Practically everyone is initially drawn to a finance careerbecause of the money, which seems to be all that college students care aboutnowadays. Most are broke, have a bunch of student loans and do not know exactlywhat they want to do in life. So the safest and riskless solution is to findthe career that pays the most amount of money! How could you ever go wrong makingthat decision?
Once you get older you will start to realize that there is more to life than just making money. After I cruised through in the early years of my career, I started to realize that making money is not all that cracked up to be, which is one of my Top 10 Things I Wish I Knew in My 20s.
Anyways, I am not here to preach about finding what yourpassionate about (although towards the end you will realize why a financecareer will prevent you from figuring out your passions). The fact is that the traditionalfinance career path (ie. starting your career in investment banking thentransition to the buyside) is the easiest way to be in the top 1% by the timeyou are in your mid to late 20s.
Before I walk through how much you can actually make aninvestment banker and as a buyside professional throughout the early parts ofyour career, I first want to show you how that initial six figure salary straightout of undergrad won’t go very far.
Making six figures in NYC or SF = middle-class incomeanywhere else
Let’s say you landed a finance / banking job that paid youover $100K right out of undergrad. Initially, you may think that with that payyou will be able to rent out an amazing apartment, buy anything you want and goout to the finest restaurant’s NYC / SF has to offer.
Hate to burst your bubble, but this can’t be further fromthe truth. Given the cost of living and the high tax rates in these big cities,making low six figures in NYC is the equivalent of a middle-class incomeanywhere else.
Yeah you can live in the West Village, Flatiron, Greenwich Villageor even Tribeca with that pay, but you will be living in a cramped, old apartmentwith no central AC paying between $1,800 and $3000 per moth.
Typical budget of a first-year investment banking analyst
As a first-year analyst, you typically make a base salary of $85K. Almost everyone lives off their base and banks their bonus. You may think you should be able to save a lot of money each year being single with an $85K base salary, but you can see below that most will basically breakeven.
Now this analysis above is excluding student loan payments.If you have any undergraduate loans, then you may need to cut back on rent andlive in a frat-style apartment in Murray Hill for a few years.
I am sure I will get a lot of criticism from people on why youwould waste $2,200 a month on rent. Well, that is just the reality of living ina decent place in a decent neighborhood in NYC or SF. Go ahead and live in Brooklynor Murray Hill or the UES/UWS if you want to, but good luck hanging out withanybody that you know.
Of course, you get that fat $50K bonus payment after yourfirst year. But then you realize that that bonus is less than $30K after-tax.
Now that you realize that six figures is not a lot of money,let’s talk about what you can truly make throughout your initial years in atraditional finance career.
How much do investment bankers make
Analyst pay is very standard across the industry, with smalldifferences between banks. The pay at most varies by $20K-$30K depending on thebank.
A1: $85K Base + $40-$55K Bonus
A2: $95K Base + $45-$60K Bonus
A3: $95K Base + $65-$95K Bonus
The bonus ranges are determined based on your reviews and what rank you received. Usually most analysts receive 1st, 2nd or 3rd (like 80% of analysts). If you are really aiming for top bucket placement (which is what buyside recruiters love), then I suggest you read my 10 Steps to Being a Top Bucket Ranked Banking Analyst.
The differences in pay between buckets is very small (~$5-10Kper bucket). Now this may seem like a big difference for someone straight outof undergrad, but once you get older you and stay in the industry, you willrealize that $5-$10K is a rain drop in the bucket.
I have known of analysts who were extremely bad at theirjobs and basically checked out / pushed back a lot. These analysts get veryscrewed when bonus season comes as I have known people who have received zerofor a bonus because of how bad they were. Usually though, if you are averageand can do the work, you will receive at least the 3rd bucket rank.
More and more banks nowadays offer a direct promotion toassociate. If you want to stay in banking, then after your second or third yearyou can get promoted to an A0 Associate (A0 is just for the first six months soyour pay is aligned with the calendar cycle). Most places offer a $50K sign onbonus as well so you are incentivized to stay versus jumping to the buyside.
Associate level pay is very standard as well. Once you are inyour third year as an associate, portions of your bonus will start to bedeferred and vest over three to four years.
