You’re All Missing This - IB & Compound Interest Potential
In the midst of several “Why IB” and “Why Even Do This” posts, I want to throw my hat in the ring for a thought that I don’t think gets enough credit on this forum.
Simply put, IB is the best entry level job to jump start personal savings and get compound interest working in your favor in your early 20s. No other job offers the ability to make 150-200k right out of college, without any additional schooling (with thousands of dollars of loans along with it). You are coming right out of college, where you learned for four years how to survive and thrive on a limited budget, likely have no immediate dependents, and can throw every incremental dollar into the S&P 500. Even if you are a poor saver, saving a full two analyst bonuses has the potential to set you up for life (asterisks there which I will elaborate later).
I’ll take a step back and provide a few caveats. I was extremely fortunate enough to go to a school on scholarship, so I do not have student loans to pay down. I also work in a LCOL/MCOL city, versus NYC or San Fran. That allows me to save a significant portion more than the average analyst in NYC. That being said, I think any analyst has the potential to save more than any of their peers coming out of college (with exceptions for the 0.1%), and I think that needs to be talked about more in the lens of compound interest and life savings.
The Case Study
Let’s say an analyst is able to max out their 401k, and save 1k per month post tax on their salary. That equates to roughly $35k in savings on base salary alone (easily doable with budgeting as a single guy/gal in early 20s). That alone would be a fantastic savings rate. Add an after tax bonus of ~$50k per year, and the analyst is saving $85k per year in the S&P 500. Keep in mind that this analyst did not have to take out loans for business school, law school, or medical school, and is in their early 20s with decades of compound interest potential ahead of them.
Let’s assume the analyst saves this in cash until their last day as an A2, and drops the full $170k in the S&P. Assuming a 7% growth rate (~10% avg annual returns - 3% inflation rate to normalize $ in todays terms), that analyst can expect to have ~$1.2M 30 years later.
That number may seem underwhelming, but that is assuming the analyst does not save a single $ for the rest of their career. Let’s say the analyst stays on for one year of associate, and is able to save another incremental $100k on top of the $170k already raised. That person would expect to have $2M on an inflation adjusted basis in their early 50s. While not FU money, it’s a significant step towards financial independence, and puts the person well on their way to Coast FIRE (lots of topics on this strategy on Reddit if interested).
Contrast that with a lawyer, or doctor, who graduates several hundred thousand dollars in debt, works IB hours to pay off that debt (big law) or to simply continue (residency), only to become net zero in their late 20s or early 30s. That is an entire lost decade of compound growth that can never be realized, and can be to the tune of millions.
TL/DR: Stay in IB for 2-3 years, save aggressively, and you have the flexibility to chase whatever you want in life, knowing that if you don’t save another $ your retirement is partially funded and millions are coming your way. Layer in modest assumptions for additional savings throughout one’s 20s, and IB -> chiller job can result in millions more of compound growth compared to another career that does not provide this level of cash compensation so early.
Good post
Very insightful - definitely helps with maintaining perspective on how an incremental year in IB affects the retirement nest egg and provides a path to financial independence
Bold assuming that we’ll get those equity returns over the next few years or even longer
Very bold equity returns. This gets meaningfully (approx 30%) less interesting if we take even 1% off the annualised equity returns, which isn't unreasonable. Forget about 2% (again, not unreasonable).
But overall point stands I guess because none of this would be unique to the IB analyst. Everyone would make smaller returns.
I don’t think 10% is bold considering last 15 years it’s been 12% but whatever
Valid counter - but would say that the 100 year average is 10%+, with 7% real returns after inflation. I think putting a 1% variance around the 7% figure captures the expected possibilities
Source: https://tradethatswing.com/average-historical-stock-market-returns-for-sp-500-5-year-up-to-150-year-averages/
yeah but out of any developped country the US has been the #1 best performing market historically, so using the one outlier to estimate might not be very accurate. Average equity returns should probably be expected to be a bit lower like 8% when considering other markets that were in similar conditions
You forgot to consider undergrad loans, but I like the argument
I said something similar to a buddy who choose to go to dental school for a purely monetary reason. IB is leagues ahead of lawyers/doctors career wise if financial potential is your #1 goal.
