I recently received this question from a reader:

• I recently read your post on emotional spending and I had a budgeting question.  I am currently in law school and hope to graduate with 60,000 in loans, but this may end up being 80,000.  The amount will depend on the amount of scholarships, jobs I can get next year.  What kind of budget would you suggest with the following goals in mind.  Possible potential salary is 160,000, in a relatively expensive city (this will probably only affect rent), I want to save(retirement, emergency and general savings) aggressively and pay off debt aggressively.  What does an ideal budget look like with these things in mind?  I am hoping to work for 2-3 years and want the ability to leave if I don’t enjoy it.  One of the things I am doing is pretending that my salary will be 60,000 and making a budget from this and saving/paying back loans with the rest of the money. [60,000 in taxes, 20,000 in loans, and 20,000 in savings maybe?] but I’m not sure.  Thanks for any suggestions.

First, I want to commend you for focusing on debt reduction and savings right out of law school.  As a lawyer, I have seen a lot of fellow classmates go right into the “spend mode” when they begin receiving the outsized paychecks from the law firm.  This is a trap, also known as the “golden handcuffs.”  It becomes a vicious cycle, where you need to work for a large paycheck just to finance your spending.  I have seen more than a few lawyers miserable in their large law firm jobs, working 70-90 hours a week, doing mind-numbing work for demanding partners, and no way out.

Given your plans to work at a large law firm after graduation, I think that your budget proposal makes sense.  Living below your means by pretending that your salary is only 60,000 is a disciplined method to focus your resources on your main objectives, which are debt reduction and savings.  This is what I would suggest in percentage terms, based on your situation.

•              160,000         Base Salary
•               64,000         40% (taxes/health insurance - which will be relatively high in a large city).
•               8,000           5% (retirement - contribute up to match, if law firm provides it).
•               60,000         37.5% (living expenses, e.g., rent, food, utilities, and a few work suits!)
•               15,000         9.4 % (emergency fund)
•               13,000         8.1% (debt reduction)

The debt reduction amount may not look like a lot, but remember, once you have saved up enough for your emergency fund, you can apply all future savings directly to debt reduction.  You also have the option of reducing your retirement savings to 3% instead, particularly if your law firm does not match, and bumping that retirement savings number back up once you have made substantial inroads into paying off law school loans.  Depending on where you live, your tax burden may be slightly less, and you can apply any differential directly to your law school debt as well.  One thing that  I would urge you to do is to avoid increasing your school debt load if possible.  It’s not feasible or advisable to work three jobs while you are  in law school, particularly because grades are so critical in landing a large law firm position.  However, live as cheaply as you can and put off the popular ”let’s go to Europe” trip after the bar exam.  Some students take out bar loans, which are meant to finance your living expenses while you are studying for the bar exam, but they end up using that cash towards a big trip.  You end up blowing several thousand (borrowed) dollars, which may feel good at the time, but sets you back enormously in terms of your goal to reduce debt.  I run into other attorneys all the time who are 10 years or more into their career and STILL paying off student loans.  Those loans are like an albatross around your neck; while you have them, you have less flexibility to take jobs in the government or non-profit sector or to leave law altogether, if you don’t like it.  Moreover, the longer you toil in a law firm, you become more tempted to buy the large home, the designer clothes, and the BMW, to cement your statute as a highly-paid attorney, when you are really just weighing yourself down further with cement blocks.  Resist the temptation to spend now and keep your eye on the long-term ball, which is to rid yourself of school debt and build a satisfying career.  Good luck with your studies and your finances!!