Heading for partnership - how can you fund it?
A guest article by Andrew Neligan of Informed Choice Ltd
You are an ambitious young lawyer with expectations of becoming a partner at your firm at some point in the future. However, you are concerned about how you will fund the partnership offer when it is made. This article looks at how you can manage this financial outlay as efficiently as possible.
The key to managing this capital outlay is to ensure you have as much control of your capital as possible and to plan as early as possible. If you are reading this and have just joined your firm, believe it or not, you are in the strongest position.
Essentially you will have three options available to you. Each one has its advantages and disadvantages.
1) Take out an unsecured loan
You could do nothing and wait until the point at which you have received your offer to be partner.
The advantage of this is that you will be able to enjoy all the disposable income that you have while you climb the early rungs of the law firm and will not have to raid any savings that you have to buy into your firm. However, this is an expensive option that can be avoided.
While you may be able to command lower interest rates due to your professional status and access loans specifically for lawyers in your situation (it may be that you are able to obtain an interest rate in the region of 2-3%) you will still be increasing your personal debt which will have to be funded.
If you have worked hard to reduce debt that you accrued whilst at university and law college building it up again, possibly on top of mortgage debt too, will be an unattractive option for you.
2) Interest free loan from your firm
It may be that your law firm are willing to provide you with an interest free loan. If this is the case this is clearly more attractive than the first option and will be a low cost way of funding your offer. However, you will still have a liability hanging over you which will require funding at some future point.
Consider also that you may wish to leave the firm before the loan is repaid which will require financing it sooner than expected.
3) Plan early and build up a fund yourself
The sooner you act on your plan to fund your partner offer the more control you will have, even if it is over five years away. If you are serious about becoming partner in the future you will prioritise your funding of it over the medium to long term.
The first step should be to reduce down any debt that you may have. This is for two reasons; firstly it will increase your disposable income the sooner it is done and secondly any investment growth you have will not be negated by the interest rate on your debt.
Once this is done you can consider an investment plan to have your money working as hard as possible for you. In all probability you will be saving from regular income after you have paid income tax. In which case you should look to establish a regular direct debit which will be taken on or near to pay day. This will ensure that you are saving money before spending it and will prevent the situation where you find that your balance has been run down before you have set any money aside.
You will need to be able to access your capital in the medium term so you will need to use a tax wrapper that provides this access. ISAs will be the most suitable starting point because they offer tax free growth (with the exception of 10% dividend taxation) and access whenever it is required. ISAs can be split into two distinct types: Cash ISAs and Stocks & Shares ISAs. The current ISA annual limit is £10,680 per person, of which only £5,340 can be saved into a Cash ISA.
Cash ISAs are not exposed to investment risk; you opt for an interest rate provided by a bank or building society that is known to you at outset. They are most suitable where access is required in the short term but the returns are negligible and are unlikely to be above inflation. Where a greater level of return is required a Stocks and Shares ISA is appropriate. This type of ISA allows you to invest in a wide range of assets via investment funds, a portfolio can be structured according to how much investment risk you wish (or need) to take. The main disadvantage with Stocks and Shares ISAs compared to Cash ISAs is that it is possible to lose the value of the capital you invested and it is for this reason that any investment should be considered before it is made.
So, by taking a long term approach to your career you can put yourself in a strong financial position when your partner offer is made. In addition, even if the offer never materialises or your career goals change you will have build up a capital value to fund other financial objectives you may have.
Andrew Neligan is a Chartered Financial Planner who helps legal professionals achieve their financial priorities. You can get out more about his services at www.icl-legal.co.uk