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It’s not about income; it’s about expenses.
That’s what the financial gurus tell us.
It’s essential to manage what we spend. If we don’t—and I can personally attest to this—then we will just spend more when we make more, and there still won’t be enough.
Our Spending Habits
When I made $25,000 a year as a brand new lawyer, I spent more than I earned.
Now, 25 years and millions of dollars later, I still like to spend more than I earn.
The amount I make doesn’t seem to matter. What matters is how much I spend.
If we spend more than we make, there’s nothing left at the end of the day.
You know what I mean. You’ve seen it firsthand (if you haven’t lived it).
How many times have you sat in stunned silence listening to someone earning an incredible income yet living paycheck to paycheck?
I’ve divorced a lot of lawyers. We aren’t especially good with our money. Thankfully, we’re better with money belonging to others.
My experience with lawyers complaining about money usually sounds like this:
“It’s feast or famine. I can’t seem to level things out. One month is great, and the next month is awful. How can I get some stability?”
That’s not a question that someone good with money asks.
The lawyers who manage money well don’t care if revenues are up and down. They have reserves. They don’t feel the pressure of a bad month. They just roll with it, knowing things will level out over time.
For those good money managers, it’s not feast or famine. They look at a longer time frame because they’re not under financial stress. The months may be up and down, but the year will be good. They’re prepared to let the money balance out.
The “feast or famine” lawyers are living paycheck to paycheck (or payroll to payroll, when they own the practice). They’re watching every nickel, and they’re anxious about cash.
It’s not a good way to live.
How to Shift Your Focus
It doesn’t have to be that way.
But changing it requires a shift of focus away from income and toward expenses.
It requires focusing on what’s going out rather than on what’s coming in.
Here’s how I’d suggest you do it in three steps:
- Look at last year and determine what you earned. Unless it was an extraordinary year, you should use that number. Now reduce that amount by 15%. Let’s say you earned a gross of $250,000. Reduce that by 15%, and it’s $212,500. Calculate the net on that amount. Let’s call it $135,000. That’s $11,250 per month. That’s your new monthly income.
- Pay yourself $11,250 per month going forward. Yep, you’re going to have a tough time paying your bills with 15% less.
- Reduce your expenses to meet the new reality. Figure out a way to get by on $11,250 a month. Of course, that’s got to include whatever you’re doing for retirement, savings, etc. That’s what you’re going to spend—period.
Figuring Out What to Cut
How will you cut your expenses?
Here’s how: you’re going to cut your expenses the same way you always do when you don’t earn what you need and you panic.
When you have a shortfall, you figure out a way to get by, right? You cut something, you defer something, or you don’t spend what you planned to spend.
Do it now. Do it while you’re calm, cool, and collected.
That’s what I mean by focusing on expenses. You’re going to have to cut some if you’re living on the edge.
You need to back away from the edge.
Will this change to a level, reduced income provide immediate relief?
- Month 1: In the first month, you’ll start to see a reserve build in the operating account. That’s your cushion. You’re holding back that 15% (keep in mind that it’s pre-tax, so it’s even more), and it’s going to grow each month.
- Months 2-4: By the third or fourth month, you won’t freak out if you have a slow week or two. Soon you’ll be able to focus on the long-term rather than on the cash coming in today.
I’d suggest that you take that extra cash and move it out of your operating account and into a separate money market account. Get it off the ledger so you don’t see it accumulating every month. You don’t need that surplus right in front of you when some shiny object appears on your radar screen.
Soon, you’ll find yourself feeling less financial pressure. Your income will be level, consistent, and stable, and you’ll worry less. You’ll get focused on doing a great job for your clients.
Focus on expenses, and you’ll find yourself in a much better place when it comes to money.
It’s not about income; it’s about expenses.