The Three Years and Out Plan

How many times have you heard a new lawyer say that they’re going to work for three years at their current job and then transition into something else? Maybe you’ve even said it yourself. I know I did when I started Biglaw. I figured I’d spend three years making a healthy six figure salary and then would find something else to do.

Importantly, this phrase isn’t only spoken in Biglaw. You’ll hear it from a new assistant district attorney or someone at a non-profit. Some lawyers want to get three solid years of experience before transitioning into a corporate role to make more money. Others plan on sticking with public service but intend to find a job with more manageable hours.

Either way, I bet you’ve had a conversation where someone said: “I’m gonna work for three years and then I’m out.”

So let’s imagine your plan is to quit Biglaw. Perhaps someone forwarded you this article. Maybe I sent it to you in response to a question you asked me. You’re just getting started at a new job or maybe you’ve transitioned into a new role and you’re thinking about doing it for about three years before finding your true “long term” job.

If that’s you, you’re going to want to make the most out of the three years that you can, right? This is particularly true if your goal is to spend three years in a higher paying field with the intent to transition into something with “reasonable” hours and the corresponding “pay cut”.

Making the most out of three years

Before we get into the tactics, there are a few things you should know:

1. Your Career is Long. You may want to leave your job in the next 1-3 years but your overall career will be much longer. Even if you take time off in a transition, you’ll eventually end up doing some kind of paid work in the future. For that reason, you shouldn’t look at the next 1-3 years as a time to accomplish one singular financial goal. Think about your working life holistically and make smart decisions that will play out better in the long run. For example, you may really want to pay off your student loans immediately. If you don’t contribute to retirement accounts, you’ll have a lot of extra cash to throw at the student loans. But what’s the tradeoff? You’ll miss out on great tax savings by skipping over the retirement accounts. You’ll miss out on years of compounding growth invested in the market. All this to pay off your loans an extra 6 months in advance? You may want to get to “freedom” as fast as possible but the reality is that by the time you get to within 6 months of paying off your loans, the shackles have largely been removed anyway. Don’t let the tail wag the dog.
2. You Might Stay More or Less Than 3 Years. John Lennon said, “Life is what happens while you’re busy making other plans.” It rarely happens that you’ll spend exactly three years in a job. You may leave sooner or you might stick around for another couple of years. This makes it tough to draw up a credible three year plan. Instead, I’d write out a complete investment policy statement that looks at your goals by the numbers and not by the time it’s going to take to achieve them. Next, make sure you pay attention to things like taxes and time in the market. Once you’ve come up with an optimized path, then it’s time to just crank through the process. If you stay in your job for 1-2 years, that’s okay. If you stay for 5, that’s okay too. Either way, you’ll be on the most optimal path.
3. Planning 3 Years vs Living 3 Years. It’s ridiculously easy to draw up a plan for three years where you do nothing but eat ramen noodles and bank 90% of your paycheck. I’ve seen a few ambitious 3Ls that plan on eating pizza and playing video games at a shared apartment for 3 years until their debt is paid off. Living that reality is a little tougher. That’s not to say that you can’t go early retirement extreme and live out of a camper but that you shouldn’t set yourself up for failure by piling up expectations. Careers in a lot of legal jobs are marathons, not sprints. If you try to sprint, you may burn out so fast that you can’t make it as many years as you thought. This is especially true if you’re in Biglaw. You need to have the right balance of spending/saving so that it’s sustainable for you.

Tactics: What you need to do in three years

So what is the optimal path? If you’re thinking that you’ll probably do about three years in your current job and then transition to something else, here’s what I would do:

1) Get rid of those student loans

Law school student loans are a pretty big albatross around your neck. In my experience, you usually come out of law school owing next to nothing or you owe well over $100,000. There’s not a whole lot of people in between. If you managed to escape without any loans, then my sincere congratulations! Celebrate the headstart and move on to the next step.

On the other hand, if you owe over $100,000 in student loan debt, you might feel that your options for taking a less stressful job for less money are nonexistent. That’s assuming you’re making a strong salary. If you’re not, you might feel even more trapped into your job.

