Budgeting Mistakes Lawyers (And Most People Generally) Make

When I first started at the law firm, there was a mid-level associate that I worked for on some deals who would buy herself an expensive present every time she finished a deal.  It was mostly new shoes and purses handbags.  And I don’t blame her.  Deals are hard.  But I shudder to think how much she spent on that stuff over the course of her time at the firm.  And more importantly, the opportunity cost of that money.

As a rough measure of opportunity cost I generally compare any discretionary expenses to a typical dividend stock yielding 3% that grows its dividend 5% per year in perpetuity.  So a $2,000 purse handbag is really foregoing $60 in dividends, growing 5% per year, for every year of the rest of your life.

People at BigLaw or even in-house don’t really talk to each other about their personal finances or budgeting, except for at that one magical time of the year – bonus time.  Then it is common to hear what people are expecting to do with their bonus funds.  Invariably people’s plans were something along the lines of, “I’m going to spend half on XYZ and save the other half,” and people generally thought they were being quite responsible for saving the other half.

Don’t Do Budgets

This type of budgeting by percentages is how almost everyone budgets.  People say that they try to save 40% or 50% or whatever of their take-home pay.  To me, that’s equivalent to saying, “I’m going to spend 60%” or 50% or whatever.  If the bare necessities end up being less than that percentage, this type of budgeting turns into a mental excuse to look for ways to spend the gap.

In our budget, every expenditure is assessed on its own merits and compared to the opportunity cost of not investing.  This isn’t to say that we don’t waste money; we do.  We splurge.  But we don’t splurge within a budget.

This advice is especially true for high income earners like junior lawyers at BigLaw.  If you are saving 50% of your take-home pay and still going to Nobu once in a while, you’re still blowing a lot of money at Nobu even if it’s “in budget”.

This method of budgeting is one of the primary ways that we managed to save as much as we have.

That Being Said…

However, I should add that if you believe some splurging now and then can actually extend your run at a high paying job, then it can be worth it on a pure numbers basis.  If some spending keeps you from burning out like yours truly, then go for it.  Even an extra 6 month run in a high paying position like BigLaw or investment banking can pay for a lot of splurging.

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