For those of you in the industry for a few years now, this post is a must-read. This applies to all jobs and careers, not just Investment Banking.
When you first joined Investment Banking straight out of college, USD 100k per year seemed like a lot of money – more than enough to make you happy. That was quite the upgrade in lifestyle from what you were used to in college. As good as it sounds, your expectations will quickly rise because “you have earned it”. If you don’t pay attention to the pitfalls, you will end up being trapped on Wall Street whether you like it or not.
With every year on the Street, you make your average 10% more. Maybe even 25% more in a promotion year. With every year on the Street, you get pigeonholed into a vertical and product group. To advance you must specialize. The more you specialize, the fewer exit options you will have. The skill sets you build are becoming more and more niche. With every year on the Street, your recurring expenses are creeping up because “you have deserved it”. Your then-girlfriend is now your wife plus kids. Your wife has expectations and your kids need to go to the best private schools – oh and don’t forget about college. Maybe you mortgaged a house. Maybe you leased a flashy premium car. You are now trapped. Every year you survive is another step down the rabbit hole. Quitting Wall Street now comes at a significant economic cost that will threaten the life you have built.
You have become a slave to your career. Every year, you need your mighty paycheck and bonus to keep the wheel spinning. You are walking on eggshells. You cannot fathom the thought of cutting down on your extravagant lifestyle because you “deserved it”. You cannot fathom losing your rank as a “Vice President” or “Managing Director” because of the prestige and recognition you have worked for so many years. Under the hood, you are afraid of losing what you have built. Not a great spot to be in.
What can you do to save yourself?
Save your bonus!
Many people say this on the Street. This is probably the best advice with the most consensus. *Always save your bonus*. This is why you do Investment Banking. This is your magic carrot. You can go ahead and spend your entire base salary on lifestyle, flash, drugs, alcohol and exotic trips. However, you must save your bonus. Your bonus will constitute more than 40% of your total compensation. By saving your bonus your savings rate immediately jumps to near half of your income. You cannot go a year without stacking your bonus. On a side note, avoid a zero-bonus year! Be extremely careful when jumping shops. You might get a zero-bonus year in your transition year. Only jump ship after receiving your bonus. If you are forced to jump ship mid-year, have a written agreement for a signing bonus. And, please, avoid declining low-performing platforms. By that, we mean shops with declining deal flow and declining top-line revenue growth.
Be a minimalist: choose freedom over flash
The game of life is a game of accumulation – be it knowledge or cash. This is how you get ahead in the game of life. If you consume more than you produce, you will be left with nothing after years of laboring. Years of hard work will vanish into thin air and you have nothing to show for it.
Contrary to popular belief, one of the worst things you can do is spend your money on fast depreciating assets, such as expensive cars, flashy fashion items or exotic trips. Think about it. You zip your credit card and the money is gone. It’s not going to come back nor is it going to appreciate over time. Yes, they are all fun if you have never experienced them, but it all wears off. At the end of the day, you are still you. You are still the same person you were before the big “consumption event” and the big party. Going on an expensive trip to an exotic island and leasing a sports car will not bring you closer to enlightenment, truth and justice. What you should be looking for is financial independence.
If you choose to live a simple lifestyle, your costs will remain relatively flat as you never upgrade to an unnecessary penthouse loft to impress other people who don’t care about you. As your career progresses, you make more money but your costs stay flat. Your savings rate increases. That’s how you win the game. All the money you blow away with zero return on investment could have gone to the bank (or Bitcoin).
Avoid debt like a plague
Most people don’t even know how to build a three-statement operating model but dare to take on debt – this is crazy. Don’t take on consumer credit and don’t buy the house you live in with debt. The first point is easy to understand. Don’t buy depreciating stuff that you can't afford and don’t take on debt to buy depreciating assets. The second point is a bit trickier because it goes against mainstream advice. Most people buy a house to save rent in the future and to see the value of the house appreciate. This is all correct. However, most people miss the point that buying the house you *live in* means that you are collateralizing your future salary against the house. You live in the house you just bought with money you don’t have (i.e. your future money). You cannot rent it out. If you lose your job and can’t service your mortgage the bank takes your house. You don’t fully own the house until you’ve fully paid off your mortgage. However, you are paying off your mortgage with your labor.
