Inspired by: I cant save money
tl;dr: This could be the most important model you ever build.
Prologue
When I started IBD in Toronto, I had a mortgage but no house. My MBA student loan was pretty bad (Canadian schools, while they don't enjoy the prestige of our US counterparts, can nonetheless be equally expensive). The worst and probably most embarrassing part is, despite being a low cost of living location (globally speaking) and relatively high comp (all-in pay for Analysts and Associates is comparable to places like NYC), I was somehow not saving any money. I would need to blow off steam, usually aggressive drinks with the guys (lots of bottles, although not so much models. I know... no game). I think the point is if you are willing to spend money, there is always someone willing to take it.
I had a short but rough unemployment patch before starting my MBA and the idea of living with no income and eating into my savings was still too fresh in my mind. Yet, because of the stresses of banking, I couldn't help but want to blow off steam. Aggressively. One night after waking up to a bill of several k's, I decided that this was a bad strategy. Being a finance nerd, I figured the solution was to build my own personal financial model. I realized afterwards that some of my colleagues had them as well.
In the hopes of helping other monkeys avoid some of the stupid mistakes I have made, I would like to present the high level steps for how I build a personal financial model and how it helped me get a handle on my spending. To be clear, the model didn't change my day-to-day spending (I didn't stop going out for lunch, drinks or buying my friends and family gifts etc.), but it just made it clear where all my money was going so I felt more comfortable with my habits.
It's actually gotten to the point where I was speaking to a financial advisor recently and they said I might be saving too aggressively (sure, he was trying to sell me his investment products, but I'll take the compliment).
1. Top-Line
Easiest step. How much do you make on your regular pay check? The only trick is that taxes change throughout the year as you pay off your Social Security (Canadians: Social Insurance) over the year, but otherwise this part should be pretty predictable.
The trickiest part is bonus, but I think most people will tell you to "bank your bonus" so I didn't even model it in my first few years. And what ever I got made sure I hit my $18k 401k max (or RRSP for Canadians) first and the rest was to pay down student debt / save.
2. Budgeted Expenses
This is the trickiest part. It's often hard to estimate your expenses. I had two categories: run-rate (monthly) budget (rent, dinners, lunches, coffees, occasional drinks, transportation etc.) and discrete seasonal (planned holidays, birthdays, gifts, charitable donations etc.).
I created what I thought was a typical budget. And then to back check, I downloaded the last three months worth of credit card statements, categorized all the expenses and compared my budget to my actual spending. I was actually pretty close, but had to make some adjustments (ate out a little more than I expected and the meals after tax and tip were a little higher than I originally thought).
Also, once you get to this step, you can start to calculate how much you should be saving on a regular basis. After this step, I set up an automated transfer from my checking to savings (or initially, student debt pay down). I also calculated my own min-cash balance as I wanted to pay down my debt as fast as possible.
3. "Unique One-Time Adjustments"
This is the most important part. Tracking unbudgeted overspend. Once you have parts 1 and 2, you need a place to track your actual spending against your anticipated spending. Any large deltas have to be captured and a comment put in place. This won't immediately change your spending habits, but as you see it over time, you become more aware of where you are wasting money.
If I overspent, I knew I wouldn't be able to make my automated saving target and would either have to cancel it, or temporarily transfer money from my savings to checking. That forced me to acknowledge that I had mis-calculated: something I did not enjoy on a very visceral level. Missing targets then became very obvious.
4. Retirement - LTIP
Make a LTIP for yourself. I found that this helped. Because what's the point of making a short term goal if there isn't a long term objective? This is highly illustrative math for myself, but I like to think that with reasonable assumptions, I'm doing ok in the long run also. Getting a financial advisor at this point also helps (and I can keep them honest because I can back check their work against my personal model).
Epilogue
I built my personal financial model several years ago now. I paid off all my student debt within two years (not hard to do in IBD if you aren't stupid about spending) and have saved a decent amount of money. I deliberately dragged paying my student debt towards the end. I deliberately kept a small balance to encourage myself to stay hungry and as a reminder of leaner times. Also, it was cheap capital. I also have several years of records and can tell you exactly how much I've spent over the years. I haven't enjoyed life any less, but I feel much more comfortable about my spending habits.
