Let me tell you the number one key to building wealth: managing your money intentionally and directing it to where you want it to go. It’s a skill you want to start honing in law school.
A lot of law students think they don’t need to worry about managing their money because they don’t have much yet. But those same law students often grow up to be the lawyers I work with who make more money (sometimes a lot more money) and still feel broke.
If you don’t learn to manage the money you have now, you won’t magically be able to manage your money when you start your career and make more. Better to start now so you don’t have to learn on the back end and try to undo bad spending habits a higher income may allow.
The foundation of intentional money management is budgeting. Budgets often get a bad rap, but that’s because many people think about them the wrong way. If you read budget and your mind immediately went to thoughts of restrictions and “I can’t spend on XYZ,” you’re thinking about budgeting wrong.
What is a budget?
A budget is a plan for how you’ll use your money for a set time period. The most common time period is a month, but you could use a different time frame. For example, as a law student, you might decide to create a budget for the semester based on your student loan refund amount, if you get one.
Regardless of the time frame you choose, the important thing is that you plan ahead of time. Most people only review the spending they’ve already done and realize on the back end that they could have made different choices. But at that point, it’s too late to do anything about your spending. Instead, decide at the outset how you’ll use your money and then check in regularly to ensure you stay on track with your plan.
Choose your budgeting style
I help my clients analyze their spending and see exactly what’s going on with their money to create a budget that works best for them. When you’re doing it on your own, though, you have many budgeting styles to choose from.
Let’s look at a few of the most popular ones.
Traditional—This is probably the most well-known type of budget. With a traditional budget, you list all your income from any source on one side. Then you list all of your expenses, whether necessities or wants, on the other.
Ideally, you want your income to be higher than your expenses, but having expenses listed out in this way allows you to easily see if that’s not the case.
Zero-based—Similar but slightly different from the traditional budget is the zero-based budget. In this type of budget, you list out all your income from any source, just like with the traditional budget. But this time, you make sure every dollar of income is allocated to something.
Those allocations would include your expenses, as with the traditional budget, but they would also include goals, like savings, investments, extra debt payments, and the like. The goal here is to ensure your income and allocations equal one another. In other words, when you subtract your total allocations from your total income, the difference should be zero; hence the budget’s name.
Proportional—Some people prefer a less-structured budget, especially as they get more comfortable with their money and are more familiar with their spending habits.
Enter the proportional budget.
The 50/30/20 budget is probably the most common proportional budget. With this type, you allocate 50 percent of your income to your needs, 30 percent to your wants, and 20 percent to savings. Another proportional budget, the 80/20, is a simpler version of the 50/30/20. With it, you allocate 80 percent of your money to expenses, whether needs or wants, and 20 percent to savings.
And then there’s the so-called anti-budget. With it, you pull out whatever amount you want to save at the beginning of the month, leaving the rest available for you to freely spend or use however you want.
With so many budgeting styles available, there’s something for everyone. And there really is no right or wrong here. The best budget is the one you’ll actually stick to.
What to include
Now that you’ve chosen a budgeting style, let’s talk about what you should put into your budget. One of the most common misconceptions about budgets is that they have to be rigid and restrictive. That’s the basis of the misguided thought, “I’m on a budget, so I can’t spend on XYZ.” It’s not true at all.
Your budget is completely within your control, so you get to include the things that are important to you. While some of that will obviously be necessities, like your bills and groceries, you can cover whatever else you want (within the bounds of the money you have available, of course).
You’re always making tradeoffs with your spending. Every dollar you use for one thing is a dollar you can’t use for something else. When you have a handle on your spending with your budget, you make those tradeoffs intentionally based on your priorities and what’s important to you.
Budgets are living documents. That means you can change your budget during the month as circumstances warrant. Let’s say, for example, you use a traditional or zero-based budget, and in the middle of the month, you decide you want to spend on something that wasn’t in your budget.
You can reallocate money you were planning to spend in another category to be able to spend it on the new thing, if the new thing is more important to you. Also, you can take a little bit from multiple categories so that you feel less of an impact in any one category. There are no budget police who are going to get you for not sticking to your original budget.
If you want more specific guidance on what to include in your budget, I teach my clients to make room for their needs, wants, and goals. That way, they can make progress on their goals without completely sacrificing their quality of life or the things they enjoy. If it feels like deprivation, you’re not going to stick with it—and as I mentioned, the best budget is the one you’ll actually follow.
At this stage of your career, your budget might include only needs and wants since it’s likely your primary financial goal is not to incur any more debt than you need to make it through law school. That’s perfectly fine.
As you figure out the specifics of what to include in your budget, keep two main guidelines in mind. First, be intentional with what you choose to spend your money on. Second, don’t spend more than you have.
Learning to manage your money well is crucial for your current and future financial well-being. When you’re living off loans or don’t have a lot of money coming in, not managing your money intentionally can mean not making rent or paying other bills, not having enough to eat, or going further into debt.
But beyond that, you’ll take the same money habits you have now with you when you’re earning more. It’s easy to overspend and not realize it when you have more money coming in regularly. When you start earning more, it’s unlikely that not having a budget will put you at risk of not having necessities. Instead,
the more likely issue is that you’ll have nothing to show for the extra income you’re bringing in.
Wealth is built in the gap between your income and your expenses. But 78 percent of Americans are living paycheck to paycheck. That figure includes 25 percent of households that make $150,000 or more and 36 percent of Americans earning $250,000 or more. If you’re living paycheck to paycheck, the gap between your income and expenses is tiny or nonexistent, and it will be impossible to build wealth.
Managing your money is a skill you can learn, and learning it now sets you up to build wealth in the future. Making more money isn’t the answer. Rather, the answer is being intentional with the money you have and making sure the money you’re spending is aligned with what you really want in life.
One of my favorite quotes is: “Don’t sacrifice what you want most for what you want now.” Following a budget lets you make sure you’re intentionally using your money in line with your values and goals. You make progress toward the life you want rather than spending on every random thing that seems cool in the moment.
Ultimately, money is a tool you can use for your benefit. If you manage it well, you can achieve the goal of having control of your time, whether at a traditional retirement age or sooner. If you don’t, you’ll forever be spending more time trying to earn more money.