I’ve come across lots of money mistakes made by lawyers. As a lawyer myself, some of these mistakes seem to be made repeatedly, and in all corners of the world I’ve worked. Sadly, a lot of these mistakes are equally applicable to other professions, especially those with high incomes.

The pressure on young lawyers to “keep up” with their peers, especially in big cities is immense. When you first enter a law firm, almost everyone around you is wealthy. Yet at the same time, you’re fresh out of law school student loan in hand, possibly never having had a proper pay cheque. The feeling of having to spend everything you earn to look the part, go to every party and act a certain way is overwhelming.

Rather than give in and follow the crowd, its better to go in with your eyes wide open. Take the time to learn good financial housekeeping as soon as possible, and work to give yourself financial freedom.

In doing so, hopefully you can avoid these top money mistakes:

Borrowing from your future self

In my personal experience I think borrowing from your future self is one of the worst money mistakes made by lawyers. This is especially true for lawyers in the first few years of practice.

The lock-step system

Most lawyers are trained at law firms rather than in-house at corporates. Most of these law firms will automatically bump up your salary with each year of exerperence. In the English law system, big jumps tend to occur when you reach certain levels of seniority – on qualification, on promotion to senior associate and when you are made up to partner. This is typically called the lock-step system.

This system provides young lawyers with a particularly delicious incentive to spend, at a time when earnings are lower than you might expect. The impact of this system is that young lawyers can almost guarantee they will have a bigger salary next year than this, sometimes quite substantially. Of course this assumes the lawyer can manage to hold onto their job!

Jam today, and tomorrow!

With this mindset, my lawyer friends would spend lavishly, even running credit card balances (though usually at a 0% interest free rate) from one year to the next. Those doing so are borrowing from their “secure” future pay rises to fund today’s expenses, spicy holidays and all the trimmings needed to keep up with their peers. Hermes bag? Yes please. Rolex watch waitlist? Why not!

It now seems totally ludicrous to do this, but I was equally guilty until I saw the light (of financial independence). For some, the music did indeed stop. Back in 2008/2009 a lot of law firms in London cut their “newly qualified” intake ranks. In my firm that meant only 11 trainees secured permanent newly qualified roles from a cohort of 30. With the jam today and tomorrow attitude, those that didn’t make the cut might have found themselves high and dry at a time when the job market was already very tight.

MMG Lesson: never borrow from your future salary increases, even if they are “guaranteed”.

Poor Debt Management

Poor debt management applies as equally to lawyers as any one else. Though there are some specific nuances for those in the legal profession.

High debt burden in early career

Lawyers worldwide tend to have large student loans and outgoings. In 2021, the American Bar Association found that US law graduates have an average of $130k of student debt.

Many lawyers have to live in very high cost of living cities to be employed. Fixed costs tend to be extremely high in these legal centres – think London, New York, Geneva and Singapore. As mentioned above, Its easy to fall into the trap of thinking there’s always going to be more tomorrow, so who cares if you spend too much now? “I deserve the flight upgrade because I’ve been working so hard (even though its going straight onto the Amex, which don’t pay off).“

The toxic mixture of having high student debt, high lifestyle costs and feeling like there’s always a better (financial) tomorrow leads to a lot of financial pain later on. Many of my lawyer friends lived / still live pay-cheque to pay-cheque via their credit cards – whilst utterly hating their job. What is the point of working so hard, to then just spend all of your money making yourself feel better? The kicker is that most of the same people don’t like being a lawyer and would love to escape law for another career if only they had the money!

The better way

Surely the better way is to pay off student loans, live within your means and invest in your financial future. I repeat this simple advice time and time again yet it tends to fall on deaf ears. Lawyers are a clever bunch, and have a good income. Most pay off debt quickly, but lifestyle creep is real. As lawyers earn more, most increase their spending to match, leaving nothing in the pot for financial freedom.

MMG Lesson: pay down debt as quickly as possible, don’t carry a credit card balance and live within your means as of today (not tomorrow).

Low Savings Rate

Lawyers who compete on spending with their peers tend to be the ones with the lowest savings rates.

Lawyers have lots of spending opportunities presented to them. As a young lawyer, its easy to go along for the ride to help you “feel” like you’ve made it (and show that you fit in). Top spending areas include:

• Private members club dues;
• Extravagant holidays to numb the bad emotions from working too hard;
• Fancy gym fees, along with massage and physio;
• Fancy cars and big houses (fully mortgaged of course); and
• Private school fees.