How about you? Do you have a personal financial model? Do you keep pretty close to it? Any other suggestions or tips for fellow monkeys? As always, SB's for helpful insight.
bravo bro, bravo. I'm certainly a fan of budgets, and I do a lot of financial planning for clients, so I've been through these types of exercises. I think it'd be helpful if I shared some tips I use myself and have helped make my clients rich. remember, I have virtually no clients who are business owners or inheritors, they're all self made employees who worked their way up, mostly millionaires by early 40s.
don't take one step forward & 2 steps back. I see it all the time where people load up on fixed expenses and then wait for bonuses + a 10% 401k contribution to bail them out. live below your means and you'll be able to save more (saving high % of your income is what leads to greater wealth). this may mean getting roommates, living in hoboken, not owning a car, but it doesn't mean no fun. mortgage/rent is usually the biggest culprit here, so keep living expenses manageable. the rule of thumb I'll use is 1.5%. if your monthly mortgage/rent is 1.5% of your pretax annual income, you're doing great. personally, mine is 1% but I live in a tier 2 city and my fiance works so I have more options than single new yorkers, but this has greatly freed up cash flow.
make it automatic. even if you're a hedge fund analyst and are great at picking names, have something automatic that you put 100, 200, 500, 1000, whatever a month into that invests for you. in your 20s and 30s, time, not timing, is what matters. I don't care where you invest (FA, wealthfront, Vanguard, whatever), just dollar cost average every single month.
don't treat a rise in income as a rise in lifestyle. of clients, this is the absolutely most critical. most of my clients get stock grants and big bonuses, they don't treat this as an opportunity to buy a ferrari or a new big house. sure, if they get a $100k bonus after tax, they may take 30k and do whatever with it, but they save the vast majority of all of that stuff. on raises, they don't take this as the impetus to join an expensive country club, change who they are, etc., they treat it as gravy. if you don't increase your lifestyle as your income increases, you'll be able to save more, which is the key here.
they focus on work, not their finances. obviously I'm biased because this is what I do, but I think part of my clients' financial success has to do with their desire to invest their time & energy in bettering themselves at their career, rather than meddling with the most optimal savings strategy, trying to save a nickel here or a percentage point there. if your income is rising because you do well at your work and you can continuously save more as a result, the details and mechanics of your finances don't really matter.
I want to expand on this last point more, because this forum is naturally populated with detail oriented, analytical types who are all in finance. you all want to make the best investment decisions, earn the highest rate of return, and usually prefer doing nothing over risking making a sub optimal decision. I'm here to tell you you're WRONG. yes, it's important to get a feel for markets, but don't do it with all or even most of your money. yes, it's important to understand what to do, but don't overcomplicate things with macros for your monthly budget, doing modelling of future returns, sensitivity analysis on different savings strategies, just keep it simple. as I said in another thread: buy VT, add as much as you possibly can monthly & from bonuses, and go to the beach (and don't forget to thank me in 30 years).
sure, the election may create volatility this month, but you should still buy. sure, seasonality may affect markets in February as the new POTUS is inaugurated and we're disappointed by Q4 earnings with the backdrop of higher rates, but you should still buy. I've seen this with my friends and with some potential clients, they have analysis paralysis. just save money, as much as you possibly can. you can try to outperform or you can just accept market performance, but what's ruined most financial plans is not whether you were in index funds versus value funds versus DFA, it's not putting enough money away or it's being in cash at the wrong time. absolutely keep a cash cushion for emergencies or once your net worth starts to rise, but again, in your 20s and 30s, time not timing is what matters, so just continue to contribute and get back to work.
was hoping that you would attach an excel spreadsheet on this thread.
5 Personal Budgeting Tips for Recent College Grads Going to Wall Street (Originally Posted: 06/03/2013)
Congratulations, through hard work, intelligence, and attending the right schools, you've won a ticket to the greatest game of risk and reward in modern civilization. Your starting salary will be higher than your fellow graduates with the possibility of annual bonuses that equal two, three, or more times your base pay. That's the good news.