- A0: $125K Base + $50K Bonus (this is for half ayear and may be different depending on the bank)
- A1: $150K Base + Bonus Up to 100% of Salary
- A2: $175K Base + Bonus Up to 100% of Salary
- A3: $190K Base + Bonus Up to 100% of Salary (~30%of bonus is deferred)
You receive a portion of the deferred portion of thecompensation each year, most likely in equal installments over four years. Thisis how they prevent you from leaving for a different bank or job as you will loseall of your deferred compensation if you quit.
How much do private equity professionals make
If you were lucky to get an analyst position in privateequity straight out of undergrad, then your pay will be similar to that of aninvestment banking analyst. Depending on the size of the fund, your all-in paycould be even less than in investment banking.
Typically for associates (after two to three years of bankingexperience), the pay goes as follows:
- A1: $115-$125K Base + $100-$125K Bonus
- A2: $125-$150K: Base + $125-$150K Bonus
- A3: $150K Base + $125-$175K Bonus (Potential forCarry)
Now for those who do not know what carry is, it is essentiallyyour equity piece in the fund that vests after four or so years. Your ownershipis ~50bps to 2% depending on the size of the fund (lower percent cut for largerfunds and higher percent cut for smaller funds).
I would not worry too much about carry as it is basically additional upside to your compensation over the long-run and is tied to the performance of your fund. Once you get more senior, the carry becomes a substantial amount of your compensation in private equity.
Read Private Equity Salary and Bonuses – From Analyst to Partner for more detail and the most common private equity interview questions if interested in breaking into the industry.
What about hedge fund compensation?
Hedge fund titles are completely different and the pay isless structured compared to investment banking / private equity. You are calledan analyst or senior analyst until you are senior enough to be given your owncapital to manage.
Typically, the all-in pay for someone who has two to three years of investment banking experience is similar to that of a PE associate.
However, there are a small number of instances where I have known people who get paid high six figures right after their banking analyst program because their fund had amazing returns that year. This is not the norm so would not salivate over it. I have also known people who make less than they did in banking because their fund had horrible returns.
See Hedge Fund Salary and Bonuses (From Analyst to Portfolio Manager) for a complete overview and most common hedge fund interview questions if interested in breaking into the hedge fund industry.
Different types of hedge funds
There are two types of hedge funds out there: a single-manager fund and a multi-manager fund. The pay structure is likely to be completely different at these two types of funds.
Single-manager fund compensation is more steady with a baseplus bonus (just like in private equity), but the upside is likely to be cappedat ~$250-300K for your first year after banking.
Multi-manager fund compensation is tied to the performance of your team. If your team has a good year and generates a lot of P&L, then you can get paid upwards of $500K-$1MM during your first few years. However, the flip side is true as well. If your team does not make any money in a given year, then you do not get any bonus and you make less than you did in banking. Read The Basics of Working at a Multi-Manager to learn more about the multi-manager pay structure.
The infamous golden handcuffs
Before I end, I want to make sure you understand one of thebiggest problems amongst finance professionals. Most people in this industrygot sucked in (including myself initially) because everyone else wanted to doit and we wanted to make a lot of money.
But after working for a few years, you will have paid offall your student loans and will likely have well over six figures saved in yourbank account. At this point, you will start to question what you are doing withyour life and what you really want to do over the longer-term.
The problem, however, is that once you realize that finance maynot be the end-all / be-all solution to all your problems, you start to wonderwhat if you did something different. But then you realize that you could neverdo something different because you will have to take a massive pay cut!
These are what are known as the golden handcuffs. Once you are 5+ years into your finance career, you are likely making well over $300K per year. If you ever wanted to do something different outside of finance, then you would have to be okay with taking a >50% pay cut. That’s why a six figure finance career alone will not make your happy.
Lifestyle creep will prevent you from finding yourpassions
If you experienced lifestyle creep along the way, then youlikely will not be able to afford your current standard of living with just alow six figure paycheck. So, you ultimately decide to stay in finance and nottry to go find out what you actually really enjoy doing.
While this is a classic rich person dilemma, it is one thatis very real and happens to practically everyone in this industry. Make sure tokeep all of this in mind when navigating through the early parts of yourcareer.