In the next few weeks, bonuses will be hitting the accounts of many people lucky enough to work for U.S. investment banks. Once there, they will be asking to be spent – many are the WhatsApp groups discussing the options for bonus spending.
But before you splurge on a new watch or spa break, I suggest you read the cautionary words below.
How levered are you?
The first thing you should do with any bonus is to think of your debts.
It goes without saying that high-interest debts such as credit card debts, financed purchases or personal loans should always be paid off first. Very few income-producing assets can consistently return more than the amount high-interest debts will cumulatively cost.
This might sound obvious, but in my experience too few people in finance think of their debts at bonus time. Most are so used to a highly-levered environment at work that they consider high levels of personal debt normal. They say there’s no point paying back mortgages or student loans at a higher rate than necessary because they can instead invest their funds to yield higher returns.
I disagree. This kind of tactic only works in a bull market. Do you really want to set yourself up for the kind of prolonged levered life that could leave you exposed if the market crashes or is particularly volatile? In this situation, not only would your job be at risk but you could face mounting debt obligations (eg. from a mortgage), while much of your income is tied up in either non-liquid assets or assets with coincidentally rapidly declining values (eg. shares).
What happens if something goes wrong?
If you’re 25 years old and you work in finance you might think you’re invincible. You’re not. I know of someone who lost his job as an associate in IBD in a bear market and ended up having to live on welfare for an entire year until he found a new job. It happens.
You should always have at least three to six months of living expenses in savings. What happens if you get fired? What happens if you get fired along with your whole team? Or you have a mental or physical health issue which prevents you working? Or you decide you want to leave finance and do something else which requires retraining? None of this is unusual.
Are you ready for getting old?
If you’re fortunate enough to be employed in firms with favourable pension scheme, it is wise to put some of you bonus towards your pension as it will usually be tax deductible. It’s also wise to save towards long-term goals like buying a home or getting married or starting a company. You won't get instant gratification; you will be preparing for the future.
Only then can you treat yourself. A lot of people in banking buy high-end watches or high-end bags, or shoes or whisky. Plenty of others go to expensive restaurants or take luxury vacations. Occasionally people donate to charity. The temptation is to indulge, but try to resist.
Here’s wishing you a healthy bonus and the wisdom to make the most of it. Good luck!
Mai Le was an investment banking associate at Goldman Sachs before she left to found several of her own ventures such as Elite Weekend (eliteweekend.com). Besides writing on her own blog (lequynhmai.com), she also runs a cover-letter sharing community called Cover Letter Library (coverletterlibrary.com) and a learning and community platform for analysts called Next Analyst (nextanalyst.com).