Financial Planning for AttorneysMay 15, 2023
by Glenn J. Downing, MBA, CFP®
One of our specializations here at CameronDowning is financial planning for attorneys. We love working with lawyers! As a rule, they keep appointments, provide documents as requested, understand paying professional fees (after all, they charge such fees themselves), and really look to us for results – just as their legal clients do with them.
Over the years we’ve noticed sub-groups within the broad category:
- the newly minted JDs
- those considering buying in to a partnership
- seasoned attorneys with high incomes.
The financial planning needs of each group are quite different – but there is one common thread that runs through each of these groups – cash flow issues.
And these issues tend to arise from deferred gratification. We all know what that is – postponement of pleasure or of receiving a benefit to some point in the future when it can be enjoyed even more fully.
The newly minted juris doctor is probably about age 26 and has spent eight years as a poor college student. Now, he or she is out of school, earning a decent buck, and wants to live! Cue the Mercedes or BMW lease, and the Brickell apartment. No more deferred anything! The goal is reached and it is time to live!
We see this theme so some degree throughout our work with the legal eagles. I earned this! I’m a working professional, highly educated, so at this point in life I should have everything I want!
There are always financial constraints.
The bad news here is that there are always financial constraints. Have my readers ever read about Hollywood stars – or lottery winners - who went bankrupt? How does this happen? Because they literally blew through all their money, with the presumption that the income source would never dry up.
Financial planning is always a discipline of allocating finite resources amongst competing priorities. Dinner out tonight at the new one-star restaurant, or an IRA contribution? S-Class lease vs. student loan payoff? When the source of income is limited – as it always is – money must be allocated in a thoughtful way to achieve one’s financial goals.
Along the same lines, another financial issue that faces attorneys who’ve achieved partnership is the uneven nature of profit distributions. Typically, attorneys have a base salary, and then annual partnership distributions, which can be quite large, depending on the success of the partnership that fiscal year. An easy trap for an attorney is to begin to spend that partnership distribution before it is in hand. (Our rule here at CameronDowning is that until the EFT or the wire hits your checking account, the money isn’t yours.) So debt begins to build up, it is paid off when the distribution is received, and the cycle repeats. The financial planning issue here is to get out in front of the cycle, and eschew debt.
Ah, student loans. At this writing the Department of Education has just said that loan repayments will begin August 1st after the 2-year hiatus, which makes budgeting and cash flow management all the more important. Borrowers need to be very careful here, because if the basic interest on the loan isn’t paid during the year, the unpaid interest capitalizes, and the loan balance increases. You don’t care, because in 20 or 25 years it will be forgiven, right? But guess what? The amount forgiven is a taxable event. Take that amount times the next marginal tax bracket, and you now owe a big chunk to the IRS. All you’ve done is swapped one overlord – the student loan people – for another – the IRS.
Lots of tools in the toolbox
If any of these issues hits home with you, please have a look at our financial planning for attorneys here. We’ll begin by analyzing your cash flows, look at your tax situation, and see what insurance you have in place. Maybe you should forgo the benefits of married filing jointly in favor of filing separately, to keep your income-based student loan repayments manageable. Maybe you should take better advantage of the benefits available to you at your firm. And maybe you need to make some hard decisions and lifestyle choices. Deferred gratification continues on throughout life.
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