320 | Rewind: Breaking All the Rules

Sometimes one of your biggest strengths can actually prove to be a weakness.

Case in point: Lawyers tend to be really good at following steps and rules. But when you’re trying to manage your money better, you can get hung up on rules to your detriment.

In this episode, let’s explore why some common rules around how to manage your money, such as maxing your 401(k) and putting 20% down on your house, may not be serving you.

• • why saving a portion of every check may not be the best strategy
  • why you may not want to max out your retirement account(s)
  • why personal finance experts recommend you put 20% down when buying a house and how to determine if that’s right for you
  • why you should question typical norms for your living situation, such as paying full rent and buying a single-family home
  • whether cooking at home is always better than buying prepared food

n/a

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back, and happy summer. I am doing something I have not done in the six years I’ve recorded this podcast, and that is taking the summer off.

In place of recording new episodes, I’m sharing webinars I’ve done, trainings from private programs, and past episodes. So, please enjoy today’s episode, and I hope you’re having a great summer.

****

Today we are talking about examining the rules you think you need to follow for your finances and determining if they even fit what you want or if they serve you.

As lawyers, we tend to be really good at following steps, following rules, but in trying to manage your finances you can get so hung up on the rules that you think you should be following that you don’t recognize your own authority and that you get to make the rules for your own finances.

So I want to look at some of the rules that I see come up most often with my clients and talk about why they may not be serving you. And I want to be clear upfront that I’m not saying you should definitely not follow these things. I just want you to at least question them and decide if they’re right for you.

I often see people blindly following rules because they think that’s what they’re supposed to do, or they’re not following the rules, which is actually more common, not following the rules and beating themselves up for not following them.

So let’s look at some of the most common ones and make sure you’re not beating yourself up with rules that don’t serve you anyway.

The first rule is about saving money and that sounds simple enough, but so many people tell me that they’re not saving enough and think they should be saving more, but they have no idea how much they should be saving or how much is enough.

Growing up I remember my grandfather telling me to save 10 or 20% of every dollar I made and maybe you heard something similar, but what is that money for? If you are saving 20% just for the sake of saving in perpetuity, you’re just building up a bunch of money in a savings account.

Probably not the best strategy. So what I have my clients do is determine how much they’re going to save. Let’s set a goal here.

The first step would be building an emergency fund if you don’t have one. So figure out what one month’s worth of expenses is for you and then from there decide how much of a cushion you want to have. Typical advice is to have three to six months of expenses saved. Some people will do as little as one month. Some people do as much as 12 months.

It’s completely personal to you, but decide how much is good for you. That way you have a goal, so you’re not saving just to save. You’re saving to hit this particular number, to hit this goal, so then you know when you’re finished.

From there, you might have other savings goals. Maybe you want to go on a trip or buy a house or buy a car, whatever it is for you. But each time you want to have a goal. You know that you’re aiming to save X amount, so you know when you’re finished saving and can use that money for another goal, whether it’s paying off debt or investing or any other money goal you have.

Another rule that comes up all the time is maxing out your 401k or your 403B or your TSP or whatever retirement accounts you have available to you. Again, this is not to say you definitely shouldn’t do that. I just want you to question whether it’s right for you and whether it’s right in this moment.

When you put money into your retirement accounts, generally it’s tied up for decades, and you can’t access it without paying penalties and taxes and such. Like there actually are some ways to access it, but generally you can’t access it without paying penalties and taxes, so while you’re in the phase of life where you’re maybe buying a house or paying off debt, you might want to have that money available to you for those things.

My clients often have the goal of paying off credit card debt, and when you’re trying to get to maxing out your 401k, the extra money that’s going into that account could be going to pay off your debt, especially when you’ve got high interest debt like credit card debt. When you’ve got debt with interest rate upwards of 20 or 25%, putting money into your 401k earning on average 8- 10% might not be the best move.