Are you suggesting that it's easier for a banker to go out on their own versus a medical or legal professional?
If you're only thinking in terms of risk averse earning, your point stands. But in terms of overall lifetime financial earning potential, doctors and lawyers are miles and miles ahead by virtue of realistic entrepreneurial opportunities. If you aren't working for yourself, you are not reaching your earning potential.
What entrepreneurial opportunities are you thinking of when referring to these doctors and lawyers?
They can put their capital to use (as can anyone in IB, but with more familiarity, knowledge, and connections), and earnings as a doctor are capped.
This is the best case scenario tbh. Very hard to save that much in NYC with student loans and high cost of living.
Also you have to factor in that being an analyst is miserable and blowing a check on a Friday night is the only escape from this hell
IB is definitely not the only job which provides this (6 figures) out of undergrad, as you claimed.
L/S equity, quant trading, S&T etc
Semantics bud - it's all the same shit anyways lmao
Definitely isn’t, given the “problems” people have with IB, and the reason for this post do not really apply to the same extent to these careers. People regularly enjoy the market facing ones.
So no, definitely not the same, aside from PE.
Fair point and I won’t argue with that - would say that my argument isn’t that IB is the only job with this potential. Instead, I think it’s a point missed when evaluating IB as a whole
Software engineering, high ticket sales
Great point - this is something I try to tell all coffee-chatters as part of the "why-IB" / "why-Finance" calculus. It's a hellish grind but each year you clock is a step-change in retirement outlook.
I preach building a personal financial model to all IB/PE-hopefuls who reach out. Run a range of toggle-able savings rates and compounding rates and see what just saving 10-50% of 2 years of IB analyst salary does vs. median or 10th-percentile income does over 25-30 years. I typically guide to plugging a 3-4% real return though.
This isn't the whole picture obviously - you can't quantify your mental health/social life drain in the same way - but it does help frame why this career is so valuable and why it might be worth shoveling the proverbial shit for a few years. It also doesn't mean that its "worth it" to every IB hopeful, but IMO every hopeful needs to run this math to properly evaluate the opportunity.
Good post - would just say 50K post tax is an aggressive assumption for a first year analyst (assuming 40-50% tax on the bonus). This amount likely would be closer to 30-40K depending on what bank / city you're at.
anyone have thoughts on compound interest potential in London? ill be an FT analyst starting next year july, trying to map this out
You can run this exact same analysis. There's not many inputs: (salary + bonus - withholdings i.e. tax etc - expenses) * 2 * 1.07^30, roughly speaking. Use a tax calculator to do the former, and ballpark the latter. Not too hard.
Umm…you might want to find a new career if you can’t figure this out on your own.
Alternatively they now have a down payment on a house saved up in a normal city and can easily get a really great corporate gig and afford a nice house while still having a ton saved up for rainy day. With how expensive housing is this is a huge leg up that your peers in the new job will not have had.
Bold of you to assume I’m not blowing my entire base on rent and CCP honeypots. Good post though
I would have to disagree with this post, although it brings up valid points. If you are going into IB for the earnings of the first 2-3 years, it’s not worth it. There are many jobs now that pay slightly above 100k first year and grow into 150k. IB deviates most in the ceiling of earnings potential. It really becomes worth it when you become an associate as there are few jobs that allow you to progress that rapidly in finance without having to have real impact
Do a backtest from 2000 to 2010 on monthly reinvesting in the sp500. We may be at the same point right now. Sp500 has a 60 percent drawdown from when the tech bubble burst to the recession. It took 13 years for the sp500 to cross 1500 again.
