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How Much Cash Do You Need to Start Your Practice

Regardless of inflation, recession, boom, or depression, the answer to this question remains the same: You need enough cash (or guaranteed income) to support yourself and your family for one year. In other words, assume that even though your practice grows,you will not be able to take any cash out for one year.

You should plan to have some combination of the following:

  1. One year’s living expenses in a savings account.
  2. A working spouse or other income-earning person with enough income to support the family for a year.
  3. A bank loan of the funds to live on for a year. (This will be almost impossible to get from a bank unless you have the right co-signer or guarantor.)
  4. A wealthy parent, in-law, or other relative to:
    1. lend you the money or
    2. give you the money or
    3. guarantee your bank loan.

In addition to the funds for living expenses, you will need money to buy and pay for the following:

  1. Announcements, stationery, calling cards, postage, etc.
  2. First and last month’s rent (possibly, you will need first and last two months’ rent).
  3. Down payment on modest desk, chair, two or three client chairs, and some modest decorating of your office.
  4. Initial payment to telephone company for equipment, line charges, directory listings, optional services and features, etc.
  5. Malpractice insurance.
  6. PC with word processing package and good printer.

I cannot emphasize strongly enough the necessity of starting with adequate capitalization for your living expenses. It is theoretically possible that you will be able to take cash out from your practice in six to nine months, but an error in calculation here can be fatal. Do not plan for only six or nine months in living expenses. It won’t be enough. You’ll be forced to leave your practice and get some kind of job to help support your family and this will be the death knell of your practice.

If you can keep your doors open for a year, you’ll probably make it, as you’ll have a backlog of receivables and work-in-progress that will start producing a steady cash flow. On the other hand, if you go under after six months, you’ll take clients with you, and these are the clients who would otherwise have been the foundation of your practice’s growth, if you had been adequately financed.

If you open your doors, then close your doors, then open your doors again, you won’t get the same clients the second time around. They will remember that you didn’t make it the first time and will be afraid to trust you the second time. You will have doomed yourself to perpetual failure with your first failure.

Lawyers have gone under the first time and somehow made it the second time, but this is a rarity. The lawyer who couldn’t successfully start a practice the first time probably won’t be successful the second time.

Do not neglect your student loan obligations. Try to extend or defer your repayment schedule if you can. In at least one state, being in default on your student loan(s) is considered grounds to prevent you from being admitted to practice.

If I had to choose between opening my doors immediately with only six months’ living expenses, or working as a laborer for two years to have enough living expenses for a year, I would choose the latter course of conduct. As a matter of fact, I worked for accountants and as a cab driver to accumulate funds. I also had a working wife, which made it possible to save cash to start the practice. Even though you are able to make money in your practice right away, this doesn’t mean you can withdraw it. You will need cash for many purposes, including:

  1. Investigators’ fees for personal injury cases.
  2. Court filing fees to commence litigation. Even though you may earn a large fee ultimately from a probate or divorce or personal injury matter, the fee will be received one or two years from the time you get the case started, and you need the filing fees immediately.
  3. Electronic research and law books are exceedingly expensive, as you will soon find out. (See the chapter on “How to Buy Law Books.”) There is no end to how much money you can spend on the bottomless pit called a law library. It is difficult enough to succeed when you are adequately financed. It is almost impossible when you are inadequately financed.

If you happen to own your home, you should consider refinancing your home to use the cash to maintain you for the year. If a relative owns a home, you might be able to convince them to refinance their home to get the cash you need.