SPEAKER_01 0:00

Hey everybody. In this episode, I want to talk about one thing you should consider when you are making the decision about whether to go to law school or whether to maybe spend some time working in another career. Specifically, I want to talk about the importance of your earnings and compound interest during the three years that you would be spending in law school. Let's talk about it.

SPEAKER_00 0:28

Welcome to Law School Decoded, the podcast that pulls back the curtain on what it's really like to succeed in law school. Let's get started.

SPEAKER_01 0:41

I feel very strongly that everyone who is going to law school should think very carefully about the finances of that decision. They should be very intentional about how they are going to pay for law school and be comfortable with that. They should be very comfortable with the loans that they are taking out and not over-leverage themselves in a way that's really going to be a challenge for them to pay back, no matter what the outcome is. I see a lot of students who take on a lot of loans, and that could be worthwhile if law school is very meaningful to you. But the fact is that it's usually not a small amount of money. So I really want people to always consider the finances of going to law school to make sure that it is the right decision for them. I'm not saying that you shouldn't go to law school or you shouldn't take out loans or you should make sure that you save up a bunch of money to pay for law school yourself. Nothing like that. What I'm saying is that you should be very intentional about your decision based on your goals and based on your understanding of what your financial situation is now, what it'll be in law school, and what it could be in the years after law school when you may be paying off loans. There's another really interesting financial consideration that I want you to be aware of and consider as you make the decision about whether you want to go to law school versus pursuing some other kind of career opportunity where you will be making money in the three years when you would have been going to law school. And the thing that I want you to be aware of are two words. Compound growth. Compound growth. What does that mean? Well, in law school, you won't be making any money. You won't have any job. You may have a summer job, but it's not going to be, even if you get a big law job, a meaningful amount in the long term. That also means that in law school, you won't be contributing to retirement accounts that employers commonly make available. You won't be contributing to health savings accounts, which can be a really valuable investment vehicle. You will go three years without making meaningful money and without investing any money in retirement accounts or otherwise in any brokerage account. You will be spending money and you will be waiting to earn money later on. Those three years of non-earnings can have a significant financial impact on your life because the earlier you start making money in your career, the better off you will be in terms of letting that money compound over time when it is invested in the market. Now, this is not an investing podcast, and I am not an investor, right? But, or I'm not someone who advises on investing at all. I'm not a certified financial planner. But what I think can be very useful is making sure that before you go to law school, you have a basic understanding of what compound growth is when it comes to the money that you are investing in the market. It's not something that I learned about until I was out of law school and starting to invest in my 401k. But the idea is this as you start investing money in the stock market, the historical returns of like the S P 500 are around 10% in terms of like real annual returns over 10-year averages. So some years the market may be up 20% or more, some years it may be down. But if you add up all of those average years over the course of about a decade, on average, the market will go up from year to year at about a rate of 10% or so. You can count on that. That's been the case for about a hundred years. Even with major dips in the market, even with crashes, the market is expected to go up about 10% a year on average. And so what that means is that you have an opportunity to put money in the market and have it grow about 10% on average per year from year to year. Now, the earlier you can put money in the market, the better off you will be because the more time it will have to grow. Obviously, if you earn 10% growth on $100, you aren't going to have as much money as if you earn 10% growth on $1,000. That's the essence of compound interest. It's that when you put $100 into the market and you get 10% growth in your first year, that's great. You get $10. But the next year, your growth isn't on that original $100. It's on the $110. So your growth is compounding. You are growing on top of your growth. Your new number at the end of one year is the new principle on which you will earn more money. There are a ton of podcasts out there on compound growth. I'd highly recommend you all go listen to them. Podcasts like The Money Guys, or read books like The Simple Path to Wealth, or a Random Walk Down Wall Street. These are all things that you should do to add to your financial literacy. The Single Path to Wealth is one of my favorite books. I have bought a copy of it and I write notes in it to my child for my child to have when they're older about compound growth so that they can learn from that book. I truly believe in it. But podcasts like The Money Guys also talk about this. And if you just Google compound investment growth on YouTube, you will get tons and tons of videos about the topic from people who know a lot more about it than me. But one of the important things for compound growth is investing as early as possible and then usually investing consistently. You want to automate it. You want to put the money in and then keep putting it in as you make it. When you're working in a job, you will have access to a retirement account. The way a retirement account works, when you're a lawyer or any other job that offers one, which is many, not all of them, but most, you are going to have the opportunity to tell your employer, hey, I want to invest in my future for retirement. So go ahead and take some money out of my paycheck every month and put it into a retirement account where it's going to grow. There's an incentive to do that because retirement accounts are what are called taxed advantaged. You will get tax advantages and pay less in taxes overall if you use this investment vehicle, as opposed to when you just invest, say, in a brokerage account that you can go open up on Fidelity or Schwab or Vanguard. If you invest through that, you're going to have to pay more in taxes through that vehicle than through your employer-sponsored retirement account. And so a key to investing successfully is doing it early and doing it often and doing it consistently. The simple fact is that if you go to law school, you will not start quite as early. You won't. You're going to spend three years