Is it a bad idea not to save anything as a junior?
Will be graduating and starting at the fund I interned at previous summer and beginning to consider what my budget should be in London. Im starting on £120k on a 3 year contract and after the internship I know I can do the role of a analyst so not really worried about getting fired for bad performance. Ive been told to expect bonus of around 100% in my first year if we have a normal year of returns, pnl of team has been very consistent over last 7 years scaling pretty linear with allocation size, they are a pod of 2 people (PM and analyst) and work as part of a larger team. The analyst is now moving to much more of junior PM role so they have taken me on. They have told me they expect me to start managing a small book in about 3 years progressing from there if I show potential at it.
I have spoken to senior people and they have said somewhat light heartedly that there is no point in saving excessively because the structure of the fund is that PMs/senior individuals have 'extremely competitive compensation structure' which I understand as if your good they pay loads (the analyst told me that in his last year when he got a semi sizeable book his base was 5% of total comp so ball park figure is £2m 5y out of school).
When you look at it from that perspective trying really hard to save £150k by limiting expenses/experiences just for one big bonus to make the £150k seem obsolete, doesn't seem smart. (I understand that this is a large bet on that I am good at the job and will transition into risk taking seat but still comp for more senior analysts is ALOT)
Of course I wouldn't exceed the £120k because bonus is never a certainty and wouldn't want to be in the red waiting for the bonus to hit because that's just stressful.
Is it a bad idea to have the nicer flat, go on that expensive trip away, eat at nice restaurants etc. Spending the 80k post tax and then to be a bit more responsible with bonus but still spending a lot of it just trying to maximise enjoyment when I'm young.
lol... yes, it is a bad idea to not save anything as a junior. I'm always astounded when finance professionals-- even some good investors-- are atrocious at personal finance-- you'll run into this a lot, so remember that just because someone has money, doesn't mean they're good with it. Everything in the post is a nice hypothetical scenario, but that's not how life works. Things happen, inside and outside of work: the fund performs badly, the PM is indicted on securities fraud and the fund is shut down, you make an inappropriate offhand comment and are fired, you have a medical emergency outside of work, etc etc. You might work there and realize you hate it and want to pursue something different a couple months in. That's not unheard of. That's why you save.
Additionally, you are forgetting about an important finance concept-- compounding. $150k is smaller than $1m, sure. But $150 now vs $1m in 10 years-- those numbers are much closer together. The numbers are even closer when you realize that future comp is anything but promised. If everything in your story comes to fruition (very unlikely, just speaking probabilistically), then awesome, you have an extra $150k + compounding at some point in the future among all your other money. But if things don't work out exactly as planned and you didn't save, you're going to wish you had that money. It doesn't need to be all or nothing; have some fun but be responsible.
I mean I agree and would save 50%+ of what ever the bonus was, so would have an emergency fund for 3-6 months of expenses. I can't say exacts because it would be very easy to figure out who I am and some people on this site are quite weird. The PM is known in the industry as a superstar, his track record is insane and I watched over the summer times where you would have expected as someone not in the industry a PM to be in the grey area of regulation/information sources and he was so far away from this (I was in charge of making all the pnl and risk reports so know no trades was put on). To the extent there isnt a single other seat I would take coming out of undergrad. Without sounding like a dick I also have a pretty impressive background when it comes to academics/markets/sport, I had offers from 50% of the top macro funds in London for grad. All of this just seems to limit downside tail risk, I have thought this through quite heavily and really dont see apart from the major ones like I get a brain tumour/ have a stroke which fucks up my ability to think in the long term, I can be a career analyst and can expect to make on average high 6 figures low 7 in 5-7 years time.
My point really is though is what is actually worth more. Extra 30k disposable income when your 21 or an extra 500k when you are 35 (maybe I've just overestimated the decrease in fun you can have when you are in your mid 30s.....)
I would air on the side of spending more money for convenience (nice flat closer to the office) even if it means you won't be saving much. 10-15% of your base and 80% of your bonus is a good target when you're junior.
I mean that's not too far off where I was thinking. Thank you
You're young and will work hard, enjoy your money and limited free time.
yes. why would u risk it
I mean using that logic why risk anything put all your money in a bank yielding 2% a year..... Its not about risk its risk/reward pay off. Was seeing if anyone was going to point out things I might have missed on either the risk or reward.
Never ever plan on the expectation of future money - let alone significantly more future money. Yes, in all likelihood as your career grows you will make more and in this field that can be a lot more. But the habit of 'oh wow in 3 years I can be making XXX' might seem freeing in the short term, but will make you an absolute slave in the long term as it sets you up to write checks for future you to cash.
Also, not sure what your goals in life are, but savings $$$ isn't the KPI to strive for. Your savings rate is what you should be looking at. Making an (again expected) amount of $240k and aiming to bank $50k of that is IMO pretty abysmal. If you arent building that frugality muscle now then dont be surprised when even with adding a zero or two to your checks you end up spending a good portion of it all.
That said, you seem like you have a good head on your shoulders, and agree with others that you should live for today a bit. With your income you can definitely do that. I wouldnt let saving money get in the way of your career, so dont cheap out if it means not buying decent clothes, or living somewhere far away from work, or losing time in other areas. Spend wisely, have a good time, and focus on your career. Dont buy luxury shit at this point. Just my two cents.
