Spending your bonus this year? More fool you
If you're working in banking, I have some wisdom to share with you. I've been there too: I spent nearly 30 years on Wall Street, working on equities trading floors from Morgan Stanley to UBS. Now, after years of 60 hour weeks and crippling commutes, I'm doing what all the best ex-traders do: I'm consulting part time. Forget retiring: this should be your aspiration. If you can afford it.
The problem with investment banking and sales and trading careers is that when you're earning a huge amount of money, it's easy to get carried away. As your pay rises, so does your spending.
I've seen this first hand. When I was a managing director (MD) at Morgan Stanley my colleagues were out there buying 5,000+ square foot houses, expensive golf club memberships and costly divorces. There were a lot of new Ferraris and Lambos and $30k watches, even as Lehman's stock went to zero. They got locked-in because they loved spending $500k in annual expenses. When they lost their jobs (as we all do), it came as a dreadful shock. Plenty of them had scramble around looking for alternatives at lesser banks.
What you need to remember, then, is that just because you're an MD, you don't need to live the lifestyle. The MD lifestyle is not your friend.
Senior people in banking will tell you that they need the golf club membership to entertain clients, along with the ski lodge, the big house and the boat, but most of that spending is nothing more than conspicuous consumption. Wearing a Rolex doesn't prove to your boss that you're any more valuable. On the sell-side, the equation is dangerously simple: if you add 10 times your total comp to the company’s bottom line, you stay. If you don't, no watch, boat or car is going to convince them otherwise. You'll be out of the industry, stuck with huge AmEX bills, a spendthrift spouse, and/or huge alimony payments.
This is why, as you climb the banking ladder you need to be disciplined. Never live on more than your base salary. Never spend this year’s bonus – not a penny of it. Hide it until you get next year’s bonus, then hide that and invest or spend last year’s. If you always have one year’s worth of spending in ready cash and you invest or save the majority of each subsequent bonus, then it adds up nicely.
This doesn’t mean that you have to live like Scrooge. The first house can be a stretch on the budget because you are young and your family is growing. However, any additional mortgages need to be paid for with your base salary. Personally, I paid off my first house before I moved to my second and then I paid that one off when I was shown the door. I had that option because I still had the previous bonus stashed away. I drive a Mercedes but it’s the same 2009 model I bought in 2011. It cost the same as a new Camry at the time and worked just fine when I drove clients somewhere.
Thanks to this discipline, I'm now in my early 50s and I'm a consultant. I'm too young to stop working and I don't want to hang out in the house or a golf club all day. I've taken a big cut to my income, but that's fine - I can afford it. I'm part of the gig-economy: I've joined a few start-ups for the equity that's on offer and sometimes I sell my skills for hard cash. Even better, the IRS lets me write off a bunch of expenses that I couldn't if I were simply retired.
This is why the most sensible ex-MDs consult. Consulting is synonymous with, "I got out of banking and survived." The least sensible MDs go to pieces when they get their pink slips. They have plenty of trinkets but no real back-up plan and are left scrambling for anything that will pay them $250k+. If you're in banking now, you can still choose which path you'll take when the time comes. Be wise: life's much easier that way.
Stanley Danko is a pseudonym for a former equities managing director at UBS who spent nearly 30 years working on Wall Street.
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