The legal profession suffers from high rates of burnout, substance abuse, and mental health challenges. I would argue that one large contributing factor to these challenges is that many lawyers remain in jobs they don’t like or hesitate to set boundaries or say “no” more at work due to money concerns. I believe financial independence is the key to those money concerns.
What is financial independence?
Financial independence is the point at which you no longer need to work for a paycheck because your assets can cover your living expenses. Investing in the stock market is the most commonly discussed route to financial independence, and that’s what we’ll discuss here. However, you can also reach financial independence by building up streams of income from more passive sources, such as rental income, that cover your living expenses.
How do you reach financial independence?
The typical rule of thumb is you’ve reached financial independence once you have 25 times your annual living expenses in investments. That calculation comes from a study called the Trinity Study, which looked at a variety of retirement portfolios over different time periods to determine the percentage of money retirees could withdraw from their accounts each year without running out of money during the time period. The study concluded that 4% was a safe withdrawal rate. To determine the amount you need so that your annual expenses are 4% of your investment portfolio, multiply by 25—hence the rule of thumb.
The importance of your savings rate
The amount you save in relation to your income is your savings rate. For example, if you make $50,000 in a year, and you save $5,000, you have a 10% savings rate. Any money you put toward extra debt payments would also be included in your savings rate because that money is helping to decrease your expenses and isn’t part of the amount you would need to cover in financial independence.
Remember that the rule of thumb for financial independence is tied to your annual expenses. The lower your expenses, the more you’re able to save each year.
Your savings rate will dictate how quickly you can reach financial independence. The higher your savings rate, the more quickly you will achieve that goal, both because you’re saving more money and because the total amount you need to cover your expenses is lower. People in the financial independence community often strive for savings rates of 50% and above, but there are certainly people who are saving less than that.
Your lifestyle will come into play here. The more your lifestyle costs, the more money you need to save to reach financial independence. Although the mainstream media like to highlight stories of people who cut their living expenses to the point that they only eat ramen noodles and walk everywhere to reach financial independence quickly (a slight exaggeration, but you get the point), most people in the financial independence community live full lives. There’s even a segment of the community who are building their investments to support spending six figures each year.
The benefits of financial independence
Financial independence sets you up so that you can live life the way you want to. Some people continue to work in the same job but feel more secure knowing they could leave if they want to. Some people change positions, including choosing positions that pay less. Some retire and travel the world. Some get into entrepreneurship.
And you don’t have to fully reach financial independence to start reaping the benefits. When you start decreasing your debt, decreasing your expenses, and increasing your savings and investments, you put yourself in a solid financial position. Working toward financial independence offers a lot of flexibility in the choices you make for your life.
Quick tips to get started on your financial independence journey
Get clear on your values and what you truly care about. Many of us spend money without thinking about it. We’re moving on autopilot and sometimes will buy an item because it’s something that we’re “supposed to” have because we’re lawyers. Or we buy it because a friend or colleague bought it. You want to think about what you value in your life and what you truly care about. Every dollar you spend on something that’s not those things is robbing you of the opportunity to have more of those things.
Examine your current spending. Figure out where your money is going. Determine whether you like (1) where you’re spending your money and (2) the amounts you’re spending in each area. You want to grow the gap between how much money you’re bringing in and how much you’re spending. That gap is also known as your savings rate and is where your wealth is built.
Make a plan to eliminate your debt. This is not necessarily to say that you have to pay off all of your debt immediately. Some people distinguish between high interest debt and low interest debt and choose to pay off the high interest debt quickly and then direct their money into investments rather than paying off the low interest debt. Others knock out all of their debt regardless of interest rate. Ultimately, it’s personal preference, but keep in mind that the power of compound interest works against you on your debt balances, especially when you have high interest debt.
Learn about investing. Yes, you want to have emergency savings in a savings account, but you also want to invest so your money will earn more money. The financial independence community (and Warren Buffett, arguably the greatest investor of our time) advocates for investing in low-cost index funds that you hold onto long-term. Whatever you decide to invest in, make sure you understand it, and you understand why you’re investing in it.
Enjoy the journey. Lawyers have a tendency to want to do things the “right” way. When it comes to learning a new way to manage money, we can take things overboard and forget to live life in the process. Remember: it’s a marathon, not a sprint. If you’re miserable the whole time, you’re not going to stick with it, so take time to enjoy life as you work toward financial independence.
Financial independence is about being intentional with your money and spending in line with your values. It’s not a quick fix or even the only solution for the challenges that attorneys face, but it certainly helps. It provides options, and I don’t know who wouldn’t want that.