Thank you for the response. Im in London so saving £50k out of £240k ($300k) expected would be actually worse due to everything being quite a bit cheaper than the states..... I was just doing a rough calculation today on what I would expect to spend to live a very nice/convenient but not extravagant life and it came to £65k. Can expect to make £80k post tax just excluding bonus for now. Im just looking at it from the point of view of what £15k does for me as a 21 year old kid vs in the future. Watched people spend 15k on refitting a bathroom. Just dont want to turn into one of those guys in later life who have millions but now dont get to properly enjoy it.
I think the general advice and what I'm going to follow is save in that first year to get a base set up if anything does go wrong, and then probably loosen up a bit from 22-24. I mean im coming from a pretty disadvantaged background and struggling to see how its possible to spend more than £100k a year if you dont have kids.... hopefully that will stay with me in the long term.
Personally I don't believe in spending less money, I believe in earning more money. Might be different for W2 bros though.
Nope, it’s a great idea.
The seniors you work for are right, you’ll be making millions in a few years so there is no point saving now.
They know talent when they see it, and you’ve got that “it” factor. It’s basically a guarantee you’ll be managing your own book in three years. In fact, I’ll be they give you your shot in two years, I can just tell that’s how good you are.
I would actually go one step further. Forget just not saving and spending everything you earn now to live the good life. I would take out some loans as well, just to travel first class and eat at Michelin star restaurants.
Because you’ll be able to easily pay it all back in a few years time when you’re taking in the millions. I can tell you by your post you have a great handle on risk so taking out loans against your future millions is a no brainer. Just don’t forget to give a little back to society once you hit your first 20 million year. Which I predict you will accomplish by age 28. Go get em super star!
I honestly don't even know how I'd spend 80k in a single year, even if I wanted to.
But as others have said shit could happen. You just don't know. It's good to at the very least have some months of necessary expenses lined up as a buffer.
Congrats on the role though, very very competitive comp there - I thought most of the pods paid £100k base in London. What's the strategy?
You’ve obviously never gone out in NYC.
What do most people do for emergency fund in terms of length? 3 months or longer? Was at more of a SM type macro fund but had done previous internship at a good MM pod and had spoken too quite a few PMs from the other MM so was sort of able to turn it into bidding war with the MM and then just got the SM to match it. I mean main focus is energy trading but very wide mandate so its basically anything in commods universe.
Nice one!
For emergency fund it's really up to you. 3-12 months. For a job in your kind of seat I'd lean higher.
Just essential expense coverage though (whatever you deem that as), not everything, cos it's unlikely you'll be buying tables at clubs if/when laid off.
I somewhat did what you are describing at beginning of my career and now run my personal finances very differently.
The first thing to internalize is that you can’t with certainty predict the future. I was set to receive funds from a life changing liquidity event that I had as much certainty in as you do in this PM and fund. It didn’t materialize for me, and I had an uncomfortable amount of savings left due to lifestyle.
Second idea to internalize is that savings equate to optionality and freedom. Those are two giant aspirations for every working person, so you threaten both if you don’t save and future earnings don’t materialize. Imagine you don’t get your bonus and the work culture becomes toxic and you are stuck in the role as you can’t afford to leave on your terms because you have little to no savings.
You obviously won’t have true f-u money at the beginning of your career but you essentially relegate yourself to serfdom if you don’t have any savings and things don’t work out the way you expect.
Thank you for the advice. If you could go back and change it would you in regards to spending less when younger to safeguard that optimality?
The hardest thing for me was getting into the mentality of saving more than my contributions to my 401k. I wasn’t living pay check to pay check but there wasn’t too much to show for in terms of savings, which is insane looking back at things now.
What I specifically would have changed is the frequency and amount spent on food and going out. Beyond that I should have paid myself from every paycheck right after allocating to rent. That establishes budget dollars for everything else and forces you to calibrate your lifestyle. What you don’t realize is that many of your peers who are frequently going to expensive clubs and dinners are either funded by the bank of mom and dad or are spending too much because of FOMO. In either case, they don’t care or don’t have to care about their personal budgets much.
If you want to live all out for a bit, I think that’s fine for a short while but only after you have a healthy amount of emergency savings.
Surely there must a middle ground where you enjoy a very flexible and convenient lifestyle while also putting some aside. What kind of a question is that. You live life, you know what you like and what you don't, your limits.
There's no need to restrict yourself too much. But it's a slippery slope. Money doesn't buy you a personality or sometimes buys you the wrong one, it's a slippery slope
Have seen juniors get carried away and then they can't afford a self assessment repayment.
Don't be ridiculous, grow up. You got some offers and the pm is great
On a base I could live a very nice life (good location living, doing stuff I wanted to do in reason etc) and have £15k spare. I just look at it from that in the longterm £15k seems like nothing but when you're 21 its enough for like 5 incredible weekend trips around Europe over the year. If I was to get a bonus I would of course save that but this 15k just seems like it would do a lot for my enjoyment... what's the point in working 70 hours a week building quant models if you dont have fun with it...
From someone who was in a similar position as you, just take the vacations…
Curious as to what you're studying / what uni you're at to have landed such a role?
Sounds great though, congratulations.
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