(THE ROADMAP TO FINANCIAL FREEDOM FOR INJURY LAWYERS)
It’s so easy to forget you’re running a business.
It’s not hard to figure out why. From the first day of law school it’s drummed into your head that you are in a profession (not a business) and if you can master the fine art of practicing law, you will have all of the riches and fame the world has to offer. What complete and utter BS!
You know the lawyer in your town that all of the lawyers privately disparage (don’t pretend you don’t know who this is). The lawyers in your town poke holes in this ultra-successful lawyer like he is a Voodoo doll—maybe it’s that he strikes it rich with cases no one else can get or he’s connected with all of the right people. The lawyers in your town find it easy to criticize this lawyer, but why? It’s simple: because they aren’t successful and he is.
Time to Face a Cold, Hard Reality
Few lawyers want to admit this, but RUNNING A SUCCESSFUL LAW PRACTICE IS ABOUT MAKING MONEY. Without money, you can’t make the payroll and you’ll go out of business. Yes, making money should be the number one priority of any lawyer. But if so, why do so few lawyers spend any time planning and projecting the income and cash flow of their business? Why do so few (if any) lawyers have specific goals for the amount of money they want to make this year?
But first, take a close look at your thoughts about money. Perhaps, like most of us, you’ve been taught from an early age that wealthy people are greedy and have a bunch of bad qualities. You’ve been preconditioned from day one to think that being rich is not a good thing. But guess what? The same people who told you this were broke and wanted you to be just like them.
You can do a helluva lot more with a lot of money than with none. If you want to help feed the poor or stop malaria, you can’t do much if you’re broke. The rich pay the most taxes, employ the most people and give the most to charity—hey, that’s just a fact. You can accept objective reality or ignore it.
The first step is to admit that you want to be rich. But it’s not simply a matter of trying to be rich, you have to be 100% committed to this goal or it won’t happen. Okay, fine, you say, but no one ever taught you how to make money in law school so where do you get started.
How Much Money Will You Make This Year
In the world of personal injury law, income is determined by one thing: a trial date. You will not get paid until the trial (yes, some cases settle during discovery, but that’s rare and you can’t rely on luck). Okay, fine, you say, but you don’t know exactly how much money you will make from every trial, do you?
Every case that is in suit should have two things:
- A settlement value; and
- A budget with the estimated case expenses for each phase of the lawsuit (discovery, trial preparation and trial).
The settlement value is the absolute rock-bottom number that your client will accept. Of course, you’d like to do a lot better, but your settlement value is a realistic, drop dead number that gives you the absolute floor for settlement negotiations. Your client will NEVER accept a penny less than the settlement value.
The case budget will have the estimated costs of every aspect of your case broken down through the three major phases of lawsuit: discovery, trial preparation and trial. The discovery expenses will include filing fees, stenographer and videographer costs, expert witness fees, etc. You need to create a case budget that has every expense of the case down to the dollar.
Once you have the settlement value and you’ve created a case budget, you can project to the penny how much money you will make from the case. Let’s say you have a personal injury case that has a settlement value of $600,000, estimated disbursements of $25,000 and a trial date on October 1st. Now you can project income of $158,333 on October 1st. Beautiful!
Now list all of the cases that have trial dates this year and the anticipated legal fees. Voila! You just determined how much money you’ll make this year. Hopefully, you’ll make a lot more than you project, but it’s great to have a strong handle on your cash flow.
But what about your cash flow for next year? Just project the cases that you expect to have a trial date next year (and keep in mind the defense will try to adjourn everything they can) and do the same math with the settlement value and case budget. Once you’ve done the math, you’ve got your cash flow for the next 24 months.
Know Thy Numbers
Next, you need to know exactly how much money it takes to run your shop. But don’t recreate the wheel here—let your bookkeeper do the heavy lifting. You need to know the exact numbers for your operating and marketing costs broken down by fixed and variable costs.
But it’s a mistake to just rely on the Profit and Loss Statements sent by your bookkeeper. Sit down with your bookkeeper and team (I include my staff in these meetings) to pinpoint the total monthly and annual costs of running your business. These strategic quarterly or bimonthly meetings with your financial team are not something you should do—they’re the most important thing you do. You must know your numbers to the penny!
Once you’ve got your costs down to the penny and projected your cash flow for the next 24 months, then you can decide how much to pay yourself. Yes, the fun part comes last. But don’t just pick any ole’ number that happens to sound good—be very precise in the amount of money you will make and write it down. You need to constantly remind yourself how much money you’re planning to make or you’ll never get there.
The Definition of True Financial Freedom
This is where almost all lawyers get it wrong. Wealth building is not about income or what car you drive—it’s only about one thing: NET WORTH. That’s right, how much money you have in your bank minus your debts. You should know this number to the penny and monitor your net worth every month.
A ton of money won’t make you happy—the rich can be just as miserable and unhappy as the poor. But wealth will give you one thing the poor don’t have: the freedom to walk away from everything…whenever you want. It’s the freedom to take only those cases you want, drop your needy clients or walk away from your law practice completely. Now that’s true success!
But the other lawyers in your town don’t get this. Instead, your lawyer friends focus on driving fancy cars and living in mansion houses—hey, that’s awesome and I applaud their success. But fancy cars and palatial houses can be a financial ball and chain and they’re usually an impediment to what should be your true goal: financial freedom.
I know what you’re thinking, you’ve got to have the fancy car and $1,000 suits to impress your clients. Do your clients really care about this stuff? They don’t, but even if they did, are those the kind of people you want to represent anyway?
A Lesson on Wealth-Building from the Richest Man in the World
Warren Buffett, the richest man in the world, has a house and car that are shockingly average and middle class. Is Buffett off his rocker? Why would a multi-billionaire live in such a modest way when he can afford anything he wants?
Buffett understands that an expensive house and car will diminish his net worth and that his money is much better spent building his investment empire. When asked why he doesn’t at least get a decent car for $50,000, Buffett answered that he can turn $50,000 into $1 million in just a few years, so he’s really spending $1 million for the car. Wow! What if you applied Buffett’s thinking to your law practice?
Come to think of it, how do you think Buffett got so wealthy in the first place? Now, if the richest man in the world thinks this way, shouldn’t you?