.
Great article and very well explained. I believe in professionals so this is a very useful article for everyone. Many thanks for your share.
Care to explain why you think an expensive professional can do better than an index fund?
Dead on, and would also emphasize that investment advisors themselves often charge percentages for managing money, in addition to the mutual fund fees (which they also derive income from). Lawyers and other professionals often fall into these high-cost investments because they don’t want to spend time on basic investing, when they may well be far better off with a few index funds.
I’ll add one more thing to your list: lawyers ignore their student loans and pay the minimums. Or they pay a small amount, rather than taking the guaranteed return (of 6-9% in most cases) by repaying their loans quickly. It also allows more career freedom.
They will definitely be far better off with a few index funds rather than those high-cost investments. For a lot of lawyers though, I just don’t think they’re aware of how much they are paying for the financial advice. Once they understand, most immediately want to move away from the high fees.
Good point on paying the minimum on your student loans. You know what kind of people don’t have student loan balances? Rich people.
Another mistake I see people making is deferring loans by continuing with higher education.
Yes, your loans can be deferred while you’re working on a graduate or doctorate degree, but they are still incurring interest, and you’re probably taking out new loans for the higher degree, which just adds to your overall debt.
So not worth it unless you have a very specific career plan that requires a higher degree. This post is very much helpful and a lot of students didn’t know where they are getting themselves into and then regret it afterwards.
Hopefully more students would be able to reach this post for them to be reminded. Thank you for sharing this list!
Great article. But I’m curious: “Then read a book about taxes.” Which ones do you recommend?
(I see that your “Books” page recommends J.K. Lasser’s “Your Income Tax,” but I wonder if you have something different in mind here.)
The problem with any book about taxes is that it’s going to be out-of-date thanks to the recent changes to the tax code. That said, there’s still some that are worth reading:
The Overtaxed Investor by Phil Demuth.
https://www.biglawinvestor.com/the-overtaxed-investor/
Taxes Made Simple by Mike Piper
https://www.amazon.com/Taxes-Made-Simple-Income-Explained/dp/0981454216/ref=sr_1_1?ie=UTF8&qid=1517964767&sr=8-1&keywords=taxes+made+simple
J.K. Lasser’s is a great companion guide as you do your own taxes.
Great. Thanks very much, for both the response specifically and the blog generally.
Being a professional lawyer myself, the article was such a truth mirror. I mostly agree on the point “Not Having a Written Financial Plan” as I never had one.
Thanks for putting it up here 🙂