If you want to be in finance, you probably like money quite a bit.
And once you break in and become a banker you’ll be making tons of cash – even if bonuses aren’t as good as they were in the old days.
But then you’ll waste it all on $200,000 sports cars, drugs, and alimony – right?
While that scenario applies to many seniors bankers and 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 US, and for associates on up.
If you earn a $70,000 base salary, that’s $5,800 per month (technically it is $5833.33333 but we’re using round numbers here).
Taxes are different for everyone, but with that level of income in NYC you’ll pay around $2,000 per month (34-35% rate) in federal, state, and city taxes – leaving you with $3,800 in after-tax income each month.
Manhattan is also the most expensive place to live in the US, and at the minimum you’ll spend $1,200 on rent (with a roommate) – but more likely you’ll spend $1,500 to $2,000 on rent.
So now you’re left with $1,800 – $2,300 per month of post-tax, post-rent income.
Models and Bottles Other Expenses
You’ll be spending a minimum of $1,000 up to $2,000 when you take into account food, utilities, transportation, dry cleaning, clubbing, student loans, and so on.
Why so much?
You can expense dinner each night, but you will have to pay for other meals, for going out on weekends, and so on – even if you assume a very low $10 per day, that’s still $300 per month.
And realistically you will spend more than twice that on food, so assume at least $600.
If you assume $100 per month for utilities, $100 for subway / taxi fare, and so on, that easily brings you to $1,000 – and we haven’t even taken into account alcohol, clubbing, and significant others.
Many analysts actually save nothing and end the year with credit card debt.
But let’s be optimistic and assume you can save $1,000 per month, or $12,000 per year.
That seems OK – but then there are non-monthly expenses like your end-of-year vacation, furniture, an HDTV, a new laptop, and so on.
Even if you’re extremely frugal and manage to save $2,000 per month – $24,000 per year – you will only be left with $15,000 – $20,000 once you take all those expenses into account.
And if you’re not so frugal, you’ll be saving well under $10,000.
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 working a normal job 50-60 hours per week and you don’t live in Manhattan.
But can you really save more money than what I’ve outlined here?
I’ll Live (With My Parents) in New Jersey / The Bronx / Queens!
You might save money if you do this but you will also want to kill yourself after a month of coming back at 3 AM and leaving at 6 AM every day – plus you’ll be spending more on transportation.
Pretty much all analysts and associates live in Manhattan – you need to be close to work to handle fire drills anyway.
I Will Never Go Out / Never Spend Money on Food!
Again, this one sounds plausible now but once you start working the picture changes.
If you want to get to know other people and build your network, you need to go out occasionally.
Maybe you won’t spend $500 on bottle service every night, but you will spend something.
And while you can use tricks to save money on food, you will find yourself buying lunch and other meals more often than not.
Don’t even think about cooking – that’s the last thing you want to do when working 80-100 hours per week.
I’ll Buy a Place Instead of Renting!
…except that would actually be more expensive on a monthly basis, at least initially.
Also, you will most likely not have enough for a down payment if you’re just graduating.
And if you want to move out of New York, buying a place straps you down and limits your options, which is not a smart idea when you’re just starting out.
I’ll Get a Roommate!
This one’s actually a good idea because you can save quite a bit on rent and other expenses.
Plus, it widens your social circle and if you have a non-finance roommate, you might get to know non-bankers (they exist, even in NYC).
Other Regions of the US
In other regions there are 2 key differences:
- Lower rent, food, and going out expenses;
- (Possibly) lower taxes.
So you might be able to save $30,000 if you live in Houston, pay a sub-$1,000 rent, and also have no state taxes (isn’t Texas awesome?).
You can get an estimate of taxes in other regions with this net pay calculator.
Houston is one of the cheapest places to be a banker in the US; if you’re in LA or SF, rent will be higher – though still less than Manhattan – and taxes and other expense will be higher, so you would save more than in NY but less than in Texas.
Outside the US
The major differences:
- (Potentially) lower taxes or no taxes at all.
- (Potentially) a housing stipend, so minimal or no rental expense.
- (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.
In other regions like Hong Kong there are still (low) taxes , but you usually get a housing stipend which saves you a lot.
So what’s the downside to working elsewhere in the world?
If you’re working for a small, local firm you will often get paid a fraction of what you earn at global investment banks.
In China and Japan, for example, local banks might pay you almost nothing compared to what US and European-based banks pay; that’s because the cost of living is theoretically lower in China (even though in big cities, it’s not really) and because of corporate tradition in Japan.
Associates On Up
If you’re starting as an Associate, you’ll get a higher base salary – more like $100K – but you will also have higher expenses, like $150K of business school debt and potentially a family to take care of.
If you don’t have those expenses you might be able to save more than analysts, but you will still not 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.
You might make $150K-$200K at the highest levels, but your tastes will also increase and you won’t want to settle for a $1,500/month studio apartment.
So despite the higher base salary, you still won’t save much until bonus season.
As a summer intern you’ll get a pro-rated salary based on what full-time bankers earn – so let’s just assume that you work for 3 months and earn $17,500 ($70,000 / 4) to get a round number.
You can save quite a bit of this if you get cheap student housing (at NYU in NYC, for example) – and you’ll 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 $5,000 – $10,000 as a summer intern, after the tax refund.
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%.
The other downside to these places is that you’ll gain a much wider network somewhere like NYC or London and have more options afterward.
…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 – and your hourly rate may not be much better than at McDonald’s.
Your Yearly Savings are Heavily Dependent on Your Bonus – So Don’t Blow It
Even a “modest” bonus of $50-$60K (after taxes, $25-$30K) is more than what you save during the entire rest of the year.
That’s why – despite recent legislation – banks are unlikely to raise base salaries and lower bonuses: psychologically, we are more motivated by a one-time infusion of cash vs. an increased trickle over time.
And we’re also much more likely to spend a sudden infusion of cash foolishly (see: lottery winners).
So 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.”
Keep Your Investing Plain, Simple, and Boring
Even after reading all this, you might still be convinced that you can defy the odds, save $100K+ in 2 years, invest in the next Facebook, and then retire as you cash out for $10 million.
But doing investing at all is very difficult as an investment banker because:
- You don’t have time to day trade or research stocks in great depth.
- There are many restrictions – you need to get permission for every single trade you make to ensure that you’re not pulling a Gordon Gecko and using insider information to profit.
So go with something simple and set up automatic contributions from your paycheck into your retirement accounts (or into your brokerage account), and then invest in a boring, diversified portfolio.
Save and invest what you can as a banker, but realize that you won’t have that much available until bonus season – unless you’re in a tax-free zone.
And in case that doesn’t work out and you end up with $30K of credit card debt, you can always hope that bonuses return to 150% of base salaries one day.