The other side of the coin is long, long hours of tedious data analysis, endless reports, and tension-filled competition with your co-workers. You'll live on the edge of physical exhaustion and adrenaline-fueled moments of intense activity, working 60- to 80-hour weeks, constantly on call the few moments you break free from your duties. Few of your fellow employees will be with the firm a half-decade hence, ground up and spit out by the ongoing, never-ending demands of high finance and escalating profit expectations.
While you may be one of the few that continues to build a career with your employer, the likelihood is that you'll change jobs, even careers, a number of times during your work life. As a consequence, it's prudent to build a financial base by developing spending and saving habits now that can serve you a lifetime. Regardless of your level of income, financial independence is possible only if you can distinguish between "wants" and "needs."
As you begin your new tenancy on Wall Street, consider the following tips:
1. Choose an Affordable Living Space Manhattan is one of the most expensive places to live in the world with the other four boroughs of New York City close behind. Fortunately, you are unlikely to have much time reveling in your apartment. A small one-bedroom apartment in Greenwich Village, Little Italy, or the Upper West Side can easily cost $3,000 a month or more, while a studio in the Financial District averages the same. Consider living with a roommate and sharing rent and utilities so that your housing costs average 30% or less of your net salary.
2. Find a Tailor Appearance is critical in making first impressions, so how you dress - the clothes you wear and their fit - is important. Wall Street fashion has always been conservative, allowing to you to buy quality wear that rarely goes out of style. An initial, well-chosen wardrobe can serve you for years.
To start, you need two or three suits in basic colors like gray, charcoal, and navy blue. Avoid "flashy" trends and unusual colors. The fit is the most important element - a well-tailored $500 suit looks better than a $1,000 ill-fitting one. Basic dress shirts in blue and white can serve you well. Indulge your creative sense in ties, socks, and braces if necessary. Once you've purchased the basics, limit your clothing expense to less than 5% of your salary or $300 per month.
3. Learn to Cook You won't have much leisure time in your new career, so beware of falling into the habit of grabbing fast food whenever you're not enjoying that rare evening out at an overpriced restaurant. Preparing fresh food and trying new cuisines is not only cheaper and better for you, but it can satisfy your creative urges and be the focus of a rare social evening with friends for much less than the cost of a typical evening out. The money you save by preparing a meal at home, even with good ingredients and a nice bottle of wine, is enough to pay the average monthly cost of a fitness club - a justifiable luxury which can help you work off the tensions of a busy day and keep the debilitating effects of a sedentary lifestyle at bay.
4. Maximize Your Allowable Taxable Deductions As a Wall Street employee, you are in the top 5% of earners in the country, which means you'll pay a high percentage of your income in taxes. It behooves you to take advantage of every legitimate credit or deduction available to you, including those employee benefit plans - group health, disability, and life insurance, as well as retirement plans and savings plans. Your share of the costs or contributions is usually deducted directly from your paycheck so you never have a sense of being deprived.
If you're single with no responsibilities, you don't need significant amounts of life insurance. However, you do need as much disability insurance as your employer provides, since disability is more probable than death. If possible, establish a Health Savings Account (HSA) with a high deductible-health plan, funding the maximum deductible each year. And if you're not covered by an employer plan, maximize your annual IRA and Roth IRA contributions ($5,500 for 2013).
At bonus time, set aside an amount for investment at least as great as the percentage of taxes you'll pay on that bonus, increasing your living standard no more than the remainder of the bonus. For example, if your bonus is $100,000 with $40,000 deducted for taxes, invest $40,000 and add the $20,000 to your budget for living expenses.
5. Set Up Automatic Payments for Recurring Bills Paying expenses like rent, utilities, credit cards, and other regularly occurring expenses automatically frees you from missing a payment deadline due to your work schedule, and it allows you to take advantage of early pay discounts as well. Most banking software lets you - not the vendor - control the timing of your payments and the amounts you pay. It's a good practice to never let any vendor or third-party have direct access to your private accounts.
For large purchases, use credit cards, especially for those expenses likely to be deductible as this creates an independent record and provides an intermediary in the event of a vendor dispute. Paying for large-ticket items with cash is rarely wise. Just be sure to pay off balances completely each month.
