When it comes to money, everybody knows that spending is easier then saving.
Living frugally and saving doesn’t have to be painful, however. For many young lawyers, the prospect of trying to save money while paying down debt and covering the bills can feel intimidating. Whether you are a first year associate or have been with your firm for a few years, you might think you’re behind the curve when it comes to managing your finances, especially in comparison to your parents.
While it may seem overwhelming to figure out how to save while paying off student loans and maintaining your standard of living, optimizing your budget doesn’t have to be a stressful process. There’s no reason why you can’t pay off your student loans, spend money on dinners out, go on vacations, and still have money left to put away or invest. Mapping out your financial future not only means having enough savings when it comes time for retirement, but also achieving financial independence and freedom as a young adult—which means not having to go to your parents when financial emergencies come up. In short, planning your finances, budgeting, and being able to pay your own way means you’re truly adulting.
Making a Budget
Making a budget is the first step to getting a better grasp of your finances. Don’t make it more complicated than it needs to be. Make a spreadsheet, download a budgeting app like PocketGuard or Mint, or simply draw a line down a piece of paper and create two columns to represent both your income and expenses. At the top of the expenses column you should list in bold your mandatory payments—bills that need to be paid each month such as student loan payments, rent, car insurance, and phone bills. Below your mandatory payments, you should make a list of the things that you choose to spend money on such as vacations, eating out, clothes, and other non-essential costs.
If you’re spending more money than you make, look long and hard at where that money is going. Is there something on that list that you could do without? Regardless of what it looks like on paper, every bit counts, so you should even consider things as small as cab rides or your Netflix subscription. At the same time, you shouldn’t feel that you have to deprive yourself of everything that makes you happy. You deserve to go on vacations and go out with friends and family when you want to. If you can’t eliminate something outright like eating out or buying new clothes, try to do it more responsibly and set a hard budget each month for each category. While looking at your list, you should consider cheaper, money-saving alternatives to your usual habits, like taking public transportation instead of Uber or ordering takeout instead of delivery. When making these decisions, focus on how much you’re saving instead of obsessing over what you’re sacrificing. By cutting down on these costs, you’ll give yourself more financial breathing room in the short term and the potential for more savings and flexibility in the long term.
How to Save More—and Better
First, realize that saving and spending are not all-or-nothing propositions. There are ways to budget your salary for saving responsibly while still being able to go on the occasional splurge. While there is no hard and fast rule for the amount or percentage of your salary you should be saving, going for more is always better. If you can, shoot for at least 15% of your salary. It is completely okay if you can’t meet this baseline; not everyone’s salaries are able to accommodate that amount of saving. Regardless of how small the number or the percentage, you should still get in the habit of saving money from your salary each month. When making your budget, you should treat your savings the same way you treat money that you put away for your monthly rent. This way, you remove the temptation to spend the money you had earmarked as savings.
In order to further maximize your long-term savings, you should start investing as early as possible. While you may be reluctant to create an investment portfolio if money is tight or you still have student loans, the earlier you start investing, the more time your investments will have to appreciate. Like with savings, no amount is too small, and you’ll appreciate having different income streams when the time comes.
In addition to investing early, you should put as much money into your 401(k) as possible—at the very least, put enough money in to get your employer match (which generally ranges from 3-6%). That match is essentially free money added to your retirement savings. Even without an employer match, 401(k) plans are still an important part of any retirement plans.
Getting a Grip on Your Student Loans
On average, students graduate law school with over $122,000 in debt. Getting a handle on your student loans can be difficult and anxiety producing. Carrying around tens of thousands of dollars in debt places an immense financial weight on your shoulders and at times feel like a soul-crushing burden. If you are like most law school students and have multiple loans with varying interest rates, tackling the debt requires a strategy. While you should not cut into your savings or investments trying to pay off your student debt all at once, you must pay more than the minimum payments on each loan to see any real progress and to avoid piling on the interest as the years go by. You can approach your debt in a few different ways, but how about focusing on paying off the loans with the highest interest rates first? Attacking the higher interest rate loans first will save money on interest payments and help to get rid of your debt sooner.
Refinancing your loans is another option to consider, especially if you have maintained a good credit score. Ideally, the new loan that you take out will be shorter in length and have a lower interest rate. This means higher minimum payments every month, but you will have the opportunity to pay off the loan in a shorter period of time, saving money on interest payments. Before you make a refinancing decision, though, be sure to research extensively and carefully compare rates. Websites like Credible offer this service for free and can even provide personalized advice for you depending on your credit score.
If you don’t have one already, start a budget—it can be as simple or as detailed as you like—that allocates money to every spending category. Plan out debt payments, how much you’re going to save, etc. Now stick to it! Adjust as you go if you find your original budget isn’t quite right.