What’s worse is that the moment you start working – in addition to six figures of student loan debt – suddenly, there’s a million different demands on your finances. Security deposit? Work appropriate clothes? Furniture? Silverware? Yep, those are things competing for your initial dollars. There used to be a saying in law school (I have no idea if people still say it) to the effect of “I can’t afford that (luxury item/gadget) today but it’ll be a first paycheck purchase.” I hate to break it to you. Your first paycheck is already spoken for. As are your next several paychecks.

But once you get those initial expenses out of the way, it’s time to buckle down on student loan payments. Assuming you plan on paying them back, there’s no reason not to refinance your law school student loans (and get some cashback, which will help you reduce your loans even faster). You’ll pay them off much quicker with a lower interest rate and of course pay a lot less interest over the long run.

When I was repaying my student loans, I found it easiest to set up automatic systems so the student loan payments never hit my bank account. Those automatic payments should be your base payments each month and it should be a huge chunk of money. It may not feel like it’s making a dent in the balance but over time it will. The goal is to get the systems going and running in the background so you spend zero time thinking about it.

After that, get excited about any extra money you can throw at the loans. Life is full of unexpected money. Every $100 or $200 payment toward your loans helps more than you think. Did you get a Fitbit as a holiday gift from a senior partner that you don’t need? Sell it on Amazon for $100 and apply it towards your loans (true story).

#2) Yes, you should still save for retirement

Retirement accounts are still important and need to be funded. I made this mistake in my own hurry to pay off my student loans (although to be fair, I didn’t have the luxury of refinancing my law school loans and so was making choices between paying off 7.5% interest loans and funding retirement accounts). Still, in retrospect, I should have been maxing out my 401(k), Roth IRA and HSA (although I didn’t have access to an HDHP then). It may seem counterproductive to fund small retirement accounts but those tax-deferment and tax-free growth opportunities are too good to pass up. The sooner you get to a point in your career that you’re maxing out those accounts, the sooner you’ll see your overall wealth skyrocket.

#3) Forget about a house

You might be thinking about buying a house during your first few years. Since there are mortgages for lawyers where you can get away with putting 0% down and avoiding PMI, it might be tempting to get started on building equity in a house. I’d wait. If you genuinely think you’re going to work at your current job for three years and then transition to something else, now sounds like a pretty bad time to lock yourself into a mortgage payment and specific location. Put those thoughts on hold. Once you pay off your student loans you’ll be able to build up a down payment pretty quickly and you’ll have more information about where you want to live and where you see yourself in the future. Your house is a terrible investment anyway.

#4) Avoid being that guy or girl

Every lawyer knows someone who worked for three years and then transitioned out but still owed $100,000 on their student loans and had no retirement savings. You might think that won’t be you – and I assume they thought it wouldn’t be them either – but unless you actually do the (minimal) work, this stuff doesn’t happen automatically.

Time flies when you’re billing hours and it’s easy to dupe yourself into thinking you’re making great progress when in reality you’re moving slowly.

If you have $150,000 in student loans and want to pay it off in three years, that’s $50,000 a year (plus interest) which is $4,166 a month. If you make $2,000 payments each month, you might feel like that’s a lot of money (it is) but it’s still going to take you 7 years to pay off your student loans.

That’s not to discourage anyone from making $2,000/mo payments toward your student loans. That’s a rockstar move by itself. However, if you want to put yourself on a “three year and out” plan, it needs to hurt.

The three year and out plan

To recap and to keep it concise, here’s what I’d do if I were making over $100,000 a year at a job and wanted a three year and out plan:

• Max out 401(k), Backdoor Roth IRA and HSA ($18,000 + $5,500 + $3,400 = $26,900)
• Refinance my student loans to the lowest possible 5 year variable rate
• Set up a new checking account called “Student Loan Bazooka”
• Decide how much money I need to live each month, being considerate of the fact that I’m in this for the long haul and eating only ramen and never visiting family is not sustainable
• Have that amount deposited into your checking account each month
• Set it up so that “everything else” is sent to the “Student Loan Bazooka” account
• Make automatic monthly payments on the student loans from “Student Loan Bazooka”
• Throw “extra” money throughout the year at the loans, including bonuses, birthday gift money, etc.
• Focus on making sure my job and lifestyle was sustainable, with healthy work boundaries, time with friends, etc. If finances are too tight, adjust your “salary” to pay yourself a bit more and keep testing it.

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 and is always negotiating better student loan refinancing bonuses for readers of the site.