Personal Finance for Lawyers

Introduction

In this section, Matt Margolis introduces himself and Law Trades, a legal tech company that provides on-demand flexible legal solutions. He also introduces the two professionals who will be discussing personal finance.

Introducing the Speakers

• Doug Bonaparte is the president and founder of Bonafide Wealth. He works with young professionals around financial planning, wealth management, and investment management.

• Tiffany Lee is a personal finance expert who will be joining in part two of the discussion.

Getting Started with Personal Finance

In this section, Doug Bonaparte discusses how to get started with personal finance.

Organizing Your Finances

• The first step in personal finance is getting organized. Start by understanding where your money comes from and where it goes.

• To get organized, track your spending for at least one month to understand where your money is going.

• Once you have an understanding of your spending habits, create a budget based on real data.

Managing Your Money

• To manage your money effectively, focus on both cash flow (money coming in and going out) and net worth (assets minus liabilities).

• Prioritize paying off high-interest debt before investing or saving.

• Consider automating savings contributions to make it easier to save consistently.

Investing Basics

In this section, Doug Bonaparte discusses investing basics.

Understanding Risk vs Reward

• Investing involves balancing risk and reward. Generally speaking, higher-risk investments offer higher potential rewards but also come with higher potential losses.

• Diversification is key to managing risk in your investment portfolio. Spread your investments across different asset classes and industries.

Choosing Investments

• When choosing investments, consider factors such as fees, historical performance, and the overall market environment.

• Index funds are a popular choice for many investors because they offer broad exposure to the market at a low cost.

Conclusion

In this section, Matt Margolis wraps up the discussion on personal finance.

Key Takeaways

• Getting organized is the first step in personal finance. Track your spending and create a budget based on real data.

• Prioritize paying off high-interest debt before investing or saving.

• Diversify your investment portfolio to manage risk. Consider low-cost index funds as an option.

• Automate savings contributions to make it easier to save consistently.

Importance of Tracking Expenses

In this section, the speaker emphasizes the importance of tracking expenses and getting 12 months of data to understand spending behavior.

Why Track Expenses

• Tracking expenses is important to understand spending behavior.

• Getting 12 months of data is necessary to account for seasonality and smooth out spending habits.

• Use tools like Tiller Money, Mint, or Rocket Money to plug in accounts and get real data.

Balancing Spending and Savings

In this section, the speaker discusses how balancing spending and consistent savings/investment is crucial for achieving financial goals.

Understanding Spending Behavior

• Categorize expenses broadly to understand where money is going.

• Analyze spending behavior to identify areas where you can save money.

• Consistently saving and investing is necessary for achieving financial goals.

Balancing Spending and Savings

• Wealth management involves balancing spending against consistent savings/investment.

• Building a budget around actual spending behavior helps hold yourself accountable.

• Give yourself three to six months before adjusting your budget based on averages.

Building a Budget Based on Actual Spending Behavior

In this section, the speaker emphasizes building a budget based on actual spending behavior rather than gaming it or making it up.

Building a Budget

• Build a budget around actual spending behavior rather than gaming it or making it up.

• Use monthly averages as a guide when building a budget.

• Hold yourself accountable when adhering to your budget by not changing things up every month.

Building a Strong Financial Foundation

The process of being in control of your financial life is a lifelong process. It takes years to get the foundation in place. If you earn income on a 1099 basis or from a sales component, it creates more irregular cash flow.

Controlling Cash Flow

• Budgeting and analyzing cash flow is easier for W-2 employees who receive a base salary.

• Sales associates or those with sales functions need to pay more attention to how their flows work relative to expenses.

• Lifestyle creep is where we see more money coming in, so we want to take advantage of being able to enjoy ourselves more.

Managing Income Increases

Darren got a raise and now makes $30k-$40k more. It's important not to fall into lifestyle creep and increase savings or investment rates relative to the increase.

Avoiding Lifestyle Creep

• Warning label is lifestyle creep.

• Increasing savings rate or investment rate two, three, four, five, six-fold relative to that increase.

• You really want that broader context and driver; otherwise, it's YOLO.

Goal Setting for Financial Planning

Understanding goals are essential when looking at what money comes in and goes out. Without understanding goals, extra money may lead us astray from our long-term objectives.

Importance of Goal Setting

• Having broader context and driver behind spending decisions.

