Avoid These Mistakes Immediately for Your Law Firm’s Growth: A Comprehensive Guide

February 29, 2024
There’s a reason we’ve kicked off the year focusing on your monetary goals. It’s the perfect time to assess how much you want to earn, to decide your rates for achieving that income, and to estimate how much effort you’re ready to exert. The trick here is to stay realistic, and not set unreachable goals that could hinder your progress.

Finance is an emotional territory. You might perceive it as a symbol of success, a source of guilt, or even as an ego boost. Regardless of your feelings, it’s crucial to navigate this domain objectively without burdening yourself with unnecessary expectations.

Rethinking Investments: Your Life vs. Your Law Firm

The common tendency among many lawyers I’ve consulted with is to plough all extra income back into their law firms. Here’s what I’ve observed: When they earn a significant profit, say an additional 40,000 to 50,000 dollars, they’re quick to hire new staff—another attorney or an office manager perhaps—hoping that these additions to their firm will either escalate their earnings or alleviate workplace stress. But let me tell you from experience, it’s seldom as easy as it seems, and the chances of this strategy paying off stand at half-and-half.

Rather, what if that extra cash was redirected to pay off some student loan, or squirreled away into a college savings account? Or put towards a vehicle that’s an upgrade from the clunker you currently drive? Such steps go a long way in advancing your personal financial situation, a factor that often plays second fiddle to the finances of the law firm.

Remember: The purpose of your law firm isn’t merely to generate profit to be reinvested into the firm. The primary objective is to create a substantial income that can be invested in your personal life, yielding real, tangible improvements in your lifestyle and future security.

The Fallacy of the $100 Return: The Real ROI of Law Firm Investments

It’s a common misconception that continuously adding new staff to your law firm increases productivity and ultimately generates more revenue. The reality is, workloads can vary drastically and thus, the assumption that your workload will remain consistent throughout the year is flawed.

Let’s say you’re facing a backlog of cases from the previous year, you might consider hiring more staff to manage this workload. The idea, of course, being that once the backlog is cleared, your firm can take on more cases and your revenue will increase. In truth though, it’s unlikely you’ve turned away enough potential clients or cases to warrant this new hire, and they may end up underutilized.

Additionally, when hiring, especially for roles such as attorneys, it’s important to ensure there’s enough work for them. This means being capable of providing a consistent workload of 100 clients, or 100 hours of work every month, or 100 new cases for them to independently handle. This often isn’t the case.

Your assumption that higher staffing levels will increase income may need reconsideration. As with most investments, it’s a risk. Sometimes they work out, other times they don’t. If you overestimate your workload, the new hire won’t be maximally utilized, leading to self-criticism, guilt, and feeling bad about your decision-making.

Instead of continually investing in your business, consider diversifying your funds. Many lawyers constantly reinvest in their firm, hiring more staff, expanding their office, or upgrading their equipment. However, this might not always be the most effective use of your profits. Sometimes, the best investment you can make is into your life outside the firm.

Firstly, the feelings of needing more clients to offset your perceived debts and inability to invest as much as your colleagues is normal, especially in the legal field. There is no magic formula to stop this, but it helps to acknowledge these feelings, and then move forward without dwelling on them. Do not allow this to become a reflection of your self-worth.

The next piece of advice from my perspective as a consultant is to diversify your financial investments, moving beyond your practice. Think of it this way: if a friend said they’re putting all their retirement savings in one stock or a restaurant, you’d probably advise against it, right? So, why not apply the same concept to your law firm? Pause and evaluate how much money you’ve invested outside of your firm in the past year, two years, or three years.

If you find that all your investments are primarily within your law firm, such as hiring more staff, expanding offices, or upgrading equipment, but you’re not allocating funds towards your personal savings, retirement, or other investments outside your practice, then it’s time to rethink your strategy.

Investing in real estate or other businesses are also good alternatives, but the crux of the matter is not to limit your investments only to your law practice. Having a diverse investment portfolio will provide a broader financial scope, safeguarding you from potential pitfalls and unanticipated business downturns.

Don’t fall into a common trap that many attorneys do. Gauge your own situation, reflect on our discussion, and ask yourself, “How diversified are my investments?”

My strong belief is that you need to allocate at least $10,000 per year for investments outside your law firm, irrespective of your earnings.

