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In my last post, we explored all of the ways I messed up in planning for, applying to, and financing law school. Ouch! I’ve made a lot of mistakes. Today I want to talk about some of things I did well before law school that have helped to set me up for financial success during and after law school.
Most of what I did well involves saving money early and often. I have always been a saver. I remember my parents walking my sister and me across the street from the store they owned to the local bank to have us set up our first savings accounts. I was probably 4 years old and I was extremely excited. There was a multi-colored stair stepper that they pulled up to the counter to let my sister and me feel like real customers. I got to climb up the stairs, put my money down on the counter, watch the bank teller take the money and open a bank account for me, and was handed my very first bank statement. I recently asked my father about this and he also remembered the multi-colored stairs – it left an impression on all of us!
I also remember transferring money to the local bank when we moved. For opening a new savings account with them, my sister and I each got to pick a rubber ducky off of a display to get a bonus amount added to our accounts. I believe I won $20. At the time I was disappointed that I didn’t pick the $100 jackpot ducky, but now I’d love to have someone gift me $20 in the form of a rubber ducky!
Maybe they should change the song to:
Rubber ducky, you’re the one!
You make saving so much fun!
No? Just me? Okay okay, fine.
A lot of my savings habits are most likely inherited from my parents, both of whom were accountants and still work in finance-heavy roles. My parents started us out with a $1.00 allowance per week around the same time we opened our first bank accounts, but we only got 50% of it to spend. The other 50% went straight into the bank. My sister often spent her other half (called out!), but I almost never spent my own money – a fact my father still teases me about often. We would occasionally venture over to the bank together and I would plop down the second 50% of my $1.00 allowance to grow my bank account even faster.
As we got older, our allowances increased incrementally along with our bank accounts. When I was in college, I wanted to study abroad, but I also played a varsity sport. Since our season spanned both semesters, my only study abroad option was during the summer. I talked to my parents, who were graciously paying basically all of my expenses in college (thanks again, Mom and Dad!). Since the trip wasn’t going to help me graduate any earlier and it was fairly expensive (you had to pay tuition even though we were actually working rather than traditional international studying in a classroom), my parents weren’t willing to foot the $10,000 tuition bill.
All of those $1 bank deposits paid off though (not to mention odd jobs and a waitressing gig in high school), and I was able to comfortably fund my study abroad trip myself. The summer I spent in South Africa was worth so much more than the $10,000 (even if I’m still a little bitter about having to pay tuition to work). I learned so much about the country and culture, gained a huge appreciation for wine (a bottle of delicious, local Pinotage was cheaper than a bottle of water over dinner!), met lifelong friends, and did some meaningful work at a non-profit in which I still very much believe. After law school, my investment in my study abroad program is probably the best (and biggest) investment I’ve ever made, and I wouldn’t have been able to afford it without careful saving and those countless 50 cents deposits.
1. Saving Enough to Pay for Half of Law School Out of Pocket (Saving Way More than Anyone Tells You)
Pretty much every law school graduate’s financial goal is to pay off his or her usually extraordinary debt. Law school tuition costs, much like other higher education, have increased 516% since 1985 for private schools, beating inflation over the same time period of only 127%. Public law schools fared even worse in the same time period, increasing tuition by 740% for non-residents. Columbia Law School, the most expensive law school in the country and my law school, currently costs $67,564 just for tuition (excluding the not insubstantial cost of living in New York City) and someone who expects to pay full tuition and cost of living (like me) can expect to accumulate over $343,000 in student loan debt. For comparison, the average private law school costs $46,329.
Some will look at these numbers and decide that a school like Columbia just isn’t worth it. Others will think it’s a no-brainer to go to an in-state public school and take on significantly less debt. In most cases, those people are wrong because of the quirk in the legal profession known as the bimodal salary curve – but that’s a post for another day.
Even with the recent raises in big law associate salaries, law school debt is extremely daunting. For instance, if someone received no financial aid or scholarship to Columbia and used loans for the entire experience, they would owe roughly $3,950 per month upon graduation. This doesn’t include any debt from undergrad. This debt obligation is more than most Americans can expect to earn each month until they are at least 35.