• Geographic bias exists among clients who are attorneys based in New York City or New Jersey.

• Private practice attorney life can be challenging; therefore, thinking long-term is crucial.

Understanding Earnings vs Expenses

Understanding earnings and expenses is crucial to make informed financial decisions.

Earnings vs Expenses

• If you're going to grind that hard for $180k, your rent is $5k.

• It's essential to understand what your goals are and what that additional money means in the context of those goals.

• You want to increase your savings rate or investment rate while increasing your lifestyle if you're getting paid more.

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Understanding Partnership Compensation

In this section, the speaker discusses the compensation structure for partners in law firms and the challenges that come with it.

Compensation Structure

• Partners in law firms receive a base salary for three years before their total compensation is increased to seven or eight figures.

• Partners are responsible for making estimated tax payments directly to the government instead of having withholding come out of their paycheck.

• This can lead to cash flow issues and confusion about promised compensation.

Challenges of Partnership

• The transition to partnership can be challenging due to the sudden increase in responsibility and financial obligations.

• It may take several years before things normalize, leading to frustration among new partners.

• Many professionals, including lawyers, lack financial education and rely on working hard and throwing money at problems rather than managing finances effectively.

Importance of Financial Education for Professionals

In this section, the speaker emphasizes the importance of financial education for professionals and suggests ways that employers can provide this education.

Need for Financial Education

• Lack of financial education can lead to wasted time and energy trying to figure out personal finances.

• Providing financial education can make employees better lawyers or professionals by allowing them to focus on their work rather than worrying about finances.

Suggestions for Employers

• Employers should offer financial education to associates early in their careers, regardless of whether they make partner or not.

• Providing financial education can benefit both employees and employers by improving productivity and reducing stress.

The Importance of Financial Planning

In this section, the speaker discusses the importance of financial planning and how it can help attorneys gain leverage in their careers.

The Never-Ending Challenge of Growth as an Attorney

• Financial planning becomes more important as an attorney's career progresses.

• It is easier to make financial decisions when you have a solid foundation and understand your cash flow.

Starting Financial Planning at Any Age

• It is never too late to start building a foundation for financial planning.

• Although it may be boring or tedious, creating a budget and setting goals are essential steps towards achieving financial stability.

Challenges Faced by Attorneys

• Not all attorneys make high salaries, especially those working outside of large law firms or in government positions.

• Student loan debt can also be a significant burden for many attorneys starting their careers.

Adapting to Changes in Career Trajectory

• Having a strong foundation in financial planning allows individuals to pivot and adapt more quickly when changes occur in their career trajectory.

• Being proactive rather than reactive is key to making sound financial decisions.

Emotional Elements of Personal Finance

• Emotions often play a role in personal finance decisions, but conditioning oneself through practice can lead to better decision-making skills.

Financial Decisions and Work-Life Balance

In this section, the speaker discusses how making proactive financial decisions can lead to better work-life balance. He emphasizes the importance of considering one's financial situation before making career moves.

Making Proactive Financial Decisions

• Before accepting a job offer, calculate the impact on your cash flow.

• Consider moving to a location with a lower cost of living or where you have family support.

• Prioritize work-life balance over financial gain.

• Don't trade work stress for financial stress.

Empowering Yourself Financially

• Take control of your finances by regularly checking in and making adjustments.

• Prioritize mental health and personal relationships when making career decisions.

• Regularly check in on your finances, just like going to the gym regularly to stay healthy.

• Consistent effort will lead to long-term financial success.

Understanding Equity and Options

In this section, Tiffany Lee and Doug discuss equity and options in detail. They explain the importance of exercising options, how to value them, and the tax implications associated with them.

Introduction to Equity

• Darren is now faced with something completely new - equity.

• Tiffany Lee introduces herself as the former General Counsel of Thrive Market and soon-to-be General Counsel of Liquid Death.

• She explains that many people, including lawyers, executives, and VPs, do not understand equity.

Understanding Options

• Tiffany focuses on explaining options rather than RSUs since they are not liquid until there is an event.

• When you get options from a company, you need to ask yourself if you saved enough money to exercise them.

• Exercising your options can save you up to 15% in taxes if you hold them for a year before selling them.

• It's important to decide whether saving 15% in taxes is worth the cash required to exercise your options.