These investments could range from a simple Certificate of Deposit (CD) to market investments or even a small business venture with a relative.

The goal here is to not solely rely on your law firm for income to sustain your lifestyle.

Imagine for a second, how would you manage financially in the face of an unforeseen event like a pandemic, which leads to zero income from your law firm? Do you have assets you can liquidate to support yourself?

Or consider this, you have a seriously ill family member which compels you to reduce your work hours from 40 to 10 a week. Your income plummets. Do you have assets set aside for such a rainy day that you could sell to get by?

This is not about planning for the apocalypse, it’s about being a prudent business owner. As the owner of a law firm, it’s unrealistic to depend on this single source of income to support both you and your employees without having some money saved for emergencies.

What I’m really stressing here is the importance of diversifying your income. So, if there’s one takeaway from this, let it be this: Set aside $10,000 this year for something not related to your law firm.

Here’s an intriguing statistic from Reuters: approximately 80% of attorneys are under the impression that every dollar they put into their practice will deliver a substantial return. But let me clarify something: just because you believe it, doesn’t make it true. There’s no universal rule that suggests if you pump a dollar into your firm, you’re sure to get back $1.20 or more.

This confidence isn’t always substantiated by real-life examples. I’m sure many of you can relate to hiring a website development team, only to see no discernable uptick in new clients. Or investing in search engine optimization (SEO), only to be unimpressed by the quality of the client leads. A multitude of firms have also dipped their toes into social media marketing to achieve mixed results.

Consider this: if you invest $3,000 over three months on a social media manager and reel in just two clients worth $1,500 each – there’s no gain. You’ve broken even, but is that a significant return on investment? It’s debatable. Moreover, are the returns you’re acquiring from your investments into your firm beating the average 7% yield that the market offers? It’s something to ponder over before making extensive monetary commitments into your firm.

Financial Coaches Weigh In: The True Purpose of Your Law Firm’s Earnings

Let’s delve into some common queries that financial coach for attorneys, Rho Thomas, is often asked. Briefly, Rho is a lawyer who transitioned into a financial coach, driven by her belief that real wealth lies in having control over one’s time. Through her Wealthiesque podcast and personal coaching, she guides attorneys towards a more mindful handling of their personal finances. You can follow her on her website, www.Rhothomas.com, and on LinkedIn.

Among the countless questions Rho gets asked, two stand out:

Question 1: “How do I get ahead financially when, despite my earnings, I always find myself short at the end of each month?”

Rho’s advice: Don’t allow your feelings to dictate your financial reality. Assess your financial situation based on concrete data, not merely on how you feel. Begin by auditing your own finances. A detailed examination of your income versus expenditure over the past month can help- identify what you’re spending on and whether these quantities truly match your perception of ‘not making enough.’ It could just be that you’re spending unconsciously, leading you to feel that your earnings are insufficient. Use your findings to make conscious, intelligent decisions about how to handle your money.

Many attorneys can strongly relate to her viewpoint. They’re often anxious about evaluating their financial scene in a realistic light, scared to confront their spending patterns. Conquering this fear and facing reality via financial audit is probably the smartest move you can make.

Let’s proceed to the second most frequently asked question.

Question 2: I have a bunch of credit card debt and student loans that’s stressing me out. It feels like a weight on my shoulders. What’s the best strategy for paying them off?

“One of my favorite things to do with my clients is to look at the good things that have come from their debt. We get a lot of messages from society about how bad debt is, but is it really? Just because some random person decided it is? Now, I’m not saying to just go rack up all the debt, but I AM saying that you don’t have to feel bad about having debt. You made the best decisions you could with the information you had at the time you took out the debt. There’s no need to beat yourself up about it now. So thinking about that might help you with the stress of it all. But to answer your actual question, I really like the debt snowball method, which is where you pay your debts off from smallest to largest balance, regardless of the interest rate. The reason I like it so much is you get quick wins that motivate you to keep going. For example, my husband and I had over $470,000 of student loans spread out across 17 or 18 different loans, but the smallest one was $1500. And then the next was maybe $2000. And then $4000. And so on until we got to the five-figure and six-figure ones. Paying off those smaller balances felt really doable, so we focused on those, one at a time. We got paid-in-full letters almost every month for a number of months in a row, which felt really good. By the time we got to the five-figure ones, we had a bunch of wins under our belt that gave us proof that what we were doing was working. Plus, with each loan or credit card you pay off, you no longer have to pay that minimum payment, which means you free up that money to go toward the next debt, so you pay that one off even faster. And there’s nothing to say that you can’t pay your debts in a different order if you want to. Sometimes there may be a particular loan or credit card that feels worse than others. For example, one of my clients had one that her mom had co-signed, and it was really important to her to get that one paid off quickly, even though it wasn’t the smallest. Then she went back to pay the rest off from smallest to largest balance. That’s okay. Personal finance is personal, so there’s no one-size-fits-all strategy that everyone must follow.”

