NOTE: This article was previously published in Attorney at Work, reprinted with permission.

The original link to the article may be found here.

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Designing a financial plan that aligns your family’s values with your hard-earned money is important to most everyone - especially attorneys. However, the most limited resource that an attorney has is time.

If you’re a DIY investor, it can be difficult to find time to sift through blog posts, articles, and podcasts. Not to mention this isn’t the way most of us choose to spend a Saturday afternoon.

On the other hand, perhaps you’ve considered engaging with a professional financial planner only to find that your homework required to complete the plan seems daunting. This often involves gathering your tax returns, investment statements, insurance policies, employee benefits handbook, etc. 

Or if you’ve actually managed to gather up all the documents, you’ve then been tasked to estimate what your vacation expenses will look like 15 years from now. Throw in some estimations around inflation, investment returns, and the future of social security and you are left with a… plan (that’s going to change).

Now don’t get me wrong. This is a terrific exercise that every attorney should do – especially as they near retirement. I do this often with my clients. It gives you direction today.

While I love a good plan, it's the course corrections along the way that make all the difference. The only thing we know with certainty is that the plan will need to be changed. Because life changes. Jobs change. Tax law changes.  Markets change. Desires change. Relationships change.

All of these variables and the work involved keeps most attorneys from taking action.

The largest common denominator that drives your financial health is your behavior. That is – understanding where your money is going and why. In its most simplest form, money can only fall in to 4 categories:

1. Savings

2. Debt payments

3. Tax payments

4. Spending

Charitable giving may be itemized separately for some, but I tend to include that in spending.

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You may be asking, “Isn’t spending too broad?” After all, “spending” could mean just about anything.

“Shouldn’t there be categories for spending?” You know – like the ones that lead you to feeling guilty about your $6 coffee that you enjoy each morning? Maybe for some.

But with time as our most limiting resource, I can make a case that if the other 3 areas – Savings, Debt, and Taxes are managed appropriately, it doesn’t matter where you spend. Stay with me, I’ll walk through how easy it can be to track these 3 categories.

If you’re not ready to engage with a professional or get down to the nitty gritty of your cash flow on your own, let me suggest a simpler way to identify a baseline in about 10 minutes – Tracking financial vitals.

Let’s dive deeper into what the 4 cashflow “Vital Signs” should look like for an attorney:

Before we start, know that this exercise is not intended to be an exact science. Some will fall above and below these ranges. But after working with clients over the last decade, I’ve noticed a pattern of healthy vitals that can be measured to help us quickly assess our current financial health baseline.

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Savings Rate

Aim for 10-20%

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Savings Rate = Annual Savings / Gross Annual Wages

For example, a family that is saving $20,000 per year on family wages of $200,000 would have a savings rate of 10%. This number is easy to quantify. Grab a bank or investment statement and look at the “YTD contributions”.

Savings include retirement accounts, including 401k, Roth IRA, IRA, etc. They also include cash savings into checking, savings, or money market accounts. I’ll take it one step further to add that the extra $300 you may be paying towards your mortgage each month could also be added here.

Why 10-20%?

 Families who save within this range give themselves the highest chance of replacing their current income in retirement. Variables such as employer match (if any), social security, pensions, or other earned income in retirement may affect your specific range. But keep it simple if this is your first crack at this.

‍Debt Rate

Aim for 15-25%

The Debt Rate is calculated as Annual Debt Payments divided by Gross Annual Wages.

For instance, a family with $40,000 in annual debt payments on $200,000 family wages would have a 20% debt rate. Debt payments include mortgage, auto, credit card, personal loan, medical debt, or any other liability.

Debt rates of 35-50% hinder future savings, while 25-35% are elevated and need monitoring. Ideal rates fall in the 0-15% range, but consistently paying with cash may indicate missed wealth-building opportunities. Banking guidelines may allow higher mortgage payments, but prudence is key for a healthy financial decision.

Keep in mind that these are not banking or lending guidelines. With a healthy profile, your bank will probably lend you enough money for a house that will leave you with a mortgage payment exceeding 35% of your annual wages or higher. But that doesn’t make it a healthy financial decision.

Tax Rate

Due to the many factors that affect tax rate, I would simply recommend quantifying this amount, and find improvements from there.

Tax Rate = Annual Tax Payments / Gross Annual Wages

Tax payments include Federal, State, and Local tax payments. These can easily be retrieved from your most recently filed tax return.

These 3 tax payments (Fed, State, Local) are good enough for this estimation. If you’d like to get more detailed, you may want to add in real estate taxes (unless you already included them in a mortgage escrow), school taxes, FICA taxes, etc. But again, keep this simple. It’s okay if these percentages don’t add up to 100 exactly.

Providing a healthy range for this category can be difficult. Asset sales, varied income, and certain tax planning strategies may affect this rate on any given year. Quantify this rate as a baseline, and then begin looking at opportunities to tax plan. This may include more contributions to retirement accounts, identifying tax deductible expenses within your business, or implementing charitable giving strategies.

‍What’s left? Spending Rate (or “Burn Rate”)

Aim for 30-50%

Spending Rate = Annual Spending / Gross Annual Wages

Once the first three cashflow categories have been identified – Savings, Debt, and Taxes, we’re left with our Spending Rate. This is the category that is time consuming and difficult to quantify under a traditional budgeting approach.

By using this “process of elimination” method, you don’t have to identify every spending expense individually. If $6 coffees make you happy, why wouldn’t you buy them? Where I spend my extra doesn’t need to be where you spend yours.

Unless retired, elevated spending of 50-70% may represent inadequate savings, higher debt rates, and higher taxes. A lower spending rate of 15-30% may represent a feeling of guilt around normal spending. It’s okay to spend! Afterall, that’s why most of us work.

Recap

In conclusion, managing cash flow for attorneys can be simplified by focusing on four vital signs: Savings, Debt, Taxes, and Spending. By tracking these categories and aiming for specific percentages within each, attorneys can establish a baseline for their financial health, making course corrections as needed while prioritizing their limited time effectively.

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