It is a common rationale for entrepreneurs to espouse this line, “well, you have to spend money to make money!” It is usually uttered after they have poured good money after a bad idea, to explain away the end justified the means. But what about the undergrad contemplating doubling down on their student loans to attend law school? Investing in yourself can be the best investment with great potential to generate income, which can lead to wealth. The biggest caveat in that last sentence is “can lead to wealth”.
When a newly minted Lawyer hits the market after graduation, often they are bringing with them sometimes six figures in student loan debt. The interest compounding that student loan debt is a consistent drum beat within their conscious, which will grow to a thunder if not dealt with appropriately. Student loan debt is often tossed into the same category as credit card debt, car debt, or personal loan debt. This is the first mistake when prioritizing how quickly to extinguish these loans.
We first must understand that your credit card debt, or car debt does not have a rate of return, whereas your law school debt does. Credit card and car debt is consumption debt. You borrowed money to make a purchase, and that purchase likely is now depreciating. Whereas your law school debt put you in a position to earn tremendous income over time, which is also considered an appreciating asset!
Consumer debt therefore must be dealt with straight out of the gates when starting one’s career. However, student loan debt must be managed. What is meant by managing your student loan debt is to finance your loans out to a 15- or 20-year time frame. This brings your mandatory payments into a proportional percentage of income, giving you freedom to choose if you want to make more aggressive payments, or start saving for your future. While emotionally we would love to pay off our student loans within the first couple of years of practice the math is not on your side.
One must make giant assumptions for the equation to work for you to be student loan free within your first four years of practice, allowing you to be liberated to simply build wealth for your remaining years in your career. Specifically, your assumption must be your income will be uninterrupted between now and the next 4 years as you embark on this emotional debt elimination quest. But time spent is also time lost. When contemplating the feeling of elation of being student loan debt free, against a concept referred to as “time value of money”, we humans tend to vote for the emotional payday!
Time value of money is a critical concept and essentially demands that we make consistent payments to student loan debt, but also consistent contributions to our future ability to spend money by way of an investment account. (see the time value of money chart). The less time you have, the more pressure that puts on you to save at a greater rate, or you become too dependent on a variable stock market forcing you into more volatile investments in the hopes for higher returns – all because you have little time.
If you choose to aggressively pay down student loans first, you will have potentially positioned yourself to enjoy the fleeting emotions for being debt free, with the new drum beat of “will I have enough to retire? Will I out-live my money?” Or the nagging regret of “I wish I started saving earlier in life.”
Humans are emotional, and those emotions cloud our judgement when it comes to prioritizing paying debt and saving for our future.
You made a sound financial decision to take out student loans to educate yourself in a profession, which has a rate of return known as income. This is your most precious asset during your accumulation years of your financial life-cycle. The first thing you must do is to protect this asset by way of securing “occupation specific disability income protection”. You are protecting your ability to use this license to practice law, to generate income to extinguish consumer debt, manage your student loan debt, and build true wealth. Your student loan debt will be paid, potentially early or on schedule, but one day it will be paid. Your wealth accumulation however, needs early attention in your career.
So yes, one does have to spend money to make money, but don’t forget to protect your asset by way of disability income protection. Secondly and equally important is to respect the impact of time on your ability to manage your debt as well as build true wealth.