In the previous post, I discussed golden handcuffs as a barrier to leaving the law. Today, I will address my personal finance situation (I am anonymous after all) and how it is affecting my personal journey.
Before getting into all of that, I would highly recommend you use an online personal finance service such as mint.com or yodlee.com to manage your finances. I was initially concerned about the safety of my account information, but was comforted by the lengths at which these services attempt to safeguard that information. Of course, there is always a slim chance something will go wrong.
What I like about these services is that all of your financial information is at your fingertips. I can see what my current net worth is ($250K) and how it compares with my net worth a year ago ($200K). Also, I could, for example, see how much I’ve spent eating out over the past year across all of my credit cards. This makes assessing my financial situation much easier than if I had to manually enter all of this information from bank statements, etc.
When it comes to leaving a big firm, the most important factors are (1) cash reserves and (2) expenses. Out of my current assets, about $90K is in retirement accounts. Obviously, I do not want to tap in those accounts prior to retirement. What I have left must cover living expenses and start-up capital (if I were to go the entrepreneur route). The big question is how much money do I need before I can safely make the leap? I don’t know the answer yet. Some experts suggested having 6-12 mos. of living expenses plus what is necessary to start-up the company. Of course, as a lawyer, I want to minimize as much risk as possible so I want to overestimate what I’ll need.
I created the following graphs that depict (1) my cash assets over time and (2) the rate at which I am saving cash over the same period. For context, I started working at my current firm around the one-year mark. I was happy to see the savings rate accelerate after year 2, which was the last time I got a raise, although I did receive a bonus after year 3. According to the chart, my cash savings rate is currently shy of $90K per year, which does not include the $15.5K I contribute to my 401(k) and the $5K I contribute to my IRA each year.
Let’s say I grit my teeth and stay at my firm for another two years. That will mean, even with no interest, I can add at least another $180K to my cash reserves for a total of $350K. Plus $40K to my retirement accounts for a total of $130K. I couldn’t even run the numbers over the next ten years because my salary could be in high six-figure range and who knows what my savings rate will be. Even assuming my current salary and a zero percent rate, I would have over $1M in cash and $300K in retirement assets. You get the idea. How much is enough?
This depends on the person. There are those people who spend money as fast as they make it. One of the partners at my firm has equestrian stables at his estate in the suburbs and a $100K car. While some may envy his lifestyle, thinking about his golden handcuffs makes me shudder It reminds me of Marc Dreier, whose lavish lifestyle caught up with him and who ended up committing a $700M fraud just to make ends meet. He plead for leniency stating “I recall only that I was desperate for some measure of success that I felt had eluded me.” (Not that I think this particular partner will be driven to commit fraud; Dreier is used as an extreme example of how the pursuit of money can corrupt.) I will address my expenses in the next post.