Lawyers often have high student loans to pay and can earn less than what many expect. In 2023, the Bureau of Labor Statistics (BLS) says that the median salary for a lawyer was $145,760 per year, which means that half of those in the legal profession earned less than that. So managing debt is a critical part of a financial plan, impacting your ability to build long-term wealth and save for retirement. Lifestyle creep is another consideration, as is preparing for your professional future. Whether it’s moving to another firm, starting your own practice or using the law to make the leap to another profession, it will cost money to take the next step. If you need help with financial planning for lawyers, consider working with a financial advisor.
Financial Planning for Lawyers: How Much Do Lawyers Make?
Financial planning for lawyers starts with understanding that most lawyers are not rich. In fact, the majority make a below-average income.
Many law students and young lawyers get into the profession to secure a high-paying job. This aligns with the perception of this field as lucrative. The trouble is, that perception doesn’t align with reality.
A small number of law school graduates exit into top-market salaries, with a large gap nationwide between salaries. According to the BLS, the lowest wage for lawyers in May 2023 was at the 10th percentile, where they earned an hourly wage of $33.54, which translated to an annual wage of $69,760. The highest wage reported for lawyers was in the industry of water, sewage, and other systems, where the annual mean wage was approximately $315,000.
For a wider comparison by sector, the median annual salary for lawyers in the same time period was $166,030 for those working in the federal government; $137,350 in legal services; $117,070 in local government (excluding education and hospitals); and $100,670 in state government (excluding education and hospitals).
What Your Salary Means
This means that financial planning for a lawyer breaks in two directions.
If you practice in big law, your financial planning will focus on two main factors: lifestyle and wealth management. Big law attorneys have an extremely high rate of burnout, so make sure you prepare a financial cushion should you want to leave. In the meantime, you have a high rate of income, and can put that money to work.
If you’re among the majority of lawyers with modest earnings, financial planning will involve careful money management. Don’t expect to organically grow wealth through sheer earning power alone. Instead, expect middle-class earnings that should afford a comfortable lifestyle, but not a luxurious one.
Budget for Lifestyle Spending
Lifestyle spending is one of the biggest dangers for any lawyer, especially junior ones.
Spending for a lawyer is typically driven by a combination of stress and time management, as many lawyers work long hours. This can lead to compensatory spending, as they try to make the most of their relatively little free time.
Lawyers can also have high convenience expenses, such as takeout during or after a late evening at the office, or in the form of hiring housekeepers and assistants to make their lives easier. While this can help claw back time, it can get expensive, so you’ll want to be careful about this kind of lifestyle creep.
Whether it’s car payments and private school tuition or just a standing order at a favorite restaurant, your lifestyle can quickly swamp even a generous income if you’re not careful. No matter where you fall on the income distribution, make sure to keep a personal budget and stick to it.
Manage Debt
The average law school graduate owes $130,000 in student loan debt. This will continue to grow, as the average cost of attendance for law school has reached $230,000. That debt comes at a standard interest rate of between 7% and 8%, putting an average first year lawyer’s debt at $1,000 per month in interest alone.
Managing this kind of debt can be difficult, but it is essential. According to the Education Data initiative, almost three out of four law school students (71%) graduated with debt. And the average borrowing amount to cover law school expenses in 2022 was $119,292.
Data also showed that graduated from top law schools owed slightly less, with an average debt of $92,267. Despite this financial burden, almost half of new law school graduates (47%) believed that their legal education was worth the financial cost.
Keeping these numbers in mind, it’s a good idea to pay off your law school debt as quickly as you can, as it will severely limit your options. High debt can limit you from starting a private practice or working in public interest law where salaries can be typically lower.
Accelerate Your Retirement Savings
After graduating law school, you’ll also have less time to save for retirement than most workers, so it’s a good idea to maximize your savings.
The average age of a first year law student is 25. This means that most lawyers don’t start working until 28. That means this cohort has about six years less time to save up for retirement compared with a professional who began working right out of college at 22.
Left unaddressed, this can lead to various outcomes. For example, say that two workers both plan to retire at 67 and each put $500 per month away in their retirement account. At a 10% rate of growth (the S&P 500 average), the worker who began at 22 will have $4.2 million saved by retirement. The worker who began at 28 will have $2.28 million.
As a lawyer, you’ll need to make up for lost time. You can do this by accelerating your retirement savings to compensate for this late start.
Budget for Future Plans
Whether you want to start your own firm, leave a practice to work for yourself, start an unrelated business, buy into your firm’s partnership or something else entirely, it’s important to budget for those future plans.
Starting your own firm or buying into a partnership, for example, is a capital-intensive process. You’ll need a lot of money on hand, as well as the ability to secure a significant loan for the rest.
Some lawyers, such as this writer, leave practice altogether and work for themselves. While less capital-intensive than starting a business, this does require a risk buffer. You’ll need money to re-establish your career and pay the bills during that process.
In all cases, if your future involves leaving a high-paying corporate practice, make sure to address the golden handcuffs. You won’t be able to execute on future plans if you can’t afford to sacrifice a certain salary level, so incorporate that into your plans. After all, it will be hard to open that quiet little practice in a college town while also making payments on a $1.5 million home.
Bottom Line
For lawyers, financial planning should typically be thought of in four stages:
- Your past: Pay off student debt.
- Your present: Budget against lifestyle creep.
- Your near-future: Plan for your career goals.
- Your far-future: Save aggressively for retirement.
While a handful of lawyers make very high incomes that require serious wealth planning, the significant majority make around $60,000 per year. For that cohort, it’s important to budget and save carefully while also paying down typically high student loans.
Professional Income Tips
- A good budget is critical no matter what your income level. It can help make even a modest salary build into real wealth, and it can help prevent generous earnings from disappearing. To get started, here are 10 of our best money management tips.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/ilkercelik, ©iStock.com/AmnajKhetsamtip, ©iStock.com/ilkercelik