10 Things We Wish We Knew About Money As Junior Associates
'Do not miss your chance to blow, this opportunity comes once in a lifetime'
When we started out in BigLaw 9 years ago, we had a very rudimentary understanding of finances—and that’s putting it mildly. The idea that you can earn BigLaw-sized paychecks and yet still be on a path to poverty simply didn’t register. We thought ourselves wealthy when we were in fact living paycheck to paycheck. We thought ourselves financially successful when we could afford luxury apartments and vacations, when in fact all we were doing was setting ourselves up for a life of endless stress to maintain a precarious social status. Like so many others in BigLaw, we were completely clueless.
We recently sat down, reflected and brainstormed the top 10 things we wish we knew back then. We hope that others will find these helpful, too.
1. Your astronomical BigLaw income does not make you wealthy
Securing a BigLaw job is a huge achievement, but it doesn’t make you wealthy. A high income does not mean you are ‘rich.’ Rather, it is what you choose to do with that money that will determine your wealth. Will you spend most of it, like basically all of your friends and colleagues? Or will you save most of it, like… well… a few of us on the internet who are suggesting that you save most of it?
As you progress through the associate ranks, you may be shocked to discover that most BigLaw attorneys, including partners, are spending basically every dollar that they make, which is the very definition of living paycheck to paycheck. In popular culture, we don’t often think of high-earning professionals with advanced degrees as living paycheck to paycheck, but that is the reality of life in America, and BigLaw is no exception. Don’t be like so many of your colleagues. Don’t squander a once-in-a-lifetime opportunity to set yourself up for financial success.
2. Saving the recommended 10%-20% of your BigLaw income is not nearly enough
So you’ve chosen to save? Great! Most financial advisors recommend a savings rate of 10% to 20%. But this rule of thumb simply does not apply at the BigLaw salary level. Why would you need to spend 80% to 90% of your absurd BigLaw income? Even as a first-year associate, that’s a six-figure spend. You just finished four years of college and three years of law school eating cold pizza leftovers, but now you need nightly filet mignon with haricot vert?
Also, understand that the primary reason financial advisors recommend a 20% savings rate is because that is how much you must save in order to be able to retire after about four decades in the work force. It has nothing to do with how much money you actually need. It simply represents what you are allowed to spend if you want to retire in your 60s. That’s just math. But you can do better. A lot better.
3. You make so much money that you can legitimately retire in your 30s or 40s if you want to
Even as junior associates, BigLaw attorneys are so highly compensated that they can legitimately afford to save half their income or more. Once you reach the mid-level associate income tier, where total annual compensation can exceed $300,000, saving over half your income shouldn’t even sound that hard. If you can manage to save 65% instead of the recommended 20%, then you can retire in about 10 years. Again, it’s just math.
Despite the ease with which BigLaw attorneys can accumulate a massive net worth that would eliminate the need for them to work unless they choose to, the financial independence movement has not gained much momentum in BigLaw. Perhaps that’s because FIRE is often associated with extreme efforts to cut expenses down to the bare minimum. But at BigLaw income levels, you don’t have to eat rice and beans or skip vacations in order to become financially independent and retire early. You can afford both a fantastic quality of life most Americans can only dream of and an early retirement. Sure, you won’t be able to spend every dollar you make, but financial independence is just a math problem. It works at any income level.
Oh, and early retirement doesn’t mean you actually have to retire in the traditional sense. It only means that you no longer need to work for a paycheck, giving you the option to devote yourself to causes, projects and interests of importance to you regardless of whether they pay any money. In a nutshell, early retirement simply means having freedom and options. Tons of options.
4. Beware of lifestyle inflation
But most BigLaw attorneys can forget about early retirement. In fact, many equity partners aren’t anywhere close to retirement-ready, which is kind of incredible when you think about it. The culprit? Lifestyle inflation. BigLaw attorneys get massive automatic annual raises, which is obviously fantastic. Just keep a pulse and you will go from an astounding $200,000 salary to an eye-popping $400,000 in just a few years.
Where most BigLaw attorneys will err is by continually increasing their spending as their income rises. If you’re not attentive of your finances, this just tends to happen naturally. So be careful, because you will never get rich if your spending is always on the rise. On the other hand, if you successfully cap your spending early on—which is what we have done—then you can grow your net worth to impressive levels with surprising quickness.
5. Save and invest while you’re young and you can end up better off than most people in BigLaw, including most partners
Most folks in BigLaw think that partnership is the only path to BigLaw riches. It is a path to wealth, but certainly not the only path. Indeed, in our view, partnership is an exceptionally busy and stressful path to wealth. A much simpler and often more efficient path is simply to save a ton very early on and let the stock market do all of the work for you. There’s absolutely no reason to wait for partnership in order to build your net worth.
