How do you budget for big life decisions given career/comp uncertainty?
Currently in my first year at a hedge fund and thinking through longer term personal finance plans - rent/buying, moving in with my partner, etc. My target comp is ~200 base +250 bonus, but bonus could fluctuate +/- 100k depending on how my positions move; if I really underperform I will be out of a job in a year.
How do you broadly think about spending habits? I hear about even people at the PM level selling their house and pulling their kids out of private school in a rough year - on one hand, living frugally makes sense given this downside risk, but on the other hand, spending extra to be comfortable makes sense too, just to avoid unnecessary stress and maximize your upside potential. (FWIW I think I have decent potential to be good at this job in the long term, but it's hard to tell without much experience.)
Obviously it's some type of balancing act - but any thoughts on this?
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First piece of advice no one in HF world seems to do even though its kind of obvious to me is to hedge your personal income and net worth. For instance, you can figure out which factors your fund is exposed to (e.g. my fund is a concentrated long only in a specific sector so I have sector specific factor risk) and hedge them. For me, that means buying puts in a rolling fashion on the sector my fund invests in. If you're at a MM, pretty much all risk is idiosyncratic to you / your pod and therefore this strategy isn't feasible. Debatably, you could sell volatility with the assumption that pod shops do well during periods of high volatility therefore you're less likely to get fired due to wholesale strategy shifts and/or the "decimate the ranks" headcount strategy of Citadel et al. in periods of high volatility.
The other piece is the obvious one which is the faster you build a nest egg which provides passive income, the less your bonus is as a percentage of your total income, the lower the volatility of your total income. Hit ~$5mm of liquid net worth and that can support a pretty decent quality of life for a small family in the tri state area in perpetuity.
Then finally, if you take a step back and look at your earnings, they may be volatile on a year over year basis but over a 5-10 year period, there's probably a reasonably tight range. Budget for whatever level of risk you're comfortable with. For, me that means living within the means that the 10th percentile of income provides.
Quick question from a banker: how do you hedge against your sector? I thought you weren’t allowed to invest personally, and I would imagine compliance wouldn’t like you to bet against your fund?
My fund has a restricted list which does not include ETFs including reverse ETFs or calls or puts on ETFs. I'm not betting against the fund directly.
I like the answer above but I'll just say you should pick up a copy of Swensen's portfolio theory and tweak the "fractions of the pie" for your own risk tolerance. You should neurotically put as much money as you can tolerate (doesn't have to be FIRE, but be good about it) into your "personal endowment". Never touch that money, nor what it generates. Live solely off of base as long as you can. You want to get somewhere above inflation in your personal endowment, over time I would say I typically get maybe 5% real returns? I don't watch it closely but it's a mix of equity, debt, RE
So many of the answers make it way more complicated than it needs to be. Don't go crazy with the apartment rental, but don't get a dump either. Take vacations, just no need to spend $2k/night. And avoid silly big-ticket spending on cars, watches etc.
Spending below your means will keep stress contained. If on top of having a bad year at work you need to worry about downsizing apartments and such, things would spiral quickly.
Save as much as you can when you're young - having even $1mm in liquid assets allows you to reliably cover quite a few bad years. If you can get to $5mm you can now reliably spin off 200k/year in perpetuity which should allow for an upper middle class lifestyle combined with your base income/partner's salary. On the spend side, cash expenses that are one time don't really matter in the big picture, e.g. watches/jewelry. What gets you is committing to expensive debt/ongoing cost. If mortgage/rent + tuitions + childcare start to exceed base+partner's base + 4% of liquid assets then I stop feeling comfortable. This does generally mean buying a smaller home than most of those in your net worth bracket.
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