Why Bankers Don’t Make Bank: Where Your Paycheck Actually Goes and What to Do About It
If you want to work in finance, you probably like money.
And once you break in and become a banker, you’ll be making tons of cash.
But then you’ll waste it all on $200,000 sports cars, drugs, and alimony – right?
While that scenario explains why some finance veterans don’t save much, the problems actually start much earlier – with your first paycheck:
The NYC Analyst
Let’s start with the base case of a newly minted investment banking analyst in NYC – after this, I’ll explain how it’s different in other regions, outside the U.S., and for Associates on up.
If you earn an $85,000 base salary, that’s $7,083 per month (rounded).
With that level of income in NYC, you’ll earn approximately $4,800 per month after taxes.
Yes, federal, state, and city taxes add up to a lot; try this online calculator if you don’t believe me.
Manhattan is also one of the most expensive places to live in the U.S., and at the minimum, you’ll likely spend $2,000 per month on rent.
You could even go higher than that if you get a 1-bedroom apartment instead of a studio, or you could pay a bit less if you live with roommates.
But let’s keep the numbers round and say that you’ll be left with less than $3,000 per month in after-tax, after-rent income.
Models and Bottles and “Other Miscellaneous Expenses”
After that, you’ll most likely spend between $1,000 and $2,000 per month on food, utilities, transportation, dry cleaning, going out, student loans, and so on.
While you can expense dinners if you stay late, you do have to pay for other meals, coffee, and so on.
Even at a very low $10 per day, that’s still $300 per month, and, more realistically, it will be at least 2-3x that amount. We’ll be generous and say $600.
If you assume $100 per month for utilities and $100 for subway / taxi / ride-sharing fare, that brings you close to $1,000.
We haven’t even factored in alcohol, clubbing, or significant others, and already you’re down to about $2,000 per month.
Still, that doesn’t seem so bad: It’s a bit less than $24,000 per year in savings.
But then there are “non-recurring” expenses like your end-of-year vacation, furniture, an HDTV, a new laptop, and so on.
And unless you have rich parents or you won a full-ride scholarship, you probably have monthly student loan payments as well.
The bottom line: In the best-case scenario, you’ll save under $24,000 USD in your first year – before bonuses.
In the worst-case scenario, you might save $10,000 or less.
Those Numbers Are Ridiculous – I Don’t Spend Nearly That Much Money!
That’s what you say now – when you’re still in school, or you’re working a normal job and you don’t live in Manhattan.
Analysts often believe they can save more money than this via several methods:
Method #1: You’ll Live with Your Parents in New Jersey / The Bronx / Queens!
Yes, you might save money if you do this – but you will also want to kill yourself after a month of coming back home at 3 AM and leaving at 6 AM each day.
Plus, what will you do if your VP or MD asks you to come into the office on short notice on the weekend?
Almost all the Analysts and Associates live in Manhattan for these reasons.
Method #2: You Will Never Go Out or Spend Money on Food!
This one may sound plausible, but it won’t be once you start working.
If you want to build your network, you need to go out.
Maybe you won’t spend $500 – $1,000 on bottle service, but you’ll have to spend a bit on drinks and food occasionally.
And if you think you can cook to save money, trust me: If you work 80+ hours per week, cooking is even worse than living in New Jersey.
Method #3: You’ll Buy a Place Instead of Renting!
If you have a trust fund or otherwise have a wealthy family, sure, OK…
…But if you do, why on earth are you even going into the snake pit of investment banking, anyway?
Also, keep in mind that unless you buy the place outright or pay a high percentage of equity upfront, monthly payments on an owned house could easily exceed rent, at least at first.
Method #4: I’ll Get a Roommate!
OK, this one’s viable since it lets you save a lot on rent and other expenses.
Plus, it widens your social circle, and you might even get to know non-bankers.
Other Regions of the U.S.
In other regions, there are two key differences:
- Lower rent, food, and going out expenses;
- (Possibly) lower taxes.
So, you might be able to save a bit more if you live in Houston; maybe $35,000 – $40,000 due to the lower cost of living and lack of state income taxes.
If you’re in San Francisco, you might save even less than in NY due to the ridiculous rent, while LA is slightly less insane (though still far worse than Houston).
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Outside the US
The major differences:
- (Potentially) lower taxes or no taxes at all.
- (Potentially) a much lower cost of living.
- …but your base salary may also be less if you’re at a local firm rather than a global bank.
I wrote “Potentially” above because if you’re in London, for example, it’s not much different than the NYC scenario and may be even more expensive.
However, you have to be careful because domestic firms in these places tend to pay far less than the global investment banks.
So, even if you pay no income taxes, you might end up earning less if you’re at a truly “local” boutique.
Associates On Up
If you’re starting as an Associate, you’ll get a higher base salary – more like $125K – but you will also have higher expenses, such as $200K of business school debt and a family (potentially).
$125K of base salary is about $7,000 per month after taxes in New York City, so you can save more than Analysts.
But you still won’t be amassing a fortune just from your base salary.
If you’re more senior – VP to MD level – your base salary actually doesn’t increase that much relative to your seniority.
A VP might have a base salary between $200K and $300K, while MDs at large banks might earn between $300K and $500K.
After NYC taxes, $300K is roughly $180K, while $500K is roughly $300K.
That sounds like a lot, but at that level, you’re probably not going to want to live in a small, crappy studio apartment, so housing could easily remove a good percentage of that.
Plus, you’ll probably have kids and/or other family members to take care of.
As a summer intern, you’ll get a pro-rated salary based on what full-time bankers earn .
If you work for 1/4 of the year and, therefore, earn around $21,000, you can save quite a bit if you get cheap student housing.
You’ll also get a large tax refund the next year because you only worked for 3 months.
Even with all the other expenses, you might save around $10,000 as a summer intern.
Signing Bonuses, Relocation & 401(k) Contributions
I didn’t take these into account above, because I’m assuming that you use most of the after-tax signing bonus and/or relocation bonus to actually pay for things and relocate.
You can make contributions to retirement savings plans that save you a bit in taxes, but these don’t result in a dramatically different picture – and you still have to pay taxes when you withdraw money.
What All This Means
This was a long article with a lot of numbers – here’s what it all means, and what you should do as a result:
If Your Primary Goal in Banking is to Save Money, Do Not Work in New York or London
Just make sure that you’re not working for a local 3-person firm or your salary might also get cut by 75%.
…But If Saving Money Really Is Your Main Goal, You Might Have the Wrong Idea
No matter what you do, you’re not going to save a fortune as an analyst or associate.
You do investment banking because you want to invest in yourself and have access to much better opportunities in the future.
Doing it to save a lot of money in the short-term isn’t a wise idea because you probably won’t save that much.
Your Yearly Savings are Heavily Dependent on Your Bonus – So Don’t Blow It
Even a “modest bonus” is more than what you save during the entire rest of the year.
That’s true at the Analyst level, and it becomes even truer at the Associate and VP levels and beyond.
Note, however, that much of your bonus at those levels will be in the form of stock and other deferred compensation – so in cash terms, you may not see a huge increase over the cash bonuses of Associates.
Whatever you do, do not do anything stupid or risky with your bonus – put it all in the bank or in conservative investments so you have a cushion.
As a VP once told me, “You can piss away your salary on coke and strippers, but save your bonus.”
I’d recommend the strippers – they’re much cheaper than coke…
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