If you want to go down the real estate route, it’s smarter to buy a rental property. The mortgage is now collateralized against your rent income – a source of income that is automated and recurring. You get paid while you are sleeping. You only need to rent out your property vs. you working to pay off your mortgage. Professional private equity funds and companies use debt and leverage the same way. They collateralize it against a recurring and automated stream of cash flow.
In short, don’t take on debt against your labor exchanging time for money. This is a sure way to become a slave to your job and to serfdom. You have been warned!
Think long and hard about cohabitation and marriage
Cohabitation and marriage are super emotional topics. As they, emotional decision = expensive decision. Cohabitation and marriage are not about true love. It’s an economic union between two people, where either party can just walk away if they “feel” like it. Think about it, you are merging your costs structures (rent and living expenses) into one housing unit. Now comes the big downside: there is no way to enforce commitment other than “trust”. No professional investor would just partner up with a person just because of “trust” and because it “felt right”. Many successful men will lose most if not all their assets as they fail to realize that marriage is not a viable option in our current culture. All we can say is don’t bet the house on “the one”. For better or worse, learn game today or you will be forced into many years of reprogramming, catching up and unnecessary stress in the future. It’s not just financial stress, but also the emotional stress that comes along with marriage and getting out of it. We are seeing tons of Partners who are either divorced and/or are busying pay their kids through college. Yes, Managing Directors are rich but pro forma for wives and kids, they are often poorer than a single Analyst.
Don’t just coast. Don’t get too comfortable. Think about your exit early
Time flies faster than you think. When you start your Investment Banking gig, you think to yourself just one year. Then you stay another year because there were not good exit options and the bonus was good – makes it two. Then you get promoted with a nice raise – makes it three. You start to feel more established at your firm; people are now taking you more seriously – makes it four years. And you are nearing half a decade on the Street at the same shop. Think about your career strategy and where you want to be early. Exiting a job takes time. You need to prepare your story and line up interviews all while keeping your performance on par. If you are getting too comfortable in your job, you end up getting stuck there.
The longer you survive on the Street, the more specialized and pigeonholed you become in your niche. First, you are a young M&A Analyst. After a couple of deals later, you are an Industrials M&A Associate. You are now pigeonholed in the industrials M&A vertical. The more specialized you become the fewer exit options there are for you. In other words, there will be fewer exit options “worthy” of YOUR expectations. Your skills are getting better and better in your niche. You are getting paid more and more in your niche. Why switch? It’s getting tougher to find competitive exit options that offer both seniority and a competitive pay. Don’t get too comfortable and make your choices wisely. You may be trapped in your vertical if you like it or not.
Where does it leave us?
The vast majority of Wall Street professionals will unlikely last more than a few years at the same shop. So don’t lever up and blow your hard-earned cash away for depreciating assets and recurring costs. Assuming you take advice from a cartoon Investment Banker, you’ll remain single without any major commitments in your life while keeping your expenses low and stacking your hard-earned cash. With this strategy, with every year passing your “golden handcuffs” become lighter and lighter. One day they will be feather-light and just disappear. You will be able to take a pay cut and walk away with more free time without feeling the mental strain of “losing prestige” or keeping up financially. You don’t have to lever up and enslave yourself to your career. If you enjoy the job, feel free to stay in Investment Banking. Just ask yourself from time to time whether your wrists are getting heavy.
With that in mind, we still think that Investment Banking is one of the best learning experiences out there. It’s still a great stepping stone for your career. You will be hard pressed to find a better learning curve + pay combination straight out of college. This is your stamp for life on your CV. Once you’ve made it passed the two-year stint, you will have the the skills and you will always be an ex-Investment Banker.
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