It is pretty crazy how well it works out if you save some in IBD. I’m 30 and went A2A out of college. Had $25k student loans, next to no savings. Now I have ~$1mm net worth. Obvi I grinded tho
are you still in IB? curious if you were at MM/BB to achieve 1M net worth
Still in it. Started MM now in BB
truth but lifestyle creep is VERY real, especially when you start dating.
My expenses literally went up 10x when i started dating. my GF earns around the same as I do, but we now do monthly trips, trips to Japan/Europe, staying in 5 star hotels and eating michelin star restaurants and drinking alcohol, not discounting the chanel/bottega bags, lululemon clothes and gym classes etc.
This is compared to me eating asian food everyday, taking public transport and walking when i travel and staying in a 3 star hotel, bringing a huge water bottle everywhere i go and wearing free t shirts, going to a no frills gym with the occasion spend on a suit/shoes - main monthly spending is rent/food and broadband and that's about it.
At some point you got to ask yourself what's the point of saving all this money? Anyway, it's not like i hate working (not in M&A anymore) so i can foresee myself working, but if it's worth it to you, go for it.
Appreciate the response - and to your point there is definitely lifestyle creep in my future.
My playbook right now is to save aggressively now while not skimping on experiences (I never turn down a concert but I’ll skip the watch). Once I can hit escape velocity on my investments (~$400k in hopefully two years) I’ll be set. I can leave IB and go to a more chill job, knowing that I can spend more of my base and worry less about my retirement, as that will be snowballing in the background.
Sure - I don’t want to leave for a drastic reduction in comp, but I can slowly lever towards lifestyle, ramping up monthly spending and ramping down monthly savings.
To me, the point of saving all of this money is to achieve financial freedom. The ability to spend similarly to you (or maybe even a bit less), but completely funded by my retirement portfolio is the goal. To have complete freedom to chose how I spend my time, to be able to spend as much time with my family, friends and eventually and hopefully my kids one day is why I am in this game. While I generally enjoy this career, I know when I look back on my life, I would have much preferred if I could spend my time with the people I love. There are several senior level individuals at my firm who always talk openly about how their kids are sad that they are never at home, and I don’t want to get to that point. I have saved aggressively since starting in IB, and while not super frugal, I try to avoid this lifestyle creep for now. Until I can find my lifestyle with my savings, I will continue to work hard and save.
The point my GF made was that - a dollar spent now is very different vs a dollar spent in the future (which leads to the time value of money). The argument is, You can't go for a concert when you're 80 or maybe you can't drink alcohol due to health, heck, you might not even be living. There are experiences now that can't come back ever at the age that you're in (i.e. sky diving, backpacking in Asia, running a marathon etc.)
Anyhow, you talked about lack of time with the kids and it doesn't sound like a money issue but more of a career issue no? Go work for Airbnb where it's 100% work from home and you can spend time with them. I actually don't mind working well into my 60s because i've seen what an early retirement does for you (most of the examples i've seen is they go back to work but in something less intense).
just some food for thought - I've seen many kids that don't want to stay close to their parents or they move states/countries and then when the parents suggest to come visit or stay with their kids, the kids are like "nah". When they grow up and don't want to spend time with you, that's when it will start to hit, but maybe i'm just a very pessimistic pereson.
A book that was recommended to me was "dying with zero" and now i'm in the "mixed" camp, spending only when i need to, which is actually never because i'm very content with gym, internet and video games, and other cheap stuff - it really is dating that did it for me
Haha what you described is just what happens when you get a girlfriend. My meals went from $14 chipotle bowls to $76 anytime I leave the house after I started dating
Do you think this jump in expenses applies the same for a woman in IB?
I spend $1k a month on hinge dates. I’m cooked
What do you tell them, Teller in Consulting
.
Finance/consulting people are quite different than SWE’s at big tech. They’re not exactly the same personalities or skills. It’s a good point though.
This guy's right . I've been working in REPE for about two years (so lower comp but better hours than IB). I've reached a $100k+ NW and coastfire with a retirement date in my early 60's.