Now if your firm or your company offers a match then yes definitely put in enough to get that match. That’s free money so you would just be leaving money on the table if you don’t put it in the for the match. Or even if your firm doesn’t offer a match, you might still want to contribute something if you’re gonna be paying off debt for a while.

For example, my husband and I knew it was gonna take us years to pay off our debt. It took almost six, and we actually had maxed out our retirement accounts for about a year and a half or so when we first started working before we started this whole journey. But we stopped when we started paying closer attention to our finances because we decided that maxing out our retirement accounts wasn’t the best thing for us at that time because we wanted to have more money available to pay off our debt.

My husband’s job offered a match so we continue to put in enough for him to get the full match, but the firm I was working for only offered a match for non-attorneys so I didn’t get one. But rather than not putting anything into my retirement account for all those years, we decided to put the same amount that my husband needed to put in to get his match. I think it was like 3%.

So we went from maxing out retirement accounts to putting in about 3%, and we directed all that money that was no longer going into 401k’s to paying off our debt. And now that we finished paying it off, we’ve gone back to maxing out my husband’s retirement account again.

I no longer have access to mine since I left my firm last year. But the point is I think maxing your retirement account is one of those things that just gets touted as the right thing to do or the smart thing to do. And most people just blindly follow that advice and think they should be doing it and beat themselves up if they’re not doing it.

But it could be that maxing your retirement account isn’t the best option for you right now. Maybe it is, but maybe a better option is putting that money towards other financial goals you have like saving for a down payment for a house or paying off debt, and you can come back to maxing it out later.

The point is that you get to decide. You don’t have to just follow the rule that says you’re supposed to max out your retirement account. You are the boss you can decide.

Another rule, speaking of saving for a down payment for a house, is putting 20% down on your house. This is another one that just gets touted as the thing that you should do and many people follow it without really knowing why.

The reason that personal finance people suggest you put 20% down on your house is that when you have a certain type of mortgage, a conventional loan, and you put down less than 20% of the purchase price of the house, then you are required to pay private mortgage insurance or PMI. And that is insurance that protects the bank in the event you stop making your mortgage payments.

Typically the monthly premium for the insurance is added to your monthly mortgage payment. Everyone talks about PMI like it’s such a bad thing and you better put 20% down so you don’t have to pay this dreaded PMI. But why not run the numbers and decide for yourself if that’s the strategy you want to use.

When my husband and I were buying our house, we were looking at whether we wanted to put down the recommended 20% or not, and we ran the numbers. I used mortgagecalculator.org, if you are in that position, and you’re looking to buy a house. I don’t have any affiliation with them or anything. It’s just the calculator that I used and the estimates that we ran were pretty accurate.

When we looked into it, the PMI was gonna be an extra like $70 a month or so added to our payment, somewhere in there. It wasn’t even a full $100 extra. And we were like okay, I’m willing to pay an extra $70 a month to keep tens of thousands of dollars in our account, right. So, we decided to put 10% down rather than 20%.

We had the PMI for a while, but we refinanced during the pandemic when interest rates were lower because they are higher now. But we refinanced to get a lower interest rate, and our loan to value ratio, which is how much our house was worth versus how much was left on the loan, that ratio was at a level where we no longer had to pay private mortgage insurance so we were able to get rid of it once we refinanced.

Just know that’s an option too. You don’t have to necessarily do a 20% down payment if you don’t want to. There are even loan programs for lawyers that allow you to put nothing down, although I think the interest rates are higher. You have to look into that because I didn’t use one of those programs so I don’t know exactly how they work, but I do know that they exist.

The point being there’s no set amount that you have to put down on your house, again, you get to determine what’s right for you.

Now these last two aren’t rules per se but just generally accepted things in our society that most people just go along with no question.

The first one is about following typical norms for your living situation. For example, one of my clients is looking at moving in the next six months or so and she’s built up an emergency fund to be able to cover her rent and other expenses for several months. Most people would just look for a new apartment, sign a lease, pay the deposit, whatever else you need to pay, and then just pay them the rent.

