You see athletes going broke after they retire and I figured if they can do it, I should probably take more care in this department. As someone who works in finance it's also pretty embarrassing to not be in control of your finances. I know some people who have a detailed spreadsheet of all their outgoings and some people who just live carefree.. I'm trying to make a conscious effort to be more on the prudent side.
A few Q's: - Out of your post tax income, what % is spent on living/saving? - When you save, are you saving generically or do you have a different bucket of savings e.g. for a house/ a car/holidays etc? What about a rainy day fund? - With savings.. it seems pointless to stick it in a bank account and earn low interest. I appreciate you should always have some liquid cash, but if I'm wanting to grow my wealth, is there any obvious flaws to sticking 10% of my savings in a bank and 90% in equities? - How do you think about allocating to different asset classes?
I appreciate all of this will be heavily influenced by your long term objectives, but if anyone could drop their 2 cents on a common sense way to approach this, I'd be super grateful. Any other tips/comments on how you stay on top of personal finance would be great.
bump
I contribute ~40% of my monthly net pay to my portfolio according to whatever strategy my Financial advisor currently has me in. Before that, I am contributing 11% to my 401k.
I pay ~20% of my monthly net pay on rent.
Beyond that the remaining 40% just goes to my checking account, which gets spent on travel, fun, etc.
I then save 100% of my bonus annually, which is roughly 35% of my total compensation.
Worth noting I am not in IB anymore and don't live that lifestyle. My "fun money" goes toward skiing and outdoor gear and travel, for the most part.
For starters, there is a common misconception that when people say save your money, they do not mean literally put it in a savings account and call it a day. They are referring to instead of spending it on useless things, that you keep it for yourself. However, what you and everyone should be doing is investing that money and allowing it compound many times over throughout the course of years. You already caught on to that.
The first thing I would recommend is developing an emergency fund. I usually recommend 5-6 months of expenses and this can go in a high-yield savings account. This is money you'll want to keep liquid. This is not the money you're going to use for retirement. It is just to have in case you are fired, laid off, etc.
As you continue to build up that fund/once it is complete, you should start with a roth IRA, 401K, and HSA. I max out the IRA ($6000 per year) and the HSA ($3500 per year). You should also automatically contribute up to your employer's maximum match on the 401K plan. This will vary depending on the specific plan, but it is literally free money. Therefore, it is a must.
The way I set up my budgeting is to take the above investments right out of the after-tax paycheck. If you categorize it with your other expenses like rent, food, etc, it makes it really easy to cut out.
In these accounts, the asset allocation will all depend on your age and risk profile. I am going to assume like most users you are fairly young and can afford riskier investments. I for example, use about 80% S&P, 10% for a total international bond market, and 10% total international equities. My next step will probably try to get involved in a bit of real estate once I get more money saved up.
The % of income on living and rent will vary depending on specific location and COL. However, there are general rules of thumb that are recommended. For example, there is the infamous 30% rule that states you should spend a maximum of 30% of your pre-tax income on rent. Obviously, this is not a one-size-fits-all rule as personal situations will dictate whether that is doable. However, this works for me.
It is important to keep track of your monthly budgets using a combination of excel and personal budgeting websites like mint or personal capital that take a more holistic approach.
Hope this helps. Happy saving and you'll thank yourself that you did this 30 years down the road.
thanks this is super useful.
Just as a follow up, how do you think about big expenditures and how do you factor them into your yearly budget?
eg. do you set aside a set amount every year for a holiday? what about large, infrequent expenses e.g. I probably buy a new phone every 3-4 years and that sets you back $1000. same with a laptop etc.
Reddit has a great personal finance intro guide on /r/personalfinance for more generic saving and investing guides.
Specific to IB, I would say that you should always invest at least 80% of your after-tax bonus. Some people say 100%, but I think it's worth spending a couple thousand on a new laptop / phone / vacation / etc. to reward yourself so you don't die at work. Being less stressed in IB can make you last longer and earn more long-run.
As an analyst, if you're living in a high cost area, it might not be feasible to save that from from your base salary, but what I like to do is max out 401k match (obviously) and then have a small portion (I think I did $500 / paycheck or $12K annually as a 1st year on $85K base salary) of my pay check direct deposited straight to my brokerage account to invest in index funds.
This still leaves you with a good amount of money to spend on frivolous going out and such plus even New York or San Francisco rent.
Depending on your bonus size, this should net you about ~$30-40K of after tax investments per analyst year not including 401K and such.
this is really useful. thank you for the detailed response!
Personal approach - all excel based.
1 - Start with after-tax / deduction bonus amount (literally the number that hits checking account). From there I deduct known, one-time / large items for the year (rainy day fund, IRA contributions, life insurance, kids college fund, wife's home improvement budget, mortgage prepayment, engagement ring, wedding, etc.). Remainder is a plug amount that goes into brokerage / HY savings account for a few months and factors into savings plan
2 - Focus on savings goals. We budget to maximize preferred tax treatment accounts and fill up those buckets (IRA, HSA, 401k, 529, life insurance). After tax-preferred buckets are filled remainder goes into brokerage account (robo account) and are used to supplement lifestyle beyond base salary
3 - True-up at year end. Calculate what we actually saved vs. plan which informs the following year budget.
Investments are all passive at this point - no individual stock ownership. Mostly target date style but weighted toward sectors / asset classes of my preference.
sounds very comprehensive. thank you for sharing, really useful!
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