Setting the foundation
Big Law associates make a dangerous amount of money. Dangerous because earning multiple six figures lets you pretty much afford anything you want. The nice car, the nice handbag, the Equinox gym membership. None of these will break the bank by themselves. The issue is when you stack them on top of each other, they can create a trap that is very difficult to escape. And all of this hits at a stage of life crowded with competing demands, from law school loans to buying a first home to starting a family, each one pulling at the same paycheck.
At this point, you may be wondering:
- Should I pay down my student loans aggressively or invest instead?
- Do I need to budget?
- How much house can I really afford?
- How much of this income should I actually be saving?
- How do I start saving for my kids’ college education?
- Is it worth maxing out my 401(k) if my firm doesn’t match?
- Can I afford to leave Big Law someday?
It’s Not a Spending Problem, It’s a Lack of Structure
The trap is hard to see because it doesn’t come from one single expense. Each one is defensible on its own. The expensive apartment downtown to reduce the commute. Eating out every meal because you have no time to cook. A luxury purchase because “you deserve it” for all your hard work. The problem is not that you are bad with money; it’s that you don’t have a system to allocate your hard-earned dollars. That system is what separates true wealth builders. The good news is that this is a structural problem, not a character flaw, and structural problems have solutions. Once you build a system that captures and saves your income before it scatters, you start feeling in control of your money. And the best part? You stop feeling guilty for sending it.Case Study
How Maya, a Fourth-Year Associate, Allocated Every Single Dollar of Her Big Law Salary
The following is a hypothetical illustration, not an actual client.
The Snapshot: Maya is a fourth-year associate at a Cravath-scale firm in Washington, D.C. She is 31, married with a 2-year-old daughter. Her base salary is $320,000 with a $75,000 potential bonus. Her husband is a software engineer at Amazon and makes around $150,000, bringing their household comp to $545,000. Maya still carries about $150,000 in law school loans and makes the minimum payment required. Their combined household expenses, including daycare and rent, are around $20,000.
What they want to accomplish: Maya and her husband aren’t high rollers. They live in a modest apartment and share a car. But somehow, when the end of the month hits, there’s nothing left to show for in their bank account. Thankfully, they were able to save much of Maya’s bonus over the years and have accumulated about $240,000 in their savings account.
One of their priorities is to allocate their extra cash because it’s earning next to nothing at the bank. Also, the couple is currently renting a 2-bedroom apartment downtown D.C., but they are looking to buy in the Arlington, Virginia suburb to keep Maya’s commute manageable and to get into a good public school system. Lastly, they would like to start saving for college for their daughter.
The Issue: The real issue is not their income (combined, they are in the top 2% of earners in the U.S.); it’s the absence of a system to capture it. Like most people, they get paid biweekly, pay their monthly expenses, then save whatever is left over (most months, it’s nothing). This made Maya uneasy because she had no clue where her money went. They tried following a budget on and off, but they were simply too busy to stay on top of it each month.
The Plan: Since we knew exactly what they were looking to accomplish (buy a home, send their daughter to college, retire at 60, etc.), I was able to reverse-engineer their plan to figure out exactly where each dollar should go. We created different savings buckets for each of their goals and automated their contributions.
- We automated a $2,000/month transfer to a high-yield savings account to use for the down payment on their first house.
- We increased Maya’s student loan payments so the loans will be paid off in five years, giving her more career flexibility as her daughter gets older.
- We opened a 529 college savings plan and funded it with $600/month.
- When Maya’s bonus hits, the plan was to allocate a chunk to her student loans, a chunk to their down payment fund, and fund their Backdoor Roth IRAs.
Now, instead of spending then saving, they were saving then spending. In other words, they were paying themselves first.
What Changed: Because the couple knew that their goals were on track, they didn’t have to worry about tracking every penny they spent each month. As long as they had enough money in their checking account to pay the credit card bill each month, they knew they were going to be okay. All of a sudden, they were in complete control of their finances.
The Takeaway: If you are earning a Big Law salary and still cannot see where it goes, it is often not a spending problem. It is the absence of a system that captures a high income before it scatters.
Sounds like you?
Not sure where to start? Download our free Savings Rate Worksheet to find out if you’re saving enough.