Understand: money invested in the S&P 500 doubles every 7 years (based on historical returns of around 10%), meaning that if you save $1 million by age 35, it will be worth something like $16 million by the time you’re 63—even if you never save another dollar after age 35. Compounding is so powerful that attorneys who chose to spend heavily in their early years, with the intention to save aggressively only later on once they start making partner money, may never catch up.
6. ‘Retail therapy’ creates a downward spiral of sad spending
It is well known that BigLaw attorneys are chronically overworked, with many feeling like they’re teetering on the edge of a precipice. Lacking the skills to set appropriate boundaries and too frightened to make meaningful changes, a common practice is for BigLaw attorneys to ‘treat’ their stress with mindless consumer spending. Problem is, it doesn’t work.
Sad spending actually exacerbates the very problem it is intended to alleviate. The momentary rush of endorphins from a new purchase is effective at making you forget about your stress, but not for long. An annoying email from the senior associate a few hours later triggers a different purchase. An end-of-day email from the partner assigning weekend work triggers yet another. Funny thing is, the downward spiral of consumption makes you more and more dependent on your BigLaw income, such that you can never really escape the stress that led you to sad spend in the first place. There are countless examples of anxious BigLaw attorneys that have spent hundreds of thousands of dollars on retail therapy, and exactly none of them are cured.
7. Your savings will have an immediate and invaluable impact
It’s easy to see why stressed-out attorneys would be fooled into sad spending rather than saving. At least you get something when you sad spend, but what do you really get when you save? The money just sits there, not doing anything.
In actuality, when you save and invest, you will start to feel the crushing weight of the job slowly lift off your shoulders. And this isn’t just about paying off debts. A positive net worth sitting in investments and ‘doing nothing’ actually has immediate and tangible benefits. It brings the confidence to stand up for yourself, to say ‘no’ to an assignment due the day before your wedding, to actually book a vacation and not stress about work when you’re on it, to not worry if you say something dumb.
Your money is always buying you something. When you spend it, you are buying things. When you save it, you are buying freedom and options. It’s easy to assume that savings are for the future and entirely underestimate the incredible, life-changing impact that savings will have on your life and on your job, right now.
8. You don’t need to buy a home to build wealth
Many BigLaw attorneys fall into the trap of thinking that dumping your first-ever chunk of positive net worth once your student loans are repaid into a mortgage is the best thing you can do with your money. Popular wisdom will have you believe that this is the case, but you have to remember that popular wisdom is often directed at the average American whose primary path to financial security is through home equity. This is not the case at BigLaw income levels where you simply make too much for a house to be your primary wealth-building plan.
It’s obviously fine to buy a home if you choose to, but building home equity is not a substitute for having an investment portfolio. Since you can expect higher returns from stocks than from home equity, it’s important to invest in the stock market as early as possible, giving you time to harness the power of compounding. Waiting until you’ve bought a house and paid off your mortgage to enter the stock market could be catastrophic to your long-term wealth.
9. Investing doesn’t have to be complicated
Like so many Americans, maybe you’re deterred from investing because the stock market sounds too complicated, or too risky. Maybe you still remember when the S&P 500 dropped 50% and took six years to recover. You don’t read 10-Ks. You’ve never calculated a company’s forward earnings. The only stocks you read about are meme stocks.
Investing may sound frightening, but it doesn’t have to be. Thanks to the indexing revolution, there are troves of resources on simple, total market portfolios that have a high probability of doing very well over a long-time horizon. And if even that sounds too complicated, there are lots of decent investment advisors (including robo-advisors) that would be happy to invest your money for you—for a fee of course. It has truly never been easier to get started.
And on an even more basic note: you should max out your 401(k) now. Just do it. There’s a strong chance that your $190,000 first-year salary is a lot more than what you made last year. If you contribute the maximum to your 401(k), then your pre-tax income is still $170,500, which is also likely to be significantly more than what you made last year. You don’t pay taxes on it and, more importantly, you don’t need it. You can still afford to aggressively pay down your loans. You can still afford a nice apartment. Fancy vacations. You can still afford everything you’ll need and then some with $170,500. The $19,500 that you do not need and will not miss would be worth about $300,000 after compounding for 40 years at 7%. And if you don’t make the contribution, your taxes will be around $6,000 higher, so this is one situation where it pays to save.
10. Protecting your mental health will make you richer
The key to building wealth in BigLaw isn’t partnership, but longevity. Ironically, the rabid pursuit of partnership riches causes many attorneys to work so hard that they burn out and quit before they ever get there. A better financial strategy, in our view, is to prioritize your mental health and well-being. Create a BigLaw environment that you enjoy well enough to stay for a decade and you can be super rich whether you make partner or not. So exercise regularly. Find the time to pursue your extra-curricular passions and hobbies. Take your vacations. Set boundaries and enforce them. Choose your teams and matters carefully. Do anything and everything necessary to stay sane and well-rounded and, at the end of the day, you won’t just be happier, but wealthier too.