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First-year associates are making more money than ever before. Starting salaries vary, but $135,000 is realistic for most large firms in the D.C. area. Some of you, at age 25, are already making more than your parents. Yet that flow of money may not last. According to a 2005 report by the National Association for Law Placement, 78 percent of associates leave their firm by the fifth year of practice. Some will go to other firms with comparable salaries, of course, but others may take government jobs with lower salaries or even leave legal practice altogether. What will you do? At this point you don’t know, and thus you can’t be certain about whether your salary will dramatically change in the future. This uncertainty about future income poses challenges for financial planning. How do you most efficiently use your current high income? What do you do first? And what do you postpone or avoid? As this issue of Legal Times addresses new associates, I would like to talk about how new lawyers can set priorities among the various financial options. I’ll begin with some mistakes to avoid, because much of money management is a defensive art. It consists largely of avoiding pitfalls, not finding exotic schemes for spectacular returns. After that I’ll turn to a list of concrete steps that new lawyers can take. These priorities can vary with an individual’s situation and preferences, but it’s still possible to make general statements about which options are good first choices — and which options are not. NOT SO FAST One of the worst things you can do as a new associate is to start trying to mimic the luxury spending of partners, counsel, or senior associates. You may think that because you are their colleague, you should be wearing what they wear, driving what they drive, or traveling where they travel. Not so fast. If you stay at a large law firm for years, by all means, enjoy the financial rewards that result. But you’re not there yet, despite your large initial salary. If you try to spend like those earning four times your income, you’ll probably be living above your means and forgoing opportunities to improve your financial situation. Likewise, it’s probably not wise to rush to buy a house or condo in your first year or two of legal practice. Yes, it’s a good long-term investment to own your home (and 94 percent of Legal Times readers do so, according to our readership data), but some delay in buying is warranted. That’s not only because the D.C.-area real estate market has appreciated rapidly in the recent past and may now be in the initial stages of a significant correction — it’s also because your personal situation at the law firm is insecure. Never forget those NALP attrition statistics. If law firm life doesn’t prove to your liking, you might want to take a job with a lower salary. That’s harder to do if you’ve bought an expensive place with a hefty mortgage, and there are additional complications if you want to move to a different city. For the first few years, stay flexible. In addition, make sure not to get pushed down the wrong financial path with bad advice. It would be an unfortunate start to your financial journey if you were to fall into the clutches of a commission-based broker or financial adviser who makes his money by selling you investment products. Alas, that can be the path of least resistance. So as a basic rule, beware of anyone calling you up with investment pitches. (I remember one broker who cold-called me at my old law firm trying to peddle municipal bonds. Although they are potentially good for certain investors in the highest tax bracket, that choice would have been one of the least appropriate for first-year associates in a lower tax bracket.) Granted, you’re busy with your legal practice, and it’s tempting to delegate financial management to someone eager to take the task off your hands. Yet that could be an expensive mistake. You could easily wind up being stuck into high-fee investments instead of better alternatives such as index funds. So don’t rush to get an adviser. You’re probably better off learning to manage your own portfolio, but if you really want an investment adviser, at least learn what type to choose. (And you still need to understand the basics of sound investing, if only so you know if you’re getting good advice.) REDUCING REGRET Another mistake, albeit a less naive one, is to commit all your resources to a single financial goal. Yes, it may be possible to max out a 401(k) this year, just as it is possible to use your every surplus dollar to pay down your student loans. And to be fair, those concentrated efforts would be better than many alternative uses of the money. Yet remember those attrition statistics. You don’t know where you’ll be in five years or how much money you’ll be making. In light of that uncertainty, it may be wisest to make progress in a variety of areas in an effort to maximize flexibility. For example, if you focus only on putting money into a tax-sheltered account, you won’t be able to use that money without a tax penalty if unexpected expenses arise. Likewise, though it may be emotionally satisfying to focus solely on eliminating