not making money, not investing, and not getting that early start that helps for compound growth. So you will be giving something up in terms of saving power. You will be giving something up in terms of wealth creation. Time is the one thing in this world that we can't change. We can't get back once it is passed. You can't go back in time and invest earlier. So as a result, it is possible that, and very likely, that you will lose on investment gains by not investing during the time that you were in law school. So let's do an example right here of what it could look like to give up income when you go to law school. Imagine that you have the choice of going to law school or working a job where you're going to earn a really good salary. Let's say that you have the possibility of getting to a job that's going to earn $100,000. And in that job, you are going to do a few things to invest. You're going to max out your 401k. You're going to max out a private Roth IRA. And maybe you can even invest in an HSA, which is a health savings account. These are all taxed-advantaged accounts, which means you can put money in and it's either going to go in tax-free or it can grow tax-free, or in some case both. But let's say you're able to invest, you know, more than $35,000 a year through those taxed advantaged accounts. Now, you may also get an employer match on those accounts, which is more money, free money essentially coming in that you need to take advantage of. Well, let's say that you have the choice to take that money and invest that money or give it up and go to law school. When you retire, it may be, say, at age 65. And let's say that you assume that your portfolio is going to return 7% annually. I know I said earlier that the number is 10% on average. Like in today's dollars, but when you subtract out inflation, the better number to use for long-term planning is 7%. And that's a conservative number. So you have the choice of making those contributions over three years or not. Over those three years, those contributions to your tax-advantaged accounts would total over $100,000. What does that mean when you're in retirement, that $100,000? Well, at a 7% return, those miscontributions could easily have grown to quite a bit of money. In fact, you could reduce your retirement assets at age 65 by a staggering amount of money, by over $700,000 by choosing to go to law school instead of just maxing out your accounts. So if the employer is matching your retirement contributions or your HSA contributions, that's going to put additional money on the table that you will lose and walk away from. So you are losing that immediate compensation during the three years, but you also aren't investing earlier in a way that would allow the money to grow over time. But again, it it could depend, right, on what the market does. Of course, there's a lot of uncertainties to this. But what we know you will lose, what I can guarantee you will lose, is that time in the market. And the saying goes that time in the market is way better than timing the market. You can't know when the stock market's going to go up and down. No one can know that. But what you can do is just put your money in, leave it in, don't touch it, and then keep adding. And if you do that and you leave it in there and you just let the money keep growing with the market and going up and down on the waves over time, it should go up unless there's a massive catastrophic thing and America doesn't exist anymore. That's what's happened in the market for the last hundred years. So by foregoing that compensation, by not taking it, by going to law school and saying, I will earn zero dollars rather than this other earning opportunity, you give up those early earnings that can compound into something special. Now, this may not matter to you because you may get out of law school and work a job where you can earn more money than $100,000. That is math that you can do. You can ask yourself, how long would it take me to catch up and make up for those years of lost income? Where is it that I have the opportunity to make more by earning more later and foregoing that salary? But I will tell you that compound interest is powerful and time for your earnings to compound is extremely powerful. But all I'm talking about in this podcast episode is the cost side. The real question is going to be whether your degree as a lawyer is going to increase your future earnings such that you ultimately have the opportunity to make more. Your age might also come into play here. If you are young when you go to law school then and you haven't started earning yet, well, when you get out of law school, you'll still be pretty young. And so you will start investing at a pretty early age. In contrast, if you're older when you go to law school, you may already be earning a lot of money, and walking away from that may have an impact on your retirement plans or your financial plans that could be meaningful, not to mention things like your mortgage if you have one or your kids if you have them. So there's all those considerations to make in terms of the finances of law school and where you are in life, but that is certainly one thing to consider. On the other hand, if you are older and you've been earning money for a while, you may have a bit more financial freedom. You may have already started investing early, and you may be sitting there watching that money start to compound in meaningful ways, invested in your retirement accounts and your brokerage accounts and your HSA and your Roth IRA and all those different accounts that you can use for tax advantages. So you might say to yourself, gosh, I did a good job. I invested early. Now I can take a little sabbatical and I can go to law school and I can spend three years not making basically any money, and I'll make up for it later. That's another approach that you could take. You could also consider what your expected salary is going to be after graduation, but the problem is that when you are going into law school, you truly cannot know what your salary is going to be after graduation. You can have an idea of it or have an idea of what you might hope it would be, but there's no guarantees that you're going to earn that amount immediately after law school or later on or after some job moves or at all. And that is a scary uncertainty that I want you to be aware of. I'll do other podcast episodes on this, but if you're going to law school because you want to make a lot of money, there are easier ways to do that. If you're going to law school because you want to build wealth, and that's the only reason, that's not really a strong motivator to pursue that path. There are easier ways to make a lot of money, including by doing the simple thing, getting a good job that pays a lot of money, working your way up so you make more money in the entire time investing everything that you can into those tax-advantaged accounts. And then also your brokerage accounts. Now, I've thrown out a lot of financial terms here and concepts, and I haven't explained them enough. I can't explain them enough. And I'm