Attorneys: Are Your Emergency Funds Ready for a Recession?
It’s ironic. As an attorney, you’re constantly counseling clients on how to manage the never-ending curve balls that come their way. This leaves you precious little time to protect yourself in similar vein. For example, we find that many high-achieving attorneys have not yet established enough emergency funding to prepare for the next economic recession or a similar financial upset. In fact, many come to us without even having determined how much emergency funding they may need.
Recession or Not, Here Life Comes
The potential for an economic recession has been on many people’s minds lately. We covered how to manage your investments accordingly in this recent post. But even if a recession doesn’t materialize any time soon, financial emergencies come in many forms. You could lose your biggest client. You could become injured. Your house could burn down. Humble Dollar’s Jonathan Clements recently listed “50 Shades of [Financial] Risk,” any one of which can make the threat of a recession pale in comparison. (I sincerely hope you never encounter Clements’ Risk #2!)
Such risks would eat into your time and ability to continue your busy practice, and be there for your family. Problems are further aggravated if you also have to worry about quickly covering the costs. Even if you have sufficient wealth to carry you through unexpected upsets, you don’t want to be caught with low or no liquidity. Settling financial obligations through high-interest credit cards, burdensome loans, or poorly timed trading is not only painfully expensive, it’s almost always unnecessary if you’ve set aside sufficient emergency funds in advance.
A Worst Case in Point
We recently observed 18 years passing since the horrors of 9/11. As does nearly every American, I remember vividly the aftermath, including the four, incredibly long days when America’s financial system went dark. My personal suffering was nothing compared to those who lost friends or family. But in my former career then, you can bet I was sweating bullets about my financial future as a derivatives trader holding several large positions at the Chicago Mercantile Exchange (CME).
I am by no means minimizing the human toll, which was horrific in comparison. But many high-achieving attorneys and other professionals in New York City and across the country learned the importance of liquidity that week, after temporarily losing access to their financial accounts. If you could trade at all, it was often at a steep loss. We had no sense at the time whether markets would ever recover, or for how long various assets might be frozen entirely.
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Let's Talk about Being Prepared for a Crisis
While I hope we never again experience the kinds of extreme risks just described, it does illustrate why it’s critical to have enough liquidity, just in case. It doesn’t eliminate fear and uncertainty during crises, but an emergency reserve can help you:
- Minimize debilitating debt: Reduce the need to use high-interest loans to cover emergencies.
- Smooth out your budget: Avoid having to reconfigure your budget every time the unexpected occurs.
- Reduce financial stress: Just knowing you have an emergency reserve fund helps you relax.
- Remain flexible: Emergency decisions are hard. More liquidity gives you more options to consider.
- Be open to opportunities: Liquidity in times of chaos allows entrepreneurial attorneys to act when others may be frozen in fear. (In Warren Buffett’s words, “Investors should … be fearful when others are greedy and greedy only when others are fearful.”)
Preparing Your Emergency Funds
Because chaos can strike anywhere, you need an emergency fund. That’s whether you’re a seasoned attorney with a bullet-proof practice, or a newly minted attorney emerging from a large law firm to strike out on your own.
But how much safety net do you need? A financial planner can help you arrive at an appropriate amount. At Cogent Strategic Wealth, we typically suggest clients have at least 6 months of living expenses set aside in an emergency reserve fund. But depending on your individual situation, it might be appropriate to keep up to 2 years’ worth of living expenses on hand.
Personal Reserve Planning
First, examine your actual monthly expenses. Strip out discretionary expenses you could easily live without. (But be honest with yourself on that.)
Also, bear in mind that healthcare costs can spike dramatically if you lose your job or your firm implodes. Healthcare coverage is often supplemented by an employer, and COBRA payments may be much higher after you are released from your employer. If you or a loved one become disabled (which happens far more often than you might think), in-home care currently costs just over $4,500/month on average. Plus, some policies don’t kick in until after 180 days have passed.