But one strategy we’ve talked about is offering to pay a year’s worth of rent upfront for a reduced cost. So if the rent is $2000 a month for example, she could offer $20,000 upfront for the year which would save her $4000 and also free up her cash flow from month to month which allows her to have more money available for her goals. From my understanding that strategy tends to work best with private landlords, but it doesn’t hurt to try.

Another example is people typically buy a single-family home for their first home. That’s what I did too, so no judgment if that’s you. But, if you’re in a position to do so, what if you got a duplex or a triplex and lived in one unit and rented out the others? Or if you do buy a single-family home for your first home and you have the space available, what if you rent it out to other rooms?

I’ve even heard of similar situations with people who aren’t buying a home but decide to rent a multi-bedroom apartment and sublet the other rooms. I haven’t personally done any of these, but I might have if I had known about them on the front end before starting my family and buying my house. I have heard about so many stories of people reducing their housing costs significantly or even completely eliminating it altogether.

For most people housing is their biggest expense so being able to cut it down or cut it out altogether could be huge. And these people are able to do it simply because they are willing to go against the typical norms. They’re willing to do something a little bit different from what people would typically do.

And now the final rule, again, not quite a defined rule, but a lot of people feel like they have to minimize how much they go out to eat, and I think eating at home is often held out as a more responsible thing to do, especially when you are paying off debt or working on another money goal.

I have a couple of clients who felt like they should eat at home and so they would go to the grocery store, and they’d buy their groceries. And they’d do all these things they thought they should do. But then when it was time to eat, they’d be exhausted from working, and they didn’t feel like cooking, so they didn’t. And they’d just get takeout or go to a restaurant and then the food they bought at the grocery store would end up going bad, so then they had to throw it out.

Now they’re basically throwing money away at the grocery store, buying this food that they end up throwing away and not eating. And then they’d have to buy more food on top of it to replace the food that went bad.

One of my clients was like she straight up doesn’t like to cook. She doesn’t want to cook. She doesn’t plan to cook. Her husband cooks some, but they enjoy going out to eat more and so they cut their grocery spending down and put more money toward going out to eat.

For another, we are exploring the idea of them buying these pre-made meals at Whole Foods because they really like those. And even though that will be more expensive than the regular food you buy at the grocery store and make yourself, it’s going to be a whole lot cheaper than them going to the store and buying food and throwing it away because it went bad and then buying takeout or replacement groceries on top of it.

Of course, there are other things you can do when you find yourself exhausted and not feeling like cooking when you get home from work, such as meal prepping on the weekends when you have a bit more time so it’s not as heavy a lift during the week. But if that’s just not working out for you and cooking is just not your ministry, that is perfectly fine. Find alternatives that will allow you to meet that need and still achieve your goals.

Don’t feel like you have to keep trying to force cooking at home. You get to make that decision because you are in control of your finances. You get to make the rules.

And so with these clients, they have decided that they are going to do something a little bit different from what people typically do around food and it’s ultimately saving them money, even if it’s technically a little bit more expensive than the typical buying groceries and making your meals at home.

Ultimately, you get to decide what you want to do. Too often we forget that. We forget about our own authority in our lives and our own financial situations. And we defer to these personal finance experts and other people rather than deciding what we want to do. You get to decide what you want to do with your finances. You are the ultimate authority. So figure out what works for you.

I gave you a few examples of rules here. But I encourage you to think through other rules that you may have internalized about money and what you’re supposed to do with it, and decide if they serve you or fit your financial situation. The key to doing that is feeling confident enough in your ability to manage your finances and to make those decisions for yourself, even if they go against the mainstream or what some authority figure told you at some point in your life.

****

Alright, I hope you enjoyed today’s episode and got a lot out of it. If you have not done so already. Please subscribe to the show, leave a review, and/or share this episode with a friend or two who you think could use this information. All of that is how we get this podcast in the hands of more lawyers, and as always, I appreciate your support.

As we close out, friend, I pray that you take the information you learn here, apply it in your life, and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live the life of freedom and choice you deserve. Talk to you later.