As lawyers, naturally, we hope that when a client comes to us for help that the result of our effort will include a monetary gain for our client. Since our attorney-client relationship in personal injury matters involves money, we are offered the unique opportunity to guide our clients, not only legally, but financially as well. This is where our profession as lawyers and my interest in finance converge to create a personal goal – to promote financial literacy.
As you know, a lawsuit often comes to an end at the settlement table, which, in my mind, presents a chance to impart a little working knowledge to help set my client on a better financial path. I look at this event as an opportunity to advise my client to look long-term at his or her net settlement funds as possible bricks on their road to financial stability. When my clients choose to invest a portion of their settlement in a structured settlement, I encourage them to view the structured settlement as the interest-earning investment vehicle that it is.
When you have the chance to help impart financial wisdom on your clients, I recommend you introduce them to the Rule of 72, which reflects the incredible power of compound interest. By helping your client understand the Rule of 72, which is a quick “mental math” approach to determining the length of time needed to see an investment double given a fixed rate of interest, you might be able to help encourage them to invest for tomorrow, rather than only living for today.
With the Rule of 72, you can plug in any rate of return and see how long it will take your money to double in value. For example, you invest $10,000 and expect to earn an 8% average annual return. To find out how long it will take $10,000 to grow to $20,000, divide 72 by 8. The answer: it will take approximately 9 years for your money to double in value. As another example, If you were able to invest that same $10,000 earning 10% per year, it would only take approximately 7.2 years for your money to grow to $20,000. By the same token, you can plug in any period of time and compute what rate of return you need to earn on your money for it to double in your chosen time period. If you have 15 years to turn $100,000 into $200,000, you will need to earn an average of 4.8% per year over the 15 years for the money to double.
These examples assume that the money is left to grow and the earnings compound over time. They also assume that there are either no taxes deducted from the investment, the investment is growing tax-deferred or that the investment’s stated rate of return is an after-tax return. Some of the benefits of a structured settlement are the tax-free nature of the return and the ease with which the investment funds can be left alone to double and perhaps even quadruple over time.
This is but one of the small lessons we can impart to our clients at settlement to set them on the course to financial responsibility.