Running a law firm is a round-the-clock endeavor that often leaves attorneys with little time for long-term planning. Unfortunately, long-term financial success rarely occurs by chance. In most cases, attorneys who take the time to assess their finances and create a long-term strategy are those who come out on top of their finances later in life.
Understanding Your Financial Landscape
Attorneys are subject to certain financial challenges specific to the legal sector, such as substantial law school student loan debt and income fluctuations based on rates of client intake and retention. The first step in creating a plan for long-term financial success is to take a comprehensive look at your current financial landscape.
Assessing Income Sources
Retainer agreements, flat fees, and hourly billing are a few of the most common law firm income sources. For many law firms, income varies at different points in time. Taking a comprehensive look at your firm’s income history can help you clearly understand your firm’s finances.
Identifying Expenses
Carefully tracking expenses is essential for managing a firm’s finances. Most law firms can divide expenses into two types: fixed and variable.
Fixed expenses are those you can always expect, such as office lease payments and payroll. Variable expenses are those that occur on a periodic or individual basis, such as investing in a new marketing campaign. Creating a realistic financial plan for your firm depends on accurate expense tracking.
Evaluating Debt
Attending law school and starting a law firm are two significant sources of debt for attorneys. Taking stock of outstanding debt, number of loans, interest rates, and current repayment plans is essential for understanding the impact of your debt on your current and future finances.
Building a Comprehensive Financial Plan
Once you’ve taken the time to gain a comprehensive understanding of where your finances currently are, the next step is to set long-term financial goals and create practical strategies for eventually achieving them.
Setting Financial Goals
Setting concrete short- and long-term financial goals is essential for achieving financial success. Getting out of debt and achieving a certain level of annual income are common goals. Many attorneys often incorporate additional personal goals, such as buying a vacation home, paying off a mortgage, or saving for retirement.
Creating a Budget
Achieving financial goals means being in control of current finances. Once you’ve done the work of understanding your current financial landscape, you can begin budgeting in a way that helps you work toward your long-term financial goals.
An effective budget should be tailored to address your personal and professional goals. There are many apps and online programs that can help you create a customized budget.
Establishing an Emergency Fund
An emergency fund is your safety net for when the unexpected happens. Your emergency fund should ideally hold enough money to cover three to six months of both personal and professional expenses.
This money is there to protect you when unexpected events like illnesses, accidents, slow periods, and client loss lead to a loss of income. An emergency fund also ensures you don’t need to go into further debt when unexpected costs arise.
Investment Strategies for Attorneys
Investment is an essential part of long-term financial success. Investments are one of the best ways to make sure your money is working for you to facilitate wealth-building and ensure adequate support after retirement.
Understanding Investment Options
There are ample options available for getting started with investing. Some of the most common investment vehicles include stocks, bonds, real estate, and retirement accounts.
Different types of investments entail different levels of risk. Risk tolerance is important to consider as you choose how and where to invest. There’s no shortage of online resources to help you learn more about how to begin investing.
Retirement Planning
It’s never too early to begin planning for retirement. The earlier you start to consider your retirement planning, the more likely it is that you’ll be able to achieve a comfortable retirement at your desired standard of living.
Common retirement planning options used by attorneys include 401(k), solo 401(k), and Roth IRA. Each type of investment account has its own rules regarding contribution limits, income limits, and tax obligations, so it’s important to educate yourself and choose the option best for your circumstances.
Consulting With Financial Professionals
When you’re unsure about how to get started with investments and retirement planning, a good first step is to consult a financial advisor or strategist. For attorneys, it’s best to begin by looking for financial professionals who specifically cater to legal professionals, as they’re most likely to understand your unique financial needs.
Tax Strategies for Attorneys
Taxation can be a significant source of financial stress for attorneys. Being aware of your obligations and having strategies in place helps ensure you remain in good standing with the government, and tax debt doesn’t catch you unawares.
Understanding Tax Obligations
Tax obligations can be complex for lawyers. It’s important to understand your tax obligations, such as payroll and self-employment taxes. Keeping detailed and accurate financial records can help you stay aware of what taxes you owe.
Tax Deductions and Credits
Taking advantage of tax deductions and credits can significantly help decrease the amount you owe in taxes. Continuing education and business expenses are two common examples of tax deductions that often apply to attorneys.
Year-Round Tax Planning
Thinking about tax obligations only during tax season is a mistake. The most effective strategy for staying on top of your taxes and ensuring you’re not overpaying is to consider tax-efficient purchases and investment strategies year-round.
Protecting Your Financial Future
Asset protection and risk management are essential elements of protecting your financial future as a lawyer.
Insurance Needs
When you practice law, having the right insurance policies in place isn’t an option. Attorneys need personal insurance protection for their homes, vehicles, and health. Lawyers also need to consider insurance that protects their practice, such as professional liability insurance and business interruption coverage.
Estate Planning
It’s impossible to discuss long-term financial planning without mention of estate planning. Death or incapacity can strike at any time. Having wills, trusts, and powers of attorney in place protects your loved ones and ensures your end-of-life preferences are respected.
Get Help Planning for Long-Term Success
Long-term financial success is achievable, but it requires comprehensive strategic planning. When attorneys need help, Woven Legal has answers. Learn more about how subscription-based support through our legal staffing service can help you achieve your financial goals.
Book a Discovery Call to get started.
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