• Tiffany encourages people to exercise their options a little bit at a time instead of all at once.

Exercising Options

• Doug emphasizes the importance of being organized when it comes to exercising options.

• You need cash resources specifically for non-publicly traded companies because there's no market to sell it if it's not publicly traded.

• You might trigger AMT preference items come tax time which could gross up your tax bill.

• The lack of knowledge around exercising options can lead people into thinking that they will become millionaires when their stock price goes up.

Conclusion

This section concludes the discussion on equity and provides some final thoughts on what was discussed.

Final Thoughts

• Exercising options requires careful consideration and planning.

• It's important to understand the tax implications associated with exercising options.

• Being organized and having cash resources is crucial when it comes to exercising options.

• Lack of knowledge around equity can lead people into making poor decisions.

Understanding Stock Options

In this section, the speakers discuss what stock options are and how they vest.

What are stock options?

• A stock option is the right to purchase a share of a company at a designated price.

• It is often offered by early to mid-stage companies because it's tax advantageous.

• If you exercise the option, you hold on to the underlying share that gets you capital gains tax versus RSUs.

How do stock options vest?

• The most common vesting schedule for new jobs is four years with a one-year cliff.

• You have to stay for one year in order to get any shares, and after that, you get 25% each month.

• Different companies have different vesting schedules.

Should you exercise your stock options?

• Talk to a financial advisor if you have one.

• Understand how the company is doing and whether it makes sense to exercise your options.

• Think about it as a spread between your exercise price and fair market value.

Additional information

• Generally, there are ten years to exercise stock options.

• You don't have to exercise them; there is an incentive to do so sooner than later based on assumptions about cashing out someday.

Qualified Stock Options and AMT Preference Item

In this section, the speaker talks about qualified stock options and the tax incentive associated with them. They also discuss the Alternative Minimum Tax (AMT) preference item and how it is triggered by exercising qualified stock options.

Tax Incentive for Qualified Stock Options

• Qualified stock options offer a tax incentive.

• Preferred tax treatment is available for long-term capital gains rates.

• The AMT preference item is triggered by exercising qualified stock options or just options.

• The preference item is calculated as the difference between what you paid to exercise and what the fair market value of the stock is.

Triggering AMT Preference Item

• When there is a significant difference between your strike price and the fair market value of the company, it can trigger a large preference item.

• If you trigger AMT, you may owe an extra liability that you may not have cash to pay.

Getting Liquidity for Your Shares

In this section, the speaker discusses how to get liquidity for your shares when switching jobs. They talk about secondary markets and platforms that can help you sell your shares.

Secondary Markets

• Many stock plans require employees to exercise their options within 90 days of leaving their job.

• There are several secondary brokers that can help you sell your shares.

• Hive Global is a newer platform that provides real-time data on the last fundraising round, fair market value, and historical price of shares.

• You can sign up for these platforms to see if you can get liquidity for your shares.

Equity Options and Liquidity

In this section, the speakers discuss how to get liquidity from equity options in a privately held company.

Getting Liquidity from Equity Options

• Brokers can help put you in touch with potential buyers for your equity options.

• The brokerage fee is typically 5-8%.

• Keep a little side pocket for taxes if you sell your shares.

• If you have options in a privately held company, there are ways to get liquidity.

• Work with brokers to find potential buyers and do simultaneous exercise and sale.

Simultaneous Exercise and Sale

In this section, the speakers discuss how simultaneous exercise and sale works.

How Simultaneous Exercise and Sale Works

• Buyers cover the exercise price so that sellers don't have to come out of pocket with any cash.

• Sellers get the net proceeds of the difference between the exercise price and the ultimate hit.

• This method can be quite lucrative.

Takeaways on Equity Options

In this section, the speakers provide their key takeaways on equity options.

Key Takeaways on Equity Options

• Understand what your equity options are worth to maximize your wealth.

• Even though you might have options in a privately held company, there are ways to get liquidity.

• Do your homework by talking to brokers and finding out what the current market price is.

Importance of Personal Finance

In this section, one speaker emphasizes the importance of personal finance.

The Importance of Personal Finance

• Personal finance has the ability to radically change your life.

• Caring about personal finance can dramatically make your life better.

• Get uncomfortable with it and dive into it to make it normal and routine.