“Flight attendants prepare for arrival…” Those were five of the sweetest words I’d ever heard. A couple months ago I endured the worst flight of my life. We left 3 hours late, had terrible turbulence and a toddler behind me screamed (and vomited) for all but 10 minutes. Suffice to say I was really ready to arrive.
For many lawyers “arriving” means becoming an equity partner. From the moment you join the firm you are focused on what you must do to make partner. You log huge hours, build your network and originate business all in the hopes that one day you’ll be a shareholder. You’ve spent countless hours preparing for arrival from a career perspective, but how prepared are you from a financial perspective?
This is the final installment in a series of blogs focused on the steps lawyers should take to move towards financial freedom, based on their career stage.
Today we’ll focus on income partners.
Income partners occupy a unique “space between” in law firm land. You’ve proven yourself and yet there’s still more to prove. You’re no longer an associate, but not yet a stakeholder.
Here are some smart steps to take now to be financially prepared when you get that long-awaited call inviting you into the partnership:
- Practicing “Lifestyle Lag” – Law firm compensation for non-equity partners can be pretty predictable. Generally speaking, as you move up the ranks you get paid more. Base salaries and bonus ranges typically follow a stair-step pattern for associates and even income partners. Unfortunately, personal spending typically follows an up-and-to-the-right pattern as well. The more you make the more you spend. Instead, what if you practiced a little “lifestyle lag” where your spending increases lagged your comp increases? Instead of leveraging yourself to the hilt, buying the most expensive house and car, what if you bought 80% of what you can afford? This would give you some precious financial white space and allow you to save for other long-term goals, such as…
- Saving Up for Capital Buy-In – Each firm handles this a little differently, but most firms require some type of capital buy-in when becoming an equity partner. Depending on the size and profitability of the firm this can be a relatively small or quite large number. It’s common for new partners to borrow some or even all of the capital needed for this buy-in from a bank or internal financing mechanism. While borrowing some of the buy-in may be unavoidable, you could save yourself some interest cost if you have a nice chunk of cash to put towards the buy-in. We’ve enjoyed low interest rates for a long time now, but rates are starting to creep higher, making this point more relevant now.
- Planning for the “New Normal” – It’s common for newly-minted equity partners to say (aloud or in their heads) something like – “I’ve worked so hard to make partner, now that I’ve made it why do I feel so poor?” Becoming an equity partner brings prestige and a real sense of accomplishment. It also brings cash flow complexity. Going from a predictable salary/bonus to a less predictable draw and distributions comp model is unsettling and not easy those first few years. Add in quarterly estimated tax payments, which sometimes must be paid without having already received your distributions and you’ve got a recipe for stress. There’s really no way to fully eliminate this, but you can mitigate it by building a “rainy day fund” now and planning for those first few years where cash flow can be tight at various points throughout the year.
As you continue to advance your career hopefully these tips will help you be more ready when you get “the call.”
Justin Peacock, MBA, CFP® is an Owner and Wealth Manager at BDF. In addition, he leads BDF’s Attorney Practice Group. This group is dedicated to providing financial planning and investment management services specifically tailored to addressing the distinct needs of lawyers. As practice group leader, Justin is responsible for the overall vision and strategy of the practice group and for developing customized solutions for BDF’s attorney clients. Justin graduated magna cum laude from Illinois State University with a B.S. in Mass Communication and earned his MBA from Northwestern University’s J.L. Kellogg School of Business.