Question: Getting off on the right foot in a high-income field

The US Supreme Court in Washington, DC, November 6, 2013. 

I am a 27 year old attorney, single with no kids. I currently work for the Government, but next fall I will begin a job with a private law firm in Washington, D.C. I like being a lawyer and think that I will probably enjoy working for a private firm, but I am acutely aware that the private firm world can be quite stressful. I have my doubts about whether this high-income but high-stress field is something I will want to stay with for a long time. This in conjunction with the ever-present threat of being laid off for economic reasons (which still happens with some frequency in private firms) makes me want to shore up my financial situation, save a great deal, and avoid the golden handcuffs for at least a few years while I figure out how permanent the job will be.

I have about $150,000 in debt -- $15K is a car loan, and the rest is student loan debt. Interest rates on the student loans range from between 6-8.9%. I have no credit card debt. My current salary is about $80,000, but next year it will more than double, plus a $50,000 starting bonus based on my prior experience. The only luxury I want to fund in the foreseeable future is a multi-week vacation to Europe between jobs, which I have not planned in any detail yet.

What should I focus on as I move into this higher-income job, keeping in mind that I may not find the money to be worth other sacrifices? My gut feeling is that I should pay off my student loans with haste, but what other strategies should I be looking into?

Response:

I'm going to applaud you for two things.  First, that you're not just after a bigger paycheck.  With a law degree it can be tempting to trade in some soul for some dollars — and to each their own.  But you're also looking to balance two important things even before you start earning more (and probably working into the wee hours): Your desire to take a probably well-deserved vacation, along with unloading some of the big financial responsibility of those loans.  

The vacation, yes, take it and plan for it.  It can pay off in spades in terms of sanity and productivity down the road.  But, give yourself a strict travel budget that includes the cost not only of your transporation and lodging but daily expenses.  At the same time, budget for your upcoming new life and its new costs.  For example, what will your living expenses be with this new job?  Can you stay put and keep your living expenses the same, based on your current and much lower income?  There's power in not being tempted into upgrading your lifestyle when your income gets a boost.  Woe is the man or woman who moves into a flashier, bigger home, gets a new car or starts living large every time he or she gets a raise.  That's a dangerous path.  There's too much employment volatility, as you mention.  Enjoy the vacation but keep your expenses as close to 'now' as possible.  

Then, take your extra income and split it between cash savings (that emergency fund we're always telling folks to have — for you, start with six months of living expenses, saving more as you take on a family and/or a home) and your student loan debt.  Throw your debt-money onto the student loan with the highest rate first.  Your loans aren't cheap.  If you were closer to 4 percent interest, I'd say don't be too much in a rush to pay them off as you're obviously making a much larger return on that investment (your upward income).  

Keep in mind while you're doing this that holding onto cash savings while you have those loans is not a trade-off or a like-vs-like comparison.  The loan was an investment that's paid off well.  The cash savings are insurance.  Should you either lose your new private gig or decide to go back to earning less, you won't be forced to take on even more expensive loans to make ends meet.  Good luck and keep on listening to that inner voice that says, "It ain't all about the money, honey."

 

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