I mentioned in an earlier post that before attending law school, I saved much of my income – often more than 50%. In the four years that I worked between undergrad and law school, I was able to put away enough money that I could cover the cost of about half of law school out of pocket. This will significantly reduce my law school debt load and will help me pay off my loans that much faster once I start working again. This is probably the single more important thing that I did to prepare myself for financial success during and after law school.
Although I consider this a huge win, one question has always plagued me: would it have made more sense to take out loan for my first year and keep that money invested? We’ll have to consider that in a future post.
2. Starting to Save Right After College Graduation, and Taking Advantage of Tax-Advantaged Accounts
Part of the reason I was able to save enough for half of law school is because I started saving as soon as I started working after college. Even though my company did not offer a 401k plan (but did offer alternative retirement financing vehicles), I still saved as though I had one. I set up direct deposit into my bank and automatically transferred a set amount of money into my brokerage account each pay period.
I then created a budget through mint.com with the leftover funds and lived on that budget each month. I simply pretended that the money flowing into my brokerage account each month didn’t exist. I was typically under my budget each month, so the leftover funds would serve as a buffer for the next month. Once that buffer reached a certain level (say $5k or $10k), I would transfer much of it into my brokerage account as well.
Most of my bonuses and other windfalls also went directly into my brokerage account as savings. I would typically reserve some amount of each bonus for a nice thing or experience I’d been wanting (a handbag or a great dinner at Bacchanalia when I lived in Atlanta), and the rest I would simply pretend did not exist, similar to what I skimmed off the top of my checks each pay period.
Finally, each year I would take advantage of my Roth IRA by maxing it out. I would typically do this in one fell swoop since it was limited to a relatively little amount of money ($5,500 this year). I would often save up my “buffer” funds at the end of the year, or part of my end of year bonus from the year before to take full advantage of my Roth IRA as soon as I could in January.
For those of you who aren’t familiar with the difference between a Roth IRA and a Traditional IRA, here’s a quick refresher. For a Traditional IRA, you put money into an account income tax-free. That means your Adjusted Gross Income (AGI) on your tax return for the year will be lowered by the amount you put into your Traditional IRA. This could keep you from bumping up into the next tax bracket or simply lower the overall amount of tax you owe. However, when you go to withdrawal the money in your retirement, you must pay income tax as you withdrawal money. This includes paying taxes on the interest accrued and compounded since you made the initial investment.
A Roth IRA, on the other hand, is taxed as normal income on the year in which you place the money into the account. However, the money then grows tax-free in your Roth IRA and you never pay income taxes on it again (but you will likely have to pay capital gains taxes). When you go to retire, you will not be responsible for income taxes because you’ve already paid income tax on the money when you placed it in the account years ago. The best part is that you also don’t have to pay income tax on the interest that grew in your account!
I chose a Roth IRA over a Traditional IRA for several reasons. The most important reason is that all of that juicy compounded interest is going to be mine tax-free when I need it in retirement! Since I don’t plan to draw down on the account for several decades, the interest will likely be the vast majority of what’s in my account when I need it. The Roth allows me let it grow without fear of an impending tax bill once I’m on a fixed income in retirement.
Secondly, I was lucky enough to be relatively comfortable with my salary and didn’t have an issue paying the taxes on this $5k or so each year. I’m relatively conservative financially, so I didn’t want to risk not having that same comfort level later in life and being stuck with a huge tax bill.
Finally, personal taxes in the United States are relatively low (I know, I know…they don’t feel very low, do they?). For the most part, effective tax rates mostly only go up (this past year being somewhat of an anomaly . . . depending on who you are). If I had to bet, I think it’s likely that the tax rate will be higher in 30 years than it is today. By paying my taxes now, I won’t have to worry about increasing tax rates in the future. Along similar lines, I hope that my income will be higher after law school than it was before (it will probably increase if I marry as well), so I was able to pay income tax in a lower bracket when I was early in my career rather than chancing being in a much higher tax bracket when I need to draw down on those accounts.
When I moved to the Bay Area, my new employer did offer a 401k plan, of which I immediately partook. There are Roth and Traditional 401k’s, which mimic the Roth and Traditional IRA’s explained above, but my employer offered only a Traditional 401k. Nevertheless, I plowed as much money into as possible, maxing it out each year I worked there – even if I didn’t work there a full year – because of the massive tax benefits of having that money in those accounts. Now that I’ve left, I’ll probably roll over bits and pieces of it into my Roth IRA (which means I’ll have to pay taxes as though that money is my income this year) since my taxable income is virtually non-existent these days and the tax bill will be relatively small.
