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money-DOL

Being a younger partner at a law firm comes with great opportunity — but tremendous pressures as well. There are demands on your time, extraordinary expectations for your career, and impulses to spend more of your newly increased income on upgrades like a larger home or luxury car.  A few simple guidelines can help you avoid lifestyle inflation and increase your wealth significantly in the long run:

1. Know what you spend: This may seem like a basic step, but it is truly crucial for partners in particular for one main reason: lumpy, uneven cash flow. Becoming a partner can turn your bi-weekly salary into uneven partner distributions throughout the year.  If you track your spending, it becomes simple to estimate your annual and monthly cash needs and make sure you have a cash cushion until your next distribution arrives. Big-ticket items like a down payment on a home or car purchase can easily wipe out a lot of your savings, so it’s necessary to plan these items in advance.

Another item that requires advance planning now that you’re not a W-2 employee is estimated tax payments.  Making estimated payments can cause anxiety several times a year.  Work with your CPA to calculate the payment amount and budget accordingly.  Fail to make a payment, and you could end up paying avoidable interest or penalties to the government.  The IRS has a safe harbor rule for avoiding penalties if certain requirements are met: TurboTax explains this and more in their guide for estimate payments.

(Extra Tip: If you’re looking for a great tool to track your spending, check out www.mint.com.)

2. Maximize retirement savings: If you aren’t already, make sure you’re contributing as much as you can towards the retirement savings for you and your spouse.  Many 401(k) plans now offer a Roth option, which allows post-tax contributions and could be advantageous depending on your tax bracket. Even if you’re maximizing your contributions, it may make sense to make additional contributions to an IRA.

The maximum contribution to a 401(k) is $18,000 in 2016. Individuals over 50 can make an extra catch-up contribution of $6,000.  The benefits of starting early cannot be understated: for a 35-year-old partner starting annual contributions today, assuming a 5 percent compounded return, those annual contributions will equal $1,195,899 by age 65 (not including catch-up contributions).  If that partner waits until age 45 to begin contributing, 20 years of annual contributions will only total $595,187. Compound interest, beginning at a younger age, can have an amazing impact on a successful retirement.

3. Fund an investment account: You don’t need millions of dollars to start investing in a brokerage account. Open up a low cost brokerage account at firms such as Charles Schwab, Fidelity, or Vanguard.  Similar to what you do with retirement savings, come up with an annual/monthly amount you can save and have an automatic deposit into the new account.

Make sure to consider how much stock market risk should be taken in this investment account. Unlike the retirement account, these dollars may be needed for future living expenses prior to retirement, so you may want to be more conservative in your investment strategy.

4.  Protect your family: Extra earnings over the last few years may have changed the lifestyle and needs of your family. Make sure you are properly covered for both life and disability insurance. You may have set up a life insurance policy when you first started at the firm, but your personal circumstances could have changed since then: your family members may depend on this coverage if anything happens to you.

It’s easy to focus on work when you’re young and healthy, but life brings changes and it’s important to be prepared. Understand the lifestyle that your family now lives and what they will need to maintain that.  Do you plan to send your kids to private school? Would your spouse remain in your current home if something happened to you?  Do you want to leave a legacy for the next generation or support your favorite charitable cause?  Have these discussions while you’re healthy and sound of mind.

5. Balance savings and paying down debt: While saving for retirement is a big priority, having a detailed plan to pay down debt is an equally important step in setting yourself up for future success.

You may have accumulated significant debt during undergraduate and law school. Make sure this debt is addressed before any large, unnecessary expenses are incurred (second home, a more expensive car, a boat – you get the idea). High-interest debt rarely goes away without a plan to eliminate it.

Credit cards tend to carry much higher interest rates, so it’s important to use them properly if you want to take advantage of their rewards programs.  Make sure your credit card debt doesn’t grow as your career advances.  Pay off your credit card in full each month.  If you have a balance, come up with a plan to pay it off as quickly as possible.

Once the credit card debt is gone, find a card with rewards that align with your lifestyle.

(Extra Tip: Check out NerdWallet to learn about the best cards currently available.  Take advantage of those points and perks.)

6. Refinance your mortgage:  Mortgage rates are at historically low levels, so now may be a great time to refinance.  As a partner, you may be able to qualify for lower rates given your higher income.  Are you in your dream home already?  Lock in a 30-year fixed rate.  Do you anticipate moving or upgrading in 5-7 years?  Consider locking in a 10/1 adjustable-rate mortgage to potentially reduce your interest expense.

If you purchased a home with less than 20 percent down, you may be paying mortgage insurance in addition to your principal and interest.  Take part of your partner distributions to get rid of this extra payment.  Keep in mind, you may need to call your mortgage company to eliminate this payment.

Bonus Tip: Start creating an annual net-worth statement that lists all of your assets and liabilities.  This is a great way to make sure you know exactly what you own, prioritize changes, and measure your wealth’s growth over time.

It’s tempting for young partners to reward long hours at the office with additional luxuries.  There’s certainly nothing wrong with that as long as they fit into the overall financial plan. Start by following these guidelines to simplify your finances, and you’ll feel better when you do make the decision to splurge: you’ll know you can afford it. 

Travis Russell, CFP, is vice president of Glassman Wealth Services.

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