Bonus Babies: Digging Into the Lifestyle
You've got the business degree, the I-banking job, and now, that first annual bonus. Here are some tips on how to save, or spend it
If you feel sorry for investment bankers because of their long work hours, you can stop right now. Analysts hired last year received their bonus checks this summer, and the average numbers were large enough to alleviate the pain of 60-plus-hour weeks (see BusinessWeek.com, 5/11/06, "Jammin' Like Crazy at Goldman").
Bonuses for first-year analysts in the period between summer, 2005, and summer, 2006, ranged from about $40,000 to $78,000—on top of an average $55,000 base salary, according to research from Vault, a media company focused on careers. Of course, bonuses at bulge bracket firms tended to be on the higher side, while some employees' checks, especially those at smaller companies, came in below the $40,000 mark.
For most new I-bankers, a first end-of-year bonus is the largest chunk of change they have ever received at one time—prompting a plethora of questions and options. Splurge on a new "toy?" Save for a down payment on a house or apartment? Pay off credit card or student loan debt (see BusinessWeek.com, 6/8/06, "Graduating? Time to Look at Your Loans")?
You've had some time to ponder the options, now it's time make those all-important decisions. Here are five smart ways to invest or spend that newly acquired dough:
Create an Emergency Fund. Most analysts have two-year contracts, which do not automatically get renewed. After this summer's bonus allocation process, employees know where they stand with their companies. "The bonus is the report card. If you think it's not, guess again," says Brian Drum, president of Drum Associates, a global executive search firm in New York City. "It is also an encouragement to stay with the organization. Or it can be a discouragement."
If a bonus was on the low end of the scale, an employee should hoard a significant portion of it, since future employment is questionable. But even if a bonus was average or outstanding, recent graduates can never be too careful and should always err on the side of caution.
Today, several potential crises can affect job security, including layoffs and company mergers and acquisitions, says Mitchell Smith, managing partner of Florida-based independent financial group Gaines & Smith. Smith suggests keeping three to six months' worth of expenses in a reserve "emergency" fund. The money should be liquid.
Think About Future Goals. Are you looking to buy a home within the next few years? Relocate? Start a business? Before deciding how to spend your money, lay out goals and upcoming major purchases, says Gregg S. Fisher, president and chief investment officer for Gerstein Fisher, a financial advisory firm in New York City. Then, some of your bonus money can go toward a venture that might be more difficult to finance otherwise.
A separate savings account—preferably a higher-yielding, online account—is also helpful in making sure socked-away cash stays that way. Bard Malovany, a certified financial planner with Sagemark Consulting in Annandale, Va., recommends going online because most online accounts allow users to set up a systematic debit from a checking into a savings account.
That way, it's easy to start the regimen of regularly saving whatever leftover money you have. "And then whenever you get a raise in the future, target most of that raise to systematically go into your savings account," Malovany says.
Consider Paying Off Debt.Credit card and student loan debt are two different ballgames (see BusinessWeek.com, 6/27/06, "Five Ways to Manage Your Student Debt").
Credit card interest rates are usually much higher than student loan rates, and should be paid off as quickly as possible. Smith, of Gaines & Smith, suggests contacting credit card companies and asking for lower rates—and then paying them off.
Regarding student loan debt, sometimes it doesn't make sense to make a huge payment. And, even a large payment may not reduce monthly payments, says James Burchetta, attorney and president and CEO of White Plains, N.Y.-based DebtResolve, a company that provides technology to resolve consumer debt. Burchetta suggests talking to the bank or institution that provided the loan and seeing how a $10,000 or $20,000 payment to the principal balance, for example, would affect monthly payments. He also warns that some borrowers might incur prepayment penalties.
Invest. Most experts agree that recent graduates should invest in a Roth IRA, for which most people qualify. "Giving themselves this kind of head start on saving for retirement will also give these new grads the incentive to contribute year after year going forward. On the other hand, those who do not start a retirement plan at this stage are more likely to put it off for another year, then another," says Dmitry Lev, a consumer bankruptcy and tax attorney based in Boston.
If an investor begins contributing the current annual maximum ($4,000) early in his career, he will easily have $1 million by retirement, if not sooner, says Lev. In addition to a Roth IRA, contributions to a 401(k) plan should be made.
When it comes to investing in the stock market, bonds, or commodities, the more conservative the investment, the better, says Smith. He says even young investors should never take a risk with more than 20% of their total sum.
Have Fun. It's hard not to spend some of your hard-earned cash. And you should, to a degree. "In that position you work nonstop and have the feeling that you earned the right to spoil yourself. It's good to spoil yourself a little bit," says Sam Hamadeh, co-founder and co-president of Vault.
Many bonus recipients decide to take a trip with part of their bonus money, a move Patricia Schultz recommends. Schultz, author of "1,000 Places to See Before You Die," says there is a huge range of trips for recent grads looking to splurge. For the golf-obsessed, the Boulders and Four Seasons at Troon North in Arizona are perfect for playing, relaxing, and unwinding. "Golf, with a certain kind of twenty-something person, is very of-the-moment. Kids who have grown up with Tiger Woods see it not as a bunch of old fogies in plaid pants doing it after retirement," she says.
If you're looking to head out of the country to a more exotic locale, try picturesque Rio de Janeiro or Buenos Aires, suggests Schultz. Besides being warm, exotic, and absolutely beautiful, Rio only has a one- or two-hour time difference for travelers coming from the U.S. That way, a short trip isn't interrupted by the need for sleep.
Buenos Aires's tango clubs (some open until 4 a.m.), incredible restaurants, ranches, and people make it a must-see for young people, says Schultz. "The people are beautiful. If you're looking for an Argentine other half, this is the place to go," Schultz says. To both Rio and Buenos Aires, airfare can run over $1,000, but hotels and entertainment come in various price ranges.
For other possibilities, see our slide show, "Bonus Splurges."
So, while you have the cash, enjoy it. Just don't go overboard.
Gordon is a reporter for BusinessWeek.com in New York.