Many attorneys feel guilty about their credit card and student loan debt, even when they’re earning substantial yearly salaries. But consider this: Nearly 75% of lawyers in the United States carry student loan debt—it’s a commonality among the profession, not an isolated case for you.

Feeling guilty about your debt is as absurd as feeling guilty about drinking coffee, a habit shared by 75% of lawyers, too. Do you feel guilt over your morning cup of Joe? Probably not. It’s part of your routine. It energizes your workday and can even spark joy.

The real issues here aren’t about you as an individual, but about the pricey cost of education, high interest rates, and the flawed student loan payment system in the U.S.

Having debt doesn’t necessarily mean you have to stop having fun. Life isn’t about complete asceticism—don’t nix all of your enjoyments just to pay off loans quicker.

While you shouldn’t indulge 24/7, there’s no need to cut out simple pleasures like a night out, a vacation, or little self-indulgences. Extreme austerity could lead to resentment and stress—something we’re definitely not aiming for here.

Think of your law school debt as a form of good debt—an investment into a lucrative profession offering stability.

In conclusion, through this lens of perspective, there’s no need to feel guilt or shame about your debt. Instead, balance your life with sensible spending, payment of debts, and little pleasures. In other words, live a full life with a responsible approach to your financial commitments.

What you make versus what other professionals make

Many lawyers harbour misconceptions about the amount of money they should be making, and they often find themselves comparing their hourly rates to those of other professions. However, this comparison can be misleading. For instance, taking a quick glance at a plumber charging $99 per hour as opposed to an attorney who is paid $150,000 but whose work equates to being paid $75 per hour, one might be inclined to think that they are earning less. But on closer scrutiny, not all factors have been considered.

Consider the nature of their jobs. Your role as a lawyer entails intellectual exertion behind a computer or in a courtroom, while a plumber’s job involves toiling away in less than savory circumstances, tackling clogged pipes and faulty toilets. Not many lawyers would look forward to a career shift into plumbing, but the re verse scenario might see more consideration.

Another potential misstep arises when comparing hours worked. The assumption that a plumber works and bills for 8 hours a day, 5 to 6 days a week wouldn’t necessarily be accurate. Unlike lawyers, plumbers typically spend a great deal of travel time and aren’t always able to work remotely. Consequently, their actual billable hours might be far fewer despite the higher hourly rate.

Ensuring you do not fall into the trap of comparing yourself to others is the first step towards financial growth. Ronald, a financial consultant, emphasizes the need to think in terms of solutions rather than dwelling on your perceived financial shortcomings. If the plumber can make $99 an hour, what steps can you take to increase your hourly rate from $75 to, let’s say, $125?

It would also be beneficial to seek out clients who appreciate the value of your services enough to pay your desired hourly rate without complaining. Hiring a financial coach such as Rho can be a judicious move in tackling your financial debt issues in a more informed manner.

Lastly, Rho advises lawyers to diversify their investments rather than just reinvesting everything back into their law firms. This could include setting up savings accounts, emergency funds, and building up an investment portfolio. This approach ensures that you are financially secure enough to maintain your lifestyle even if you choose to quit practicing law.

So, rather than focusing on whether debt is bad, understanding how to effectively manage your financial situation is the key. As you equip yourself with the right tools and adopt a proactive mindset, you’ll be better prepared to navigate the financial landscape and secure a better financial future for yourself.

If you enjoyed this article and want to work together around your pricing and helping you establish a roadmap for when to hire and at what revenue levels, use the form below to reach out.