Personal Finance: How do people manage large financial commitments?
For background, mid career at a SM (6-8YOE) with OK visibility and job security trying to figure out the best way to manage my personal finances. The key question for those who have more experience in the industry, how have you managed your expenditure especially on large purchases (eg mortgage and tuition)?
For many years, I’ve been able to live comfortably off my base salary with almost the entirety of the bonus going straight into savings. However, with family planning being an increasingly realistic near term catalyst, it’s hard to see any sensible family home option that doesn’t require a very large cut in day to day spend or dipping into your bonuses, especially with where rates are today.
A few more experienced colleagues have told me they set a portion or their bonuses aside every year to draw down on to meet monthly cashflow needs, which intuitively makes sense but does seem daunting.
For those that are in a position where your base is only a small fraction of your total comp, is this also how you finance your lives? If we say illustratively that your take home is $1MM with a base of $250k (or £750k total and £200k base in London), hard to imagine you’re not burning through half of your base on a decent sized mortgage. Maybe just buy a smaller place / lower LTV? Also for the purposes of this exercise, I tend to assume no further comp progression but would love to hear how people plan with further comp convexity in mind.
Managing large financial commitments, especially in high-income roles with variable compensation, requires a strategic approach. Based on the most helpful WSO content, here are some insights and strategies:
1. Base Salary as the Foundation
2. Bonuses for Strategic Goals
3. Mortgage and Housing Costs
4. Family Planning and Education Costs
5. Planning for Comp Progression
6. Key Takeaways from WSO Threads
By adopting these strategies, you can manage large financial commitments while maintaining financial security and flexibility.
Sources: Can someone help me with budgeting? 170k as a 22 year old is absurd to me., Managing Your Money - Building a Personal Financial Model, Managing Your Money - Building a Personal Financial Model
this is definitely tricky bc if you constrain yourself to the just base to your point you will certainly be prudent but arguably will be taking an excessive "quality of life" discount. I don't think your colleagues are off base except it should be a portion not majority of bonus and would definitely augment it with a multi year liquidity emergency fund (2x the high end of the time i think it would take me to land another seat helps me sleep at night...sure it is a cash drag but it works for me)
I think you’re absolutely right and it’s about a mindset change both in terms of “you can actually afford this” so to allow yourself those choices, but also to put yourself in the financial position to make those choices, eg setting aside a buffer that gives you security/reassurance
Think part of the answer, which I’m still struggling with to this date, is also the confidence that you will actually be able to find another seat as well…
Similar situation here, what I did before buying a house was look at the cash in and cash out of my bank account on a monthly basis over the last 12 months and see how much you are actually making and spending, what I found was that I was saving more than I thought. In a high tax state your 1MM annual comp turns into around 40K after taxes each month, so after figuring your monthly spend away from housing you can sort of back into how much house you can afford based on how much of that remaining money you are comfortable spending on housing/trying to save. Another thing I would recommend is not buying a house until you get a feel for how much a kid actually costs, which you sort of don't know until you actually have one. So not sure on your current living situation but if you need to get a bigger apartment for a year I think that is wise.
In terms of day to day financing, I do what your colleagues do and put a portion of my bonus in money market fund and take a chunk out each month to pay bills. I also see people not reinvest the dividends and interest from their PAs and just have that sent to their checking account, same concept but different way to go about it. I'm personally not a fan of putting more down than I have to for housing in that its illiquid and I can't easily access the equity I build like I can in my PA. The common wisdom is that for people in volatile industries you are ok spending more each month for additional flexibility. If I lose my job and need cash to keep the lights on while I figure things out its much easier to sell/borrow against public market investments vs trying to get equity out of my house.
Thank you for this incredibly detailed and helpful write up. I think the key is to strike the right balance between security and not holding yourself back. For the housing purchase specifically, it feels like there’s a sweet spot on putting down a large enough deposit that gets you the best rate that also helps you manage your cashflow vs not having a lot of capital tied up in an illiquid asset. That risk appetite is then a pretty personal decision. What I find hard (and almost ironic and funny) is trying to reconcile how I think about investments and leverage when we do our day to day jobs and how to apply that same sort of rationality to my personal life.
Could not agree with this more. It is a hard decision to reverse and you are likely introducing a meaningful change in lifestyle and commute. Not to mention if you hit that convexity (or get canned) in the next few years it could adjust the kind of house you intend to buy.
An intermediate step of a bigger apartment in perhaps a more distant neighborhood is often a good reality check. In your current position and the current environment, I suspect you are much more likely to regret making this decision too early than making it too late.
This is what you've been saving all your life for, to provide for your family. Dipping into your savings, even in a big way, to buy a house is what normal people do all over the world.
Might require a mindset change from you, but it's pretty straightforward. I get wanting to be prudent and not overstretch, but living off your base salary when you have substantial money in the bank (and good visibility to a bonus?) is ridiculous.
Hey man, thank you for taking the time to reply and frankly this might be exactly what I need to hear
I guess what I’m completely comfortable with is spending a significant chunk if not all of my savings to purchase a place. My question was more centered around managing cashflow as opposed to the purchase itself. To your point, we work hard and save to afford to make these choices, but there’s a world where for the first months after your purchase until your next bonus is paid you are basically “pay check to pay check” because you’ve drained your cash savings.
What I’ve gathered from the responses is you basically hold back some of your savings to manage both the cashflow needs to fund your lifestyle (mortgage, childcare, car etc.) but also enough buffer in case you need to be out of the market for 12-24 months.
agreed. i recently made my first "adult" purchase of a single family home. the stress actually somewhat takes care of itself, particularly on cash flow. the bank will only allow you to borrow $xx dollars based on a $200k salary and i tell them to assume my bonus in perpetuity will be zero despite my past (lumpy and sometimes non existent) bonuses.
i dont remember the math exactly and am too lazy to look it up, but basically it meant i could qualify for something up to like a 1.5mm loan from the bank. i did that and used my savings for the rest, meaning i put down a really big down payment. i dip into savings for the twice a year mortgage tax payment, so yes, savings are bleeding and cash flow is tight, but once i get another bonus, should be fine. nothing unmanageable, especially considering i could pay off the bank loan in a worst case scenario and just own the house outright if i were to lose my job and never work again
Curious about this as well. What is a reasonable % of mortgage relative to net worth? How do you think about comp trajectory, job stability, etc.?
I don't know the situation in the UK, but in the US - don't buy a house right now.
I bought when home prices were 40% lower and run a mortgage rate 50-60% lower than today's. My mortgage payment is less than half what buying my house today's would involve.
250 -> 1MM is tough to live off base. I've always been lucky to have a wife earning a stable income almost as high as my base. I would definitely skimp on lifestyle until my bonuses caught my nw up with my income
Lesson #1 is buying a house is not an investment, it's where you're going to build a family. Of course you don't want to overpay, but this trying to time the cycle is silly if you can afford the mortgage. You're not buying a stock, you're choosing the place your kids will grow up. Also, if rates go down from here, you can refi your mortgage.
Most wives get this, by the way. It's us HF monkeys trying to optimize every financial decision that miss the forest for the trees on this.
How much money do have saved?
Sunt ullam quaerat ullam velit dolore dolores recusandae sit. Eos earum sequi non dignissimos aut ut. Sit ipsum vel quasi enim. Porro cumque et rem unde ducimus dolor nemo.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...