To prepare, build your emergency fund today out of investable assets. Or at least embark on a disciplined plan for funding it over time. Consider making small, regular, auto-drawn contributions into a savings account at your local bank. Or enroll in an online cash-management service like Flourish Cash. Flourish pays market-rate CD-levels, (currently 1.9%) of interest and offers FDIC protection on up to $2 million for individuals or up to $8 million for couples. There is no minimum to invest, and the assets are liquid. [Whether you are lucky enough to be a Cogent client or not, you will need an invite from us to open Flourish Cash account. We’d be glad to help you out. Email us at Liz@TheCogentAdvisor.com.]
Business Reserve Planning
The idea is to have enough liquidity to sustain your practice when times get tough, whatever the genesis of the chaos may be.
Start with protecting the essentials. Then add funding to protect what you can, as you can. First, establish at least enough cash in the bank to reboot and sustain your practice for 6 months to a year.
How do you determine the costs to keeping your doors open during a crisis? If you’ve got a business plan in place, it should offer guidance. (If you don’t, it’s an action we recommend, especially for any lawyer starting a new practice.) Include in your business plan a budget for a year’s worth of expenses. Make a list of all of the regular, recurring monthly expenses you expect for your practice:
- At a minimum, plan for rent, utilities, and research service costs (unless your bar provides free research services as a member benefit).
- Many jurisdictions require monthly connection fees for electronic filing, as well as per-page fees to access court dockets and copy or download materials from court files.
- According to the American Bar Association, other necessities include a small monthly allowance for office supplies, a backup service for your electronic data, and marketing funds.
Combine your personal and professional expenses, and you have a tangible plan for establishing your base emergency reserve funds. Beyond our general recommendations, consider holding even more in reserve if you:
- Are particularly entrepreneurial, self-employed, and/or in an especially high-salaried or highly specialized career
- Have multiple dependents, and/or a spouse who is not earning income
- Have a pre-existing medical condition, or thrive on high-risk hobbies (mountain biking, anyone?)
- Own multiple rental properties
- Have significant wealth tied up in highly illiquid investments such as private equity or hedge funds (although, let’s talk about whether that even makes sense to begin with!)
- Have especially high fixed expenses, such as a large amount of debt or tuition bills
In lieu of cash, you may be tempted to turn to other creative ways to establish liquidity. For example, there are lines of credit on your home or other assets; credit cards; small business loans; unsecured lines of credit; or loans from family or friends.
Each of these have unique risk characteristics, and any of them can dry up just when you need them most. Caveat emptor!
It’s a Marathon, Not a Sprint Preparing for a recession
Overall, we counsel patience. Especially for the young attorney, anxious to establish an independent law firm. Ultimately, your goal is to support and sustain yourself and your loved ones over a lifetime.
Unless you have a wage-earning spouse or other sources of income to fully support your family while your practice becomes profitable, we recommend having sufficient savings to cover a year of personal living expenses. It’s tempting to take a leap of faith before your safety net is in place. And it’s possible you’ll succeed. But we know of many more who have stumbled and fallen. The results aren’t pretty. Financial, mental, and marital harmony are worth more than reaching your highest career aspirations ahead of schedule.
Speaking of marathons, we’d love to go the distance with you, and show you how to create a proper emergency reserve fund for your lifestyle that will sustain you through a recession or other emergency. Let’s get together to plan out how you can realistically achieve your personal and professional financial goals, no matter what life has in store.
Life is uncertain. The market is even more precarious. This means building wealth has no shortcuts. Success requires a solid investment approach, a long-term perspective, and discipline to stay the course. Instead of leaving your financial future to chance, you need to have a plan. Cogent Strategic Wealth is here for you.
So, instead of worrying about your future, why not take positive steps to protect it? Set up a Cogent Conversation with us today. We’ll show you how to transform your hard work into durable wealth.
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