I know many lawyers who are advanced in their careers with multiple six figure salaries, who only manage to save 10% (in a good month!) or less. Without saving much, much, MUCH more, these folk are destined to work until they drop. Learning how to save is a skill which a lot of lawyers just don’t have.

MMG Lesson: keep your savings rate as high as possible (ideally above 50%) if you want to achieve financial independence and retire early.

Becoming the Bank

Loaning money to friends and family is a recipe for disaster. As a lawyer and a perceived wealthy person, people may ask you to loan them money. The truth is that you may not have enough to spare, and even if you do, there are large pitfalls.

The MMG rule of thumb is that if you are considering loaning money, give it as a gift instead. By converting the “loan” to a gift, theres no adverse impact on a treasured relationship.

Further, when something is structured as a loan, you may be tempted to be over generous with the amount or greedy with the desired “return”. As you are not a bank, this is dangerous for both your investment portfolio, and more importantly, for your relationships with loved ones. Don’t do it!

MMG Lesson: give gifts, not loans.

Failing to Use Tax Efficient Investment Vehicles

There are lots of tax efficient investment vehicles around the world. Wherever you live, you should utilise them to the max.

In the UK there are ISAs and SIPPs. The USA has 401K and Roth IRAs. In Singapore is the SRS scheme. All of these provide tax advantages which really add up over time. Its important to understand how such accounts work in your country and how to use them.

Use it or lose it

Usually these “tax efficient” accounts have a yearly contribution limit. For example, the SRS in Singapore is capped at S$15,000 for Singaporeans. If you don’t utilise your allowance, you lose it. Each year is then a lost opportunity.

Employer contribution match

What is even better is that some employers will offer an employee match up to a defined level. By failing to contribute up to that level, you are throwing away free cash. As a young lawyer, this is exactly what I did (to my chagrin now!). Though I luckily saw the light after 3 years of working and started contributing to my UK SIPP. Don’t be me, take advantage of these wonderful accounts ASAP.

MMG Lesson: use your allowances in your tax efficient investment vehicles each year. Start as soon as you can once you are gainfully employed. Especially take advantage of employee matches.

Disintegration of Relationships

A marriage breakdown has a catastrophic effect on finances. Sadly a lot of lawyers end up divorcing. Starting afresh in mid-life is of course emotionally very difficult.

A senior law firm partner once told me that my significant other(s) will come and go, but my career will always be there. I lost a lot of faith in the legal profession that day. Sadly, I could see that sentiment play out time and time again across the office.

There’s something about the legal profession which really hinders relationships. Its something I’ve noticed time and time again. I think it has something to so with the late nights and general incessant work pressure. I remember partners sleeping on the floor of their offices or booking out sleeping pods just to avoid their families. Horrible.

MMG Lesson: remember that you’ve married your signifiant other, and not your job.

Overpaying for Managed Investments

Lawyers (as juicy high earners, too busy to care) are targeted by finance professionals claiming to be able to manage your money better than the last guy. They prey on the ego of lawyers to make us feel special, elite and deserving of sophisticated advice. This is all of course total rubbish.

High adviser fees

My friends who use wealth advisors are charged astronomical fees essentially for fancy stationary and cuddly customer service (minus good investment returns). Overpaying for investment products though adviser fees or expensive actively managed funds is probably the biggest money mistake made by lawyers. Actively managed funds sold by these advisers can charge 1-2% more in fees than an index fund and usually produce sub-optimal returns to boot.

The $1m decision

The difference that these 2% a year of fees makes over the long run is really mind boggling. On a $50K investment over 30 years at a 5% return, those adviser fees will eat up almost $1,000,000 of your money. Thats a lot of money to pay for fancy stationary and a monthly phone call. People are waking up to this and advisers like St Jame’s Place are now feeling the heat.

There are lots of ways to avoid falling into this trap with some basic financial education. Simple index funds are the investment vehicle of choice in the financial independence community. I first learned about index fund investing when I found the financial independence movement in 2020. It was a pivotal moment in my investing career. Index fund investing means paying fees as low as 0.04% (or lower). If you are new to investing and lofty notions of financial independence, start here.

MMG Lesson: learn about investing basics and consider if index fund investing could be a better way for you. 

Are there any other money mistakes made by lawyers that you’ve noticed? Have you fallen into any of these money mistakes yourself? Leave a comment below!