The return on investment of a law degree

DSC_0427-01.jpeg

Apparently, the job market for lawyers in the US is so bad that a lot of lawyers end up working in hair salons, book stores and end up selling tractors. But still a lot of people contemplate going to law school for the useless purpose of supplementing their existing credentials in fields outside of the legal world.

I urge you to consider the return on investment (“ROI”) of a law degree before going to law school. Note that going to law school must be distinguished from being a lawyer, not all who go become a lawyer as there are barriers to entry, mainly the Philippine bar exam, which has a notoriously low passing rate of 17-25% of all test takers.

I went to law school because I wanted to be a lawyer and actually help people in need of legal counsel.  I genuinely love this profession with passion.  Thus, undecided ones should go to law school because they want to be lawyers and not pursue it for the perceived high income thereafter. The average entry level salary of a law firm lawyer in Makati right now is PhP 50,000.00 gross.  The net take home pay depends on your salary structure and whether there are tax shields provided by your law firm.  A popular and large law firm in Makati notoriously pays entry level salaries of just PhP 24,000.00.

Of course, your pay will vary because of additional incentives that may be paid on top of your fixed monthly salary, such as profit share (in the billable hours worked), notarial fees, appearance fees, and transportation allowance.  Some good firms pay for overtime meals, provide car rentals with driver for out-of-town hearings, annual firm trips abroad, up to 15th month pay and other non-monetary benefits like health care coverage of up to PhP 100,000.00.

For Cebu where living costs are lower, I understand that the average entry-level law firm salary is about Php 15,000.00, not much more than minimum wage, I guess. In Cebu, salaries are certainly better in non-law firm workplaces. For purposes of computing the ROI, let’s peg the salary at PhP 50,000.00.

The ROI is determined by computing
ROI= (GAINS from investment – COST of investment) / COST

It is established that my total cost of law school, up to admission to the bar, is PhP 1,971,100.00.  I spent about five years in pursuit of such goal.  On the other hand, let’s peg the yearly gain of being a lawyer to the fixed monthly salary of PhP 50,000.00, or a five-year gain of PhP 3,000,000.00. Therefore:

ROI = (PhP 3,000,000.00 – PhP 1,971,100.00) / PhP 1,971,100.00

ROI =  1,028,900.00 / PhP 1,971,100.00

ROI =  0.52 or 52% return by five years AFTER law school

Interpreting the result

A cursory look at the above equation indicates that an  ROI with a positive number implies that getting a law degree would be worth your time and the cost of going to law school is less than the future benefit you receive.  Indeed the ROI of 52% from the total cost of PhP 1,971,100.00 is significant.

However, we should put this in perspective by noting the yearly profit. Thus, 52% profit computed at a yearly return (52% ROI / 5 years) yields only a 10.40 % profitability per year, less the cost of inflation (3-4%) and you get a net yearly profit of only 6.4% in real terms.  As you can see, the return is not that spectacular as some may erroneously believe.  In comparison, the average yield of a bond or T-bill is about 5-10%. Profits from investing in stocks or a business may be as high as 20% onwards.  Some may be better off investing their money than going to law school.

Manage your expectations

The ROI computation is limited by several factors. Not all lawyers will earn the average PhP 50,000.00 monthly salary as firms are selective on the basis of the law school you graduated from (there is preference for the top three law schools of the Philippines), your grades and other achievements.  If you do not graduate from any of the top law schools, your earning capacity as a starting lawyer may be hampered and even delayed as law firms only hire underbar (bar-takers who are just waiting for the release of the bar results) lawyers from the top law schools.

Being a lawyer is a noble profession.  If you make the choice to go to law school, please do it for the right reasons and not merely for the thoughtless pursuit of money.  Ultimately, you make the choice for your future.  What was your ROI on your college degree?

xoxo,

20 something lawyer

Advertisements

2 thoughts on “The return on investment of a law degree

  1. Your yearly return is ignoring compounding. It should be 8.76% p.a. instead of 10.40%. Of course this also assumes you spent the whole cost at once and got the whole 3000000 at the end of the five years, which is not the case. To get your real return you should do it on a yearly or monthly cash flow. Doing it yearly leads to an rate of return of 9.95%.

    irr([-480000.0,-480000.0,-480000.0,-480000.0-51100,600000,600000,600000,600000,600000])
    0.09952

    (you can calculate the same as above in a spreadsheet: those are your yearly costs, followed by your yearly incomes)

    Like

    1. Hi ultrotter, welcome to the site. You appear to have put a lot of thought into that. I’m glad our article made you think somehow. 🙂 What is your conclusion are you contemplating going to law school? 🙂

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s