Final Thoughts As a Wall Street financier, friends and acquaintances often overestimate how much money you actually make. As a consequence, you may feel pressured to meet their expectations of a lavish lifestyle, picking up dinner and drinks checks you can't afford, or purchasing items to fit the image of a successful deal maker, trader, stockbroker, or analyst. Trying to fulfill others' expectations is a sure and often-traveled path to a life in which you constantly chase a higher and higher income to cover past expenses. While it may be important to meet the lifestyle and appearance expectations of your employer and clients, you would be wise to resist the pressures of acquaintances, hangers-on, and others who have no "skin in the game" of your life.
Personal Finances: How much are you letting slip through the cracks? (Originally Posted: 11/05/2012)
I'm a frugal guy, and I'm addicted to getting a good deal. I can't say I cut coupons, exactly, but I've always wondered how much money you can save doing so. I do spend a few minutes a day checking various deal sites to see if there's anything I want, and I rarely make a big purchase (let's say over $200) without making sure that I am not getting ripped off.
Just the other day I picked up a subscription to The Economist for $40 for an entire year, an absolutely stellar buy given that the student rate is a whopping $99. Love getting extra value for my $.
But more and more frequently, I am amazed at the fact that people often pay full-price for items without batting an eye. I know people who buy the $4.99 version of The Economist at Barnes & Noble every single week and for whatever crazy reason will not spring for a subscription even though it's $150 a year list-price. When I was in college, I was living on a budget, just like everyone else. I had a few campus jobs and good financial aid, so I generally had a good bit of disposable cash, but my checking account didn't really contain anything noteworthy. Often times, I would go shopping with some friends -- maybe to pick up some clothes, for example -- and I was always that guy who would try a few things on, think about it for a few minutes, and remember that I could get the same pair of jeans or shoes from a discount retailer online for half the price. Why on earth would I pay double? Beats me, but so many people do!
One friend I have in particular, who mind you does not come from a wealthy family by any stretch of the imagination, goes to Saks to buy jeans and is perfectly comfortable paying $200 for an item that can be bought online for $70. Maybe there is some inherent prestige with shopping at a place like Saks, but I'll be damned if I ever pay a premium that large to walk through the check-out area and "feel" like I'm a boss because I'm at a store like Saks buying some exorbitantly overpriced items.
Even when I was making a lot of money in the software business, I still always hunted for the best possible deal. It didn't take much time or effort, and it did save me a lot of money on a lot of different items. No matter how I try to rationalize it, I simply cannot understand why people overpay for items, yet there are always a thousand people at the Apple store and the Ralph Lauren store is always completely packed -- do any of these people know that you can buy all their crap online for less? Do they just not care?
Some of you guys out there make a lot of money. Do you watch your spending? Do you look for better deals when you're in the market for a particular item? Or is it simply more convenient to pay whatever price you find first, and then go on about your business?
After a rough experience in one of my posts, I foresee shit coming my way once again but I don't care.
I fully and wholeheartedly endorse the idea that achieving colossal wealth is ONLY a matter of making more, not of spending less. The "save every penny" mentality is useless, if not detrimental. If you succeed after a long career in finance, whatever you save in an Economist subscription or a MacBook is financially irrelevant to your final net worth, especially considering how back-loaded your cash flow profile looks like in this business.
Living up to this pinchfist philosophy and taking it too seriously has the power to lower the probability of bumping across your MD while he's wearing your team's jersey in that upscale mall (and as a consequence, of starting a great promotion-accelerating chat) or having $20 craft limited-edition beers with that distant friend-of-friend that may put a word for you for some big name PE interview. If you want to be one of them, live and spend like one of them as far as possible, and don't charge it as COGS, book it as social capex. If you're out of luck, you may need to write that ingangible off one day, but fuck it, life's a bitch sometimes.
Well, and the fun part is that if you save and fail, in 30 years those $40 will have accrued to $91 at the 30y T-Bond rate (more likely $50ish once you remove inflation - thank Uncle Bernanke). That will buy you maybe a week longer before you hit the shelter at 30th and 1st Ave. Don't get me wrong, as a rational utility maximizer, I will always evaluate owning $X+e as better than $X, no matter how small "e" is. It is just that, from experience, such savings are seldom worth the time you need to invest to get them, and even when they prove to be, it's always ex-post, you really never know beforehand.