not an expert on them at all. I'm a lawyer, not a CFP, not a certified financial planner. I don't even do my own taxes. I have someone help me with them. I read books about investing and listen to podcasts about investing. I highly recommend that you do that as well. I highly recommend that you read books like The Simple Path to Wealth before you go to law school and listen to some podcasts about compound growth before you go to law school so that you can have an idea of what you're giving up in the three years that you'll be there. By the way, that's three years when you may also be taking out loans. Those loans compound, they have an interest rate. So that's something that you need to consider. Not only will you be giving up three years of earning potential, but you may be giving up and will likely be giving up some investing potential after law school. Why? Because you feel the need to pay off your loans rather than do things like invest in a 401k, rather than do things like invest in an HSA. I really hope you can find a way to budget and do both. How to figure out a way to pay for all of those things, how to pay yourself and pay off your loans. But again, we don't know how much you're going to make after law school. But those are all things you can consider. You can consider what your age is going to be, your expected grad school, law school tuition, and your expected salary now and after graduation. And you can consider financially how long is it going to take me to break even on law school? You can do the math. You can go to compound interest calculators online, just Google that, compound growth or interest calculator, and then put in what you think you could make and invest while in law school and the interest rate. And you'll determine how much you would have in the next few years, all the way up to whatever you think your retirement age might be. Then you can say to yourself, okay, what's scenario number two? I go to law school. I don't have those investing years anymore. I only invest later on. Hopefully, I'll have more money, so I can maybe invest more, but I also am going to be paying off loans. And so I've got to factor that into the math. You can do all that math. You're smart. You're making it to law school, considering it, or you're already there. So go ahead and write it all out, put it into AI, use the compound growth calculators to determine all the different likely scenarios that you might face. It's your own little Monte Carlos simulation. Go look that up. That's another financial concept and modeling that people do to determine their potential financial futures. You're essentially doing that, is what I'm proposing for the decision to go to law school versus not. And you're going to mess with changing some of the variables like how much you're going to make after law school, how much you're going to invest after law school, what you're going to have to pay off in terms of student loans after law school. Consider all of those scenarios. Consider all the different financial outcomes so that you can decide, is law school right for me? Or should I take this other career path where I'm going to be earning money and giving it a chance to compound over time? Honestly, even after talking about all this to you, I really don't think that that financial consideration should be the one that determines whether you go to law school or not. I hope it's not. Those earning years can be made up later. But it is one thing you should be aware of. And I worry that law students aren't necessarily financially aware of these things as they are entering law school because they haven't had a job with a retirement account before. They haven't had a job with an HSA before. They don't know what those things are and necessarily how they work. So as a result of that, they aren't necessarily making an informed decision. That's all I want for you is to make a decision knowing all the facts and knowing all the outcomes. I don't want your success to be by chance. I want it to be planned with everything that you do in law school, from your preparation for exams to how you read cases to your career search to your finances. It's just one more area that I want you to knock out of the park. So I want you to be aware of what compound growth is and what you are giving up by having three years, potentially early on in your career, when you won't be earning money and what that means for delaying the snowball effect of compound growth by three years. Another thing you can look up online is the difference between starting to invest like at age 20 and age 30. You will find it staggering how important compound growth is. It is a wonder of the world. It is something that can make a huge difference when you start early. And a difference of 10 years will make a difference on your life in almost any scenario, unless you win the lottery at age 30. A difference of 10 years will hold you back in terms of your lifetime earning potential. But again, I don't want you to make the decision to go to law school based on compound growth alone and what happens during those three years. I want you to make the decision based on what the right path is for you. I want you to make the decision based on whether you believe that being a lawyer day in and day out, in one form or another, is something that you will find professionally fulfilling that you can do every day. Our lives are short and our work lives are even shorter. We don't have much time on this earth and we have less time to spend working. It's not what you should spend all your time doing. You should work to live, not live to work. But as much as possible, it can be fulfilling if your profession is something that you enjoy. And many lawyers pursue the profession because they believe that will be the case. And for many, that is the case. For some, it isn't. That should be the primary consideration in whether you go to law school, in my view. Financial ones should be part of what helps you make an informed decision, because certainly your finances may help make law school and being a lawyer more enjoyable or not, depending on your circumstances. And you should be aware of those as you seek to enter the profession and as you apply to law school and as you give up those three years of earning potential as part of that financial calculus. So I hope you enjoyed this podcast. You have a lot of extra homework to do after listening to this. You need to go read the simple path to wealth. You need to listen to some financial podcasts about compound growth. Go watch a YouTube video with some cool images and gifts explaining to you how compound growth works so that you can be aware of it as you decide what the right path is for you financially and in terms of whether law school is the right decision. I hope this was enjoyable. I hope it was informative. Thank you all for joining. We will see you next time on Law School Decoded.

SPEAKER_00 24:08

That's it for today's episode of Law School Decoded. Visit us online at lawschooldecoded.com and make sure to subscribe. Until next time, keep decoding the law one step at a time.