your student loans, remember that certain financial opportunities, such as contributions to an individual retirement account, are limited by year. You can’t triple your IRA contributions three years from now to make up for contributions you didn’t make in 2006 and 2007. By diversifying your financial investments across an array of options, you reduce the regret (and loss) if one of those choices proves suboptimal. If you sink most of your law firm earnings into a single investment choice that does relatively poorly, it will feel like a waste of a lot of billable hours. The flip side, of course, is that diversification reduces the possibility of huge gains if one particular option proves especially profitable. But don’t worry too much about that. If you’re like most people, you dislike losing money more than you enjoy gaining it (potentially by a factor of about 2-to-1, according to behavioral-finance research). And, more broadly, I’m assuming that most people who go to law school instead of becoming entrepreneurs prefer a steady likelihood of reasonable success over a long-shot chance at a jackpot. If you’re a gambler instead, best of luck to you, but for most lawyers, it’s better to diversify among a variety of sensible options. OUT OF THE GATE So what exactly should you do? For starters, pay down any high-interest credit-card debt you accumulated in college or law school. If you’re paying a 15 percent to 20 percent interest rate, getting rid of this high-interest debt is probably the best move you can make. In fact, you can use the “credit-card test” as an easy way to begin to evaluate the integrity and competence of any would-be financial adviser. Paying off credit-card debt is almost always the best option for any consumer, because money devoted to that is far more likely to pay the equivalent of high returns (that is, the money that would otherwise have been lost to high interest) than money devoted to almost any other investment. Yet paying down credit-card debt doesn’t benefit a financial adviser through commissions or fees. Thus, if a would-be adviser recommends paying down credit-card debt before investing, it’s a sign of honesty. Conversely, if the emphasis seems to be a sales pitch for a particular product, even over a risk-free return of 15 percent from paying off credit-card debt, you have a warning sign. After eliminating any credit-card debt, contribute the maximum amount ($4,000 this year, assuming you’re under age 50) to a Roth IRA. A Roth IRA is a way to hold investments such as a mutual fund so that they grow tax-free, and any distributions after a certain age are also tax-free. That’s highly desirable, but income restrictions on this opportunity exist. In future years, your full law firm salary will likely make you ineligible. (For example, for a single taxpayer, the current limit is $110,000 in adjusted gross income. Publication 590 from the Internal Revenue Service can explain more fully.) So get into a Roth IRA while you can so that you can use the Roth to hold investments, such as Treasury Inflation-Protected Securities, that are best withdrawn tax-free. After paying off credit-card debt and funding your Roth IRA, you have a variety of reasonable options to consider. One is to develop an emergency fund, a stash of six months’ worth of living expenses to handle unemployment or unexpected expenses. Keeping this money in a money-market fund or in short-term certificates of deposit is common. Another option is to start investing in a 401(k). The conventional wisdom is to invest at least enough to capture whatever matching funds your employer provides. This isn’t bad advice, but, again, remember those law firm attrition statistics. It often takes five years for an employee to become fully vested in the employer’s contribution, so acknowledge the risk of losing that match in your calculations. You can always invest in taxable accounts, where you enjoy the lower tax rates for capital gains on stock holdings. And, of course, your student loans are starting to come due. Quite reasonably, you may wish to make advance payments to get out of debt faster and to reduce the total amount of interest paid. None of these three options — emergency fund, 401(k), and student loans — are bad, and it’s sensible to start working on all of them at once. As for how much to spend on each, your personal preferences matter. If you’re cautious, you may devote more money to the emergency fund and loan payments, and less to stocks. If you’re more tolerant of risk, you may put more into growth investments such as stocks, even as you fund the other options. As long as you’re making steady progress in all areas, you’ll probably do just fine. Remember, if you’re living frugally on your law firm salary, you’re throwing a great deal of money into improving your financial situation, and the long-term odds are in your favor. And this likelihood of financial success, after all, is why you choose to work so hard as a new associate.
Robert L. Rogers, associate opinion editor at Legal Times , writes the Legal Tender column on personal finance. E-mail with questions or comments for future columns.

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