I don't think people are understanding that the benefit is you no longer have to contribute to your retirement. You can pivot into a passion industry that probably pays peanuts. Pivot into an easy 9-5. Or you can keep working in IB, but spend all of your disposable income. Once you break in, you only need to last 2-3 years while keeping your expenses low. Anyone can do it and it gives you more options.
This is how I've always thought about it. I'm surprised when people post about having $1m+ net worths in their early 30s and scoff about how its not enough to retire if you get off the intense career path. The point isn't hitting the retirement number but hitting the coastfire number early then being able to make decisions without money as the only factor.
forget compounding interest, who else is playing MSTR?
sorry
It’s hard to save up some of those money
It’s hard to save up some of those money
It’s hard to save up some of those money
It’s hard to save up some of those money
It’s hard to save up some of those money
This post is key for anyone starting. I'm a VP now and was frugal AF until I was an associate, I probably went overboard...ate every meal at the office except saturday, didn't have a GF as an analyst cause women will suck you dry financially, had roommates until I was a mid-level associate, etc. I will also caveat I was an associate during COVID with a roommate, so I was aggressively investing during the lock downs in 2020 which was likely a generational black swan investing moment for equities. Currently 30 and just above $1mm NW. I was still able to have nights out with the boys and do bottle service etc sparingly. But I've never had a bar tab >$200...just pregamed with friends at home before going out. Also, most of my friends from college did not do IB so naturally we never spent a ton of money going out
Damn which bank(s) provided all meals during weekdays when you were associate?? Mine just does dinner stipends.
I can't believe so many people on this forum treat a girlfriend like a hospital bill. You don't have to pay for everything lol, 50/50 it all, I mean, feminism right?
I wish it were that simple
I mean it kinda is hahha, just split everything
LOL…NonDatingAsYouCanBe. If you want to fish in the bottom end of the talent pool, this could be an approach.
I find women who don't want me for my money very attractive and mature, I don't look to date gold diggers or kids, but whatever floats your boat
Agree with this sentiment and it has pretty much been my plan from the start.
Did 4 years of IB, then left to a non-PE finance role that still pays good money. Will hit $1m saved this year at age 28, then assuming a 6% real return, $2m at age 32 based on current savings rate. Will reassess at the time but if I feel like moving into a cushy lower paid role I can do so whilst still securing a decent retirement. If I don't save contribute another penny after age 32 I should have around $6m at age 50 just from compounding.
You save close to $200k a year? Impressive.
Expecting to save and invest ~170k annually over the next 4 years is incredible
Smart points that highlight the power of long term (multi-decade) thinking.
Only tech and other high finance jobs (PE/HF/Prop trading) offer similar upside out of college.
Are there any thoughts on time value of money here — does a point exist where it makes more sense to spend your money than let it compound?
You do need to take into account the aging and health impacts though.
IB is not for everyone. And not everyone can handle the gruesome hours, especially when you don’t have anyone to keep you accountable on a healthy diet and rest.
I personally know many people who got some health complications, few of them needing surgeries, so there’s also the time value of health that gets deteriorated.
While I agree with everything else, it is not the best option for everyone.
Didn't read, but is your big takeaway "earn more money, be able to save more money"? I mean, yeah? Do you think people aren't saving?
I think the point, which is valid, is that a decent sum of money accumulated in your twenties is much more valuable than that same amount of money (even adjusted for inflation, because your likelihood of beating inflation over a couple decades is or should be nearly 100%) earned in your 30s, 40s, or 50s. And that banking, risk adjusted, is one of the best ways to do that. You might be surprised by how many people - in finance - don't understand this.
I posted something very similar on coastFIRE / compounding returns in 2018: https://www.wallstreetoasis.com/forum/off-topic/burnout-life-choices
Pumped that I have far-surpassed all those figures.
Would love to trade notes sometime as I am similarly-obsessed with compounding, just like you.
I never get this argument. PE comps roughly equivalent to IB on a cash basis and then you also get carry. It's not like someone who starts at TPG isn't going to save money as an Analyst.
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