How Lawyers Are Affected By Low Interest Rates

As a lawyer in practice, you know too well how much dedication and effort it takes to earn your income.

Have you ever considered the prospect that the money you earn from your legal practice could be lost?

No, I’m not talking about a ‘risky investment’ or fraud. I’m talking about simply keeping your money in a bank account.

How could this be?

It’s all about interest rates.

Interest rates are at record lows and the prospect of rates going down is a realistic proposition. In fact, there is even talk of the rate on interest earnt on typical savings bank account nearing zero or lower.

So what does this mean for you as a legal practitioner seeking an investment return on your funds?

Cash balances as a store of this value could mean you are losing your formerly earned hard work.

Generally speaking this means you will be getting a return of no more than 1-2% on your cash balance.

I’ll give you an example:

In simple terms; a 1.5% return on say $100,000 of practice fees earnt is only $125 per month! This hardly equates to a great return on money earned from your hard work!

History dictates that cash (or bank accounts / bank deposits) are not necessarily the most effective ‘store of practice fee value’. After accounting for tax on the 1.5% interest rate return, your money is in fact going backwards! If we assume the cost of living is 3% per year and the net cash after tax return on your money is only 1% per year, then you are losing 2% of your $100,000 every 12 months. Over 10 years that means your $100,000 is only worth $75,000 in today’s dollars.

Cash does have its benefits: it is easily accessible at almost an instant for your to enjoy. The chances of losing the cash balance is next to none.

However, this certainty and flexibility comes at a cost, being that each day your cash could be worth less.

Set up a Strategy for Better Return on Your Investments

So in simple terms, working hard to earn your net practice fees is only the first step. Once you have earnt that income, you have to make it work for you by setting up an investment strategy.

A sound investment strategy should take into account all of your personal circumstances. A loss of value of your money, should certainly be one of those factors.