The Advice
Black Enterprise came up with a structured approach to help Thomas achieve his goals and prepare for life now and after law school.
Rethink his post-school plans. Thomas is underestimating the expenses associated with opening his own law practice. Plus, he will graduate with $60,000 in student loans if he continues borrowing at his current level–it could be more if he’s not able to renew his grants, scholarships, and fellowship. Certified financial planner Alfred L. McIntosh of Los Angeles-based McIntosh Capital Advisors Inc. suggests he consider accepting a position at a private firm. That way he can pay off debts and save up to start his practice; he can always fulfill his passion for helping the community through pro bono work. At the very least, he should interview attorneys working in a public law practice to find out what revenue he can expect in his first few years and what his expenses are likely to be, so he’ll have a realistic idea of how much startup capital is required.
Build up savings. One of Thomas’ main issues is that he is entering law school and will have limited income to pay his debts and basic necessities. Since his mom will assume most of the rent, his expenses will drop by about $200 a month. Thomas will have an excess of $9,000 from grants and scholarships during his first year of law school. He should use a portion of that money to pay toward the car note. McIntosh says, “Thomas should put the remainder in a money market account as a part of his cash reserve. Any extra money he earns through internships or externships while attending law school should go into his savings.â€
Let mom handle her own debts. Considering the fact that Thomas is not earning a steady salary, he should not pay his mom’s credit card bills. In addition, Thomas only has $400 in his savings account. Ideally, he should have at least six months in his cash reserve (or about $4,800) in an account where he can easily access the money if needed. He also should add the $2,000 Financial Fitness contest winnings to his emergency funds.
Develop an aggressive investment plan. Currently, Thomas has opted not to roll over the 401(k) from his previous employer. The reason: he was not 100% vested when he left. Once he is fully vested, which should be around the time he finishes law school, he needs to roll over those funds into an IRA, individual 401(k), or a SEP-IRA depending on his situation–employed at a firm or in private practice. Moreover, when he is working again, he should start saving $650 a month, increasing that contribution by 8% per year (as his income rises).
Eliminate individual stocks. Thomas’ lack of diversity increases his risk, says McIntosh. For example, 25% of his portfolio is invested in United States Steel Corp. (X), which has not out-performed the market in years. McIntosh suggests Thomas move the $4,308 he has invested in stocks into mutual funds (including index funds), and exchange traded funds (ETFs). This way Thomas can diversify, thereby reducing his overall market risk and increase his probable rate of return.
Replace current bond fund. Thomas should cash out of the bond fund and reinvest that money in a slightly different fund that has less risk and fluctuation.†McIntosh recommends an inflation-adjusted Treasury bond fund, which tends to perform better with rising interest rates.
Carolyn M. Brown is a contributing editor at Black Enterprise.