As I mentioned in my last post, I wish I had taken more advantage of tax-advantaged accounts, such as the 529 account before deciding to attend law school. However, I think my savings rate and the tax-advantaged accounts that I did utilize were excellent tools to take advantage of at the time.
3. Increasing Savings Incrementally and as my Income Increased
Lifestyle inflation is real, y’all. The biggest cost-driver in your budget is likely your housing, especially if you live in an area where real estate is in high demand. I graduated from college in Atlanta and lived there for several years on a very modest housing budget (I shared a house with three other girls for $650 / month (the most expensive room in the house!) – and it was one of the best living situations I’ve ever had). When I moved into a one-bedroom apartment in Atlanta, my rent doubled. When I moved to Palo Alto a few years later, my rent doubled again even though I took on a roommate.
My move to the Bay Area definitely shook up my budget. I took a pay cut to work for a company that I thought had a cool idea and an amazing culture – and I loved every minute of it and have never regretted my choice. But, my budget definitely took a hit with a slightly reduced salary and a wayyyyy higher cost of living (not to mention taxes). However, no matter where my budget started in each of my jobs, I increased my savings rate incrementally over time and as my salary increased from promotions and raises.
I typically did allow myself some extra buffer in my budget as I received raises (usually to satisfy my extreme appetite for eating out), but the vast majority of each raise got skimmed off the top along with the rest of my savings. I always set this up through automatic bank transfers so that I never even had the opportunity to spend the extra money. This ensured my lifestyle inflation stayed low and I socked away enough money for my more important financial goals, like the most expensive law school in the country.
4. Keeping Track of My Credit Score
It’s important to keep track of your credit score for a couple of reasons. Most importantly, the government uses it to decide if you’re eligible for Direct PLUS loans. If you’re not, you may need to take out private loans, which are considerably more expensive and will depend heavily on your credit score.
Secondly, you should monitor your credit score and report because there are sometimes errors on it. I’ve found an error every few years that have included listing accounts that don’t belong to me, not listing credit card accounts that do belong to me, and various other small errors. You want to catch these errors before it becomes harder to remove them and because they could potentially damage your credit score unfairly (harming you in all kinds of financing transactions).
Keeping track of your credit score sounds pretty lame, and admittedly, it’s probably not the most fun activity on the planet. However, it’s painless as long as you follow some simple rules.
Never pay to check your credit. By law, you can get a free credit report from each of the three credit bureaus each year. This means you should really never need to pay for those services that constantly monitor your credit score. I remember when I first started monitoring my credit, I signed up for one of those check-your-credit-for-free-for-three-months services. I set an alert on my calendar to cancel after three months, which I did. They still charged me the next month. When I called and told them that I had already canceled, they actually tried to tell me that they were unable to refund me for what I’d already paid. You’d better believe I sat on that phone demanding to speak to every person in the call center until they finally relented, refunded my money, and canceled the service for good. Lesson learned: don’t take no for an answer when you know you’re entitled to something! Especially from what’s clearly devolved into a sleazy scam.
Check your credit score regularly. Since you can get a report from each of the three major bureaus each year, you can keep a pretty good eye on your credit score by checking one of the three every four months. I set a recurring calendar reminder for myself, review the report for errors or changes, and print off a copy for my records. For the average person, this should be sufficient.
5. Applying for Financial Aid
This is probably a given, but when you’re applying for a very expensive law degree, one of the easiest ways to offset the cost is through institutional funding of scholarships, grants, and financial aid. As I’ve mentioned before, I got a big fat $0 check from my law school, but I’m still glad that I applied and appealed the decision. I can now rest easy that I did what I could to reduce my debt load going into school. Of course, I should have started earlier and worked harder to get those scholarships.
6. Matriculating into the Right School….for Me
I’ve also mentioned before that NYU (an already cheaper law school than Columbia) offered me $10k off of tuition to attend law school there. Even though Columbia refused to match that offer, I’m still glad that I chose Columbia. There are probably the same number of opportunities at NYU and Columbia and the schools are virtually identical in so many ways (basically the same ranking, similar cost, same city, similar quality professors, and you can even cross-list in the others’ classes). Would I really have had such a different experience at NYU that it justified more than $10,000 more? Maybe, maybe not.
