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Young lawyers face tough financial choices

Many burdened by student loans, and more debt still to come
By Simon Hally
October 07 2016 issue

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Most people make the biggest decisions of their lives between the ages of 28 and 32 — career, marriage, buying a home — and rack up some pretty big debts too. So a plan to pay down those debts is a necessity, says financial adviser Kurt Rosentreter of Manulife Securities.

For most lawyers in that critical age range, the need for financial planning is compounded by debts incurred at university.

A 2014 report from the Law Students’ Society of Ontario reported that only 30 per cent of law students expected to graduate with no outstanding loans to government or financial institutions. The other 70 per cent owed an average of more than $71,000 in government and bank debt at the end of three years of law school.

That figure happens to be the midpoint of the average salary range for first-year associates at small- to mid-size Canadian law firms — approximately $68,000 to $74,000 — according to Robert Half Legal’s 2016 Salary Guide for the Legal Field. Lawyers starting out in very small firms or solo practice are likely to earn less.

Considering that income taxes, living and work-related expenses and other unavoidable costs must be deducted from those gross salaries before any remaining income can be applied to debt, it’s evident that many young lawyers will need several years to pay off their student loans. Even for those who land jobs at large firms, where the starting range is $87,000 to $100,000, getting out of the hole will take time.

How much time depends on individual priorities and choices.

“A priority for me is to avoid debt in my life. When I graduated I made the decision to invest in my business as opposed to buying a home and taking on a gigantic mortgage,” says Usman Sadiq, who has been in solo family law practice in Toronto since he was called to the bar in 2013.

“Lawyers running their own practices need to be prudent managers of money. That’s why I made it a priority to pay off my student debt as quickly as possible,” Sadiq says.

“The best way to avoid debt is to lead a simple life. Yes, as a lawyer you do need to dress professionally and you likely need a car to get around. However, that doesn’t mean you need to go into debt by buying the most expensive suit or driving a luxury car.”

Anar Dewshi, another solo practitioner in Toronto, agrees: “My business is a priority for me. Paying off debt is another one. Owning a home or taking a vacation is not a reality at this point. I have overheads to consider.

“I’ve been in practice for over a year, doing real estate, estate planning and family law. I went on my own because it’s tough to find work with a large firm. You have to incur expenses in the start-up but I don’t regret my choice to go solo. Paying debt down over time seems doable. I expect to be in much better financial shape in about five years.

“It’s a struggle but I don’t focus on that. The work is satisfying. It’s about how you can help people. If your only focus is money, that’s a disservice to your clients,” Dewshi says.

“Some of my colleagues have a one-track mind about paying off debt. I’m trying to find a balance,” says Meghann Melito, who started practising family law in 2015 as an associate at MacDonald & Partners LLP in Toronto.

“I’m also hoping to buy a house. I’ve been saving for that as well as paying down loans. And I got married recently, so I was saving for the wedding and honeymoon. My lifestyle hasn’t changed much from being a student to being a lawyer.

“You have to accept certain realities. I’m from Montreal and sometimes my family asks why I don’t move back there, but I need the higher income I can get in Toronto to pay off debt,” says Melito, who was a financial adviser for a couple of years before turning to law.

Her advice to other young lawyers is to prioritize what you want and think where you want to be in a few years. Specifically, she says, compare interest rates on different types of debt and pay down the highest first. Look for any income tax benefits, such as tax relief for payments on government student loans. And check your life insurance: if you have coverage through your firm, you may not need insurance you bought with a bank loan.

Rosentreter makes the case for seeking professional advice: “Financial planning is like losing weight. It’s difficult to do on your own without a trainer or adviser. Talking about money can be very emotional and especially difficult to do with a partner. Talking to a neutral coach is less confrontational.

“The first thing I tell people is start with a summary of your financial goals: short-term, mid-term and long-term. Think about timelines, then cost out your goals.

“You may realize some goals aren’t achievable right now. Early on, it’s better to reduce debt than save for retirement. Paying off debt is relatively easy to cost since you know how much you owe. You’ll need to commit four to eight hours a year to financial planning with good advice and a good, disciplined plan to follow.”

It’s never too early to start financial planning, Rosentreter adds.

“Failure to plan is very common in all high-income professions: doctors, accountants, lawyers. They’re earning lots of money so they think, why worry? That will catch up with them. They often don’t have pension plans and end up working past their planned retirement age just to maintain their lifestyle,” he says.

“Family lawyers like me have concerns about clients with too much debt,” says Sadiq. “We have to make budgets for our clients so we see their finances in detail. With low interest rates and high housing prices, it’s common to see families becoming very comfortable with debt. In some cases it’s shocking to see how much debt families are taking on.

“There’s a trend for Canadians, including some lawyers, to be overleveraged. It’s very dangerous in terms of long-term financial security and very likely contributes to increased stress levels.”

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