Tuesday, December 13, 2016

A Sense of (Financial) Possibility

Not especially topical, but, fun fact, the real-life Conde Nast Publications used to share a Times Square office building with one of NYC's largest biglaw firms.

Not too long ago, K hit a major financial milestone: He's officially halfway done with paying down his (substantial, ~$150,000*) student loans! He's only just completed his second full year in biglaw, and he did all that while saving for retirement and accumulating sizable cash savings. He's very close to  having a positive net worth. This is a huge accomplishment!**

K is so many things to me: my best friend; a truly good, kind soul; someone who makes me laugh; someone with an unending intellectual curiosity, which I value greatly in all people; and super-handsome. With his hard work on personal finance management, he has also been an excellent financial role model. He graduated a year ahead, and I was initially shocked to find that he'd been able, during his first full year, to:
  • (a) accumulate ~$20,000 in "emergency fund"-type cash savings;
  • (b) without taking income-based repayment ("IBR") and therefore, by definition, making at least a monthly minimum loan payment of ~$2000/month;
  • (c) making more than his monthly minimum payments regardless, so he eventually exceeded the $2500/month I averaged out at, getting closer to $3000/month; 
  • (d) making good, though not maxed-out 401K contributions (5%, while I hovered around 6-7%; neither of us maxed out, as with our federal loan interest rates, paying down debt is more of a priority than investing);
  • (e) do all this while living and working in NYC, with all of its expenses, and having done some international travel (we traveled together).

My initial reaction was that I couldn't possibly get anywhere close to what he accomplished. Part of me made excuses: As a white-collar professional woman, I face certain expensive fashion and grooming demands that are practically a requirement, I started out with a larger student loan balance, around ~$180,000 from law school and an additional negligible number from undergrad (he attained his largely due to his own frugality in law school, by the way, which I did not exhibit), etc. In the end, though, I got pretty darn close, and would have stayed on that trajectory for my second year, were it not for starting my clerkship. The clerkship is worth it, but it's a career choice that comes with serious financial opportunity costs if the alternative is biglaw. Having his vivid real-world example encourages me to set ambitious personal finance management goals for myself. It gives me a sense of what's possible, and encourages me to save more, do better, because I know it's possible and that it doesn't require feeling especially deprived.

We are extremely privileged, and we also worked very hard, to be where we are. Even in this type of unquestionably high-compensation firm, we have many peers who express skepticism about being able to say, pay their loans down in 10 years, even while refraining entirely from larger financial outlays such as buying property. Notice the number of biglaw people who plan to ride out IBR in hopes of eventual loan forgiveness, tax bomb or no. I don't hear, in real life, about that many other biglaw or biglaw-adjacent attorneys who are extremely devoted to frugality and saving, maybe just this one tiny discussion thread at r/financialindependence, to be honest (a non-biglaw, but well-compensated, private sector attorney reporting a 65% savings rate if including loan repayment, 48% if not) and this more general one.***

For some (slightly depressing) fun, I calculated my savings rate for my time in biglaw using the methodology proposed by Ramit Sethi in I Will Teach You to be Rich: The denominator, or all income, is total post-tax income plus any "before-tax" savings one did. In my case, that's post-tax income, plus 401K savings, plus tax refund. The numerator, or the total amount saved, is well, everything saved. For me that's my cash emergency fund, my 401K contributions, and my Roth IRA contribution. I also ran a calculation including all the money I put into my loans as well. My savings rate is: 31.5% including loan repayment and 18.2% not including loan repayment. That's not as high as I wanted, so this calculation is useful food for thought that could affect my personal budgeting when I return to the private sector.

* He also had a scholarship. Mine was larger, though, I must confess, I still borrowed more.

**For context, biglaw salaries, especially in NYC, are standardized to this payscale following a recent industry-wide move to raise salaries this past summer. That payscale is NOT, by itself, a reason to go to law school, (a) given the extreme cost of attendance and resulting student loan burdens, and in my experience those statistics either exclude the substantial interest that accrues during the three years of school or are skewed by some very wealthy peers with considerable parental support (I had a substantial scholarship for a third of the total cost of attendance, and still ended up with a larger balance than even the highest "average indebtedness" numbers at the most expensive schools in the country, if I had no scholarship I would likely have owed $260,000 for law school alone); (b) given how demanding the industry can be (there have been several more "worked to death" biglaw stories in recent years that didn't even hit the news); and (c) as a general matter, those of us who leave biglaw (almost all of us, generally within three to five years) are very unlikely to get back to the same earning potential again for quite some time, if ever. 

*** A few other relevant, though not entirely on-point discussions: This ex-biglaw attorney did a Reddit AMA about her time at a western biglaw firm's office in Qatar. Personal finance was not front and center in that discussion, but I believe she was saving aggressively. Note that for most US-trained JDs, working for a US or UK biglaw firm abroad often results in extra compensation (a cost of living adjustment or "COLA," but certain international markets like Singapore don't have one) and, for US citizens, there's the foreign earned income exclusion, so a portion of your earnings is not subject to US federal income tax and it reduces your taxable income (and marginal tax rate) as a result. This Refinery29 Money Diary is likely from someone whose husband is biglaw-adjacent, if not in biglaw. This other Refinery29 Money Diary is likely a biglaw attorney, but I suspect some numbers are slightly fudged as I can't quite match the salary to a class year, either pre or post-raise. The extremely generous summer associate or business development food and drink reimbursement policy does make some strong suggestions about which firm it is, but who knows (and it's not really my business).  

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