However, it was important to me that I was comfortable at the school I chose. I personally chose Columbia because it had slightly better facilities, it was in a quieter neighborhood, and had a real campus. I have several friends at NYU who chose it for the exact opposite reasons, not to mention their lower tuition bill.
All of this to say, cost of attendance is only one factor in deciding which law school to attend. If you get into only one top tier school, you should definitely pick that one, but if they’re similarly ranked, a lot of times it comes down to feel and culture fit. Don’t let $10k (which isn’t even guaranteed each year) be the deciding factor in your choice. It’s a lot of money, but in comparison to the full cost, it’s but a drop in the bucket.
7. Taking Advantage of Subsidized Law School Housing
Once you’re in law school, many schools offer subsidized on-campus housing. This is particularly relevant for people living in cities like New York or San Francisco where the cost of living is astronomical and the subsidy can make a big difference. Before I came to law school, I read the book “1L of a Ride” by Andrew McClurg. His top financial recommendation was to take on a roommate, which can significantly reduce your debt load. I completely agree – not only do you reduce your overall debt, but you also meet people from different sections, class years, or even programs.
Housing will likely be your biggest living expense in law school. Do what you can to reduce it by taking advantage of subsidized housing through the school (or their recommendation on location if they don’t subsidize or offer housing) and taking on a roommate or two.
8. Sticking (Basically) Within the Allocated “Cost of Living” Budget Given by the Law School
Each school publishes a cost of living amount for their school each year. This is usually the maximum amount of federal-sponsored loans that you can take out, which I mentioned in a previous post. Personally, I found Columbia’s cost of living budget to be fairly accurate. While I spent just slightly less than their budgeting housing cost, I spent more on food than they expected, which I knew would be a problem going in (it’s New York, people!). As I mentioned previously, I went a few hundred dollars over the yearly budgeted amount and need to reduce my monthly spending by about $50 during the upcoming academic year to stay within the allocated Columbia budget (not to mention my rent increased 3% – and 3% of a lot is a lot!).
1L year can be really stressful, especially if you’ve been out of college for a few years like I was. It takes a little while to get back in the habit of living with a budget but no income, studying until all hours of the night, and figuring out what to do with this new “law” stuff. Plus, you’re meeting a ton of new people and developing new friendships while also looking for a summer internship, learning how to network with law firms, and a myriad of other things. My first year, I didn’t pay super close attention to my monthly spending, but spent what felt reasonable and then saw how I did at the end of the year.
I probably could have checked on my progress during the winter break, but I still didn’t do so badly. I mostly stayed within the budget and can probably reduce my weekly Chinese take out orders to accommodate a stricter budget in the coming year.
9. Take Advantage of “Freebies” at the Law School
At Columbia, no one has class between 12:10 and 1:10, and everyday multiple student organizations sponsor lunch time talks about a myriad of topics – sometimes they’re relevant to the type of law I want to practice, but often it’s fun to attend talks about subjects I’ll likely never take classes on or practice just to see what’s out there. No matter who’s talking, there’s always one thing – free lunch.
I went to a lunch talk almost everyday of 1L and took advantage of the free food and usually interesting conversation. This definitely reduced my budget. While I often skipped these talks to study as finals drew near, they were often a great break from class or studying and usually decent food.
In addition to lunches, firms and other potential employers came to campus often and always sponsored a mixer with heavy hors d’oeuvres and drinks. These mixers can almost always serve as dinner, another huge win, especially for someone who spends a significant chunk of her budget on food (this girl!).
Take advantage of all of the freebies both to learn something or meet someone new, but also to help you stay within that allocated budget each month!
10. Having a Buffer
I was lucky in my first year of law school to not have to worry a ton about finances. Since I had saved zealously when I had an income and live in a place that offers $1 pizza on basically every corner, I was able to focus more on my studies and new life at law school and a little less on finances. Having a buffer of a little bit of money beyond the allocated cost of living dictated by the school helped reduce my stress and let me take advantage of opportunities like the US Open (nosebleed seats) and the occasional splurge dinner.