New Year’s Financial Resolutions for Lawyers
It’s hard to believe that we’re at the beginning of another new year. Since ‘tis the season for making resolutions, I thought I would provide some ideas for helpful New Year’s financial resolutions for attorneys. Putting these tips into practice should help you get 2022 off to a strong start from a financial perspective.
1. Utilize Your “Year-End” Distribution Wisely
In my experience, most law firms make sizeable “year-end” distributions either around late December or January (and sometimes even February). So, as a law firm partner, you may very well be sitting on a nice pile of cash from your year-end distribution as you read this article. The question is, what are you going to do with it? My guess is there are two very likely options staring you in the face: 1) pay down some (or all) of your existing debt, and 2) invest the cash into your long-term portfolio. So, which is the “right” answer?
There are two equally valid ways to look at this decision. There is a “math” answer and a “sleep at night” answer. Let’s explore both a bit.
- The “Math” Answer – The math answer says, quite simply, if you can make a higher rate of return on your portfolio than you are paying in debt service, you should invest your cash into your portfolio, keep your debt in place and “make the spread.” The lower your interest rate on your existing debt, the “easier” it is to beat that rate on your investment portfolio, and you come out ahead from a mathematical standpoint. Pretty black and white.
- The “Sleep at Night” Answer – This one is a little grayer. This answer says something like, “it feels amazing to wake up in the morning and not owe anyone a penny.” While you might be mathematically better off to keep your debt in place and invest the cash into your portfolio, you might sleep better at night if you reduce or fully eliminate your debt. There are real, psychological benefits to having less debt in terms of stress relief and a feeling of increased financial freedom.
So, as you evaluate how to utilize your year-end distribution, keep this framework in mind. You may decide to go with the “math answer,” or you may decide to pay down debt so that you sleep better, or a little of both. There is no perfectly “right” answer.
2. Adjust Your 401(k) Mix
If you are like most busy attorneys, you haven’t looked at your 401(k) in a while unless you have an advisor managing it for you. The start of a new year is a perfect time to review your stock-bond ratio in your 401(k) and make sure you’re in the right spot. Make sure you not only look at your 401(k) stock-bond mix on its own but also relative to your overall investment portfolio. The key is how your overall portfolio is invested, and the nice thing about your 401(k) is that you can rebalance as needed with no tax impact. So, perhaps after another strong year in the stock market, you are now “overweight” in your stock target. If that’s the case, you can easily rebalance to get back to the right overall mix by adjusting your 401(k) stock-bond ratio with no tax consequences.
The new year is always full of hope and promise. Hopefully, these couple of practical tips can help you get your new year off to a strong financial start!
Justin works closely with clients to design wealth management plans that take into account the full spectrum of their career and personal concerns with a specialization in advising law firm partners. Justin earned his MBA from Northwestern University’s J.L. Kellogg School of Business.