And once you break in and become a banker you’ll be making tons of cash – even if bonuses aren’t as good as they were in the old days.

But then you’ll waste it all on $200,000 sports cars, drugs, and alimony – right?

While that scenario applies to many seniors bankers and explains why some finance veterans don’t save much, the problems actually start much earlier – with your first paycheck.

The NYC Analyst

Let’s start with the base case of a newly minted investment banking analyst in NYC – after this, I’ll explain how it’s different in other regions, outside the US, and for associates on up.

If you earn a $70,000 base salary, that’s $5,800 per month (technically it is $5833.33333 but we’re using round numbers here).

Taxes are different for everyone, but with that level of income in NYC you’ll pay around $2,000 per month (34-35% rate) in federal, state, and city taxes – leaving you with $3,800 in after-tax income each month.

Manhattan is also the most expensive place to live in the US, and at the minimum you’ll spend $1,200 on rent (with a roommate) – but more likely you’ll spend $1,500 to $2,000 on rent.

So now you’re left with $1,800 – $2,300 per month of post-tax, post-rent income.

Models and Bottles Other Expenses

You’ll be spending a minimum of $1,000 up to $2,000 when you take into account food, utilities, transportation, dry cleaning, clubbing, student loans, and so on.

Why so much?

You can expense dinner each night, but you will have to pay for other meals, for going out on weekends, and so on – even if you assume a very low $10 per day, that’s still $300 per month.

And realistically you will spend more than twice that on food, so assume at least $600.

If you assume $100 per month for utilities, $100 for subway / taxi fare, and so on, that easily brings you to $1,000 – and we haven’t even taken into account alcohol, clubbing, and significant others.

Many analysts actually save nothing and end the year with credit card debt.

But let’s be optimistic and assume you can save $1,000 per month, or $12,000 per year.

That seems OK – but then there are non-monthly expenses like your end-of-year vacation, furniture, an HDTV, a new laptop, and so on.

Even if you’re extremely frugal and manage to save $2,000 per month – $24,000 per year – you will only be left with $15,000 – $20,000 once you take all those expenses into account.

And if you’re not so frugal, you’ll be saving well under $10,000.

Those Numbers Are Ridiculous – I Don’t Spend Nearly That Much Money!

That’s what you say now – when you’re still in school or working a normal job 50-60 hours per week and you don’t live in Manhattan.

But can you really save more money than what I’ve outlined here?

I’ll Live (With My Parents) in New Jersey / The Bronx / Queens!

You might save money if you do this but you will also want to kill yourself after a month of coming back at 3 AM and leaving at 6 AM every day – plus you’ll be spending more on transportation.

Pretty much all analysts and associates live in Manhattan – you need to be close to work to handle fire drills anyway.

I Will Never Go Out / Never Spend Money on Food!

Again, this one sounds plausible now but once you start working the picture changes.

If you want to get to know other people and build your network, you need to go out occasionally.

Maybe you won’t spend $500 on bottle service every night, but you will spend something.

And while you can use tricks to save money on food, you will find yourself buying lunch and other meals more often than not.

Don’t even think about cooking – that’s the last thing you want to do when working 80-100 hours per week.

I’ll Buy a Place Instead of Renting!

…except that would actually be more expensive on a monthly basis, at least initially.

Also, you will most likely not have enough for a down payment if you’re just graduating.

And if you want to move out of New York, buying a place straps you down and limits your options, which is not a smart idea when you’re just starting out.

I’ll Get a Roommate!

This one’s actually a good idea because you can save quite a bit on rent and other expenses.

Plus, it widens your social circle and if you have a non-finance roommate, you might get to know non-bankers (they exist, even in NYC).

Other Regions of the US

In other regions there are 2 key differences:

1. Lower rent, food, and going out expenses;
2. (Possibly) lower taxes.

So you might be able to save $30,000 if you live in Houston, pay a sub-$1,000 rent, and also have no state taxes (isn’t Texas awesome?).

You can get an estimate of taxes in other regions with this net pay calculator.

Houston is one of the cheapest places to be a banker in the US; if you’re in LA or SF, rent will be higher – though still less than Manhattan – and taxes and other expense will be higher, so you would save more than in NY but less than in Texas.

Outside the US

The major differences:

1. (Potentially) lower taxes or no taxes at all.
2. (Potentially) a housing stipend, so minimal or no rental expense.
3. (Potentially) a much lower cost of living.
4. …but your base salary may also be less if you’re at a local firm rather than a global bank.

I wrote “Potentially” above because if you’re in London, for example, it’s not much different than the NYC scenario and may be even more expensive.

But if you’re in Dubai, Saudi Arabia, or other emerging markets then you can save a ton of money thanks to no taxes + generous housing allowances.

In other regions like Hong Kong there are still (low) taxes , but you usually get a housing stipend which saves you a lot.

So what’s the downside to working elsewhere in the world?

If you’re working for a small, local firm you will often get paid a fraction of what you earn at global investment banks.

In China and Japan, for example, local banks might pay you almost nothing compared to what US and European-based banks pay; that’s because the cost of living is theoretically lower in China (even though in big cities, it’s not really) and because of corporate tradition in Japan.

Associates On Up

If you’re starting as an Associate, you’ll get a higher base salary – more like $100K – but you will also have higher expenses, like $150K of business school debt and potentially a family to take care of.

If you don’t have those expenses you might be able to save more than analysts, but you will still not be amassing a fortune just from your base salary.

If you’re more senior – VP to MD level – your base salary actually doesn’t increase that much relative to your seniority.

You might make $150K-$200K at the highest levels, but your tastes will also increase and you won’t want to settle for a $1,500/month studio apartment.

So despite the higher base salary, you still won’t save much until bonus season.

Summer Interns

As a summer intern you’ll get a pro-rated salary based on what full-time bankers earn – so let’s just assume that you work for 3 months and earn $17,500 ($70,000 / 4) to get a round number.

You can save quite a bit of this if you get cheap student housing (at NYU in NYC, for example) – and you’ll get a large tax refund the next year because you only worked for 3 months.

Even with all the other expenses, you might save around $5,000 – $10,000 as a summer intern, after the tax refund.

Signing Bonuses, Relocation & 401(k) Contributions

I didn’t take these into account above, because I’m assuming that you use most of the after-tax signing bonus and/or relocation bonus to actually pay for things and relocate.

You can make contributions to retirement savings plans that save you a bit in taxes, but these don’t result in a dramatically different picture – and you still have to pay taxes when you withdraw money.

What All This Means

This was a long article with a lot of numbers – here’s what it all means, and what you should do as a result:

If Your Primary Goal in Banking is to Save Money, Do Not Work in New York or London

Thanks to taxes and the ridiculously high cost-of-living in these places, you will save far more of your salary in regions like Dubai, Saudi Arabia, and Hong Kong.

Just make sure that you’re not working for a local 3-person firm or your salary might also get cut by 75%.

The other downside to these places is that you’ll gain a much wider network somewhere like NYC or London and have more options afterward.

…But If Saving Money Really Is Your Main Goal, You Might Have the Wrong Idea

No matter what you do, you’re not going to save a fortune as an analyst or associate.

You do investment banking because you want to invest in yourself and have access to much better opportunities in the future.

Doing it to save a lot of money in the short-term isn’t a wise idea because you probably won’t save that much – and your hourly rate may not be much better than at McDonald’s.

Your Yearly Savings are Heavily Dependent on Your Bonus – So Don’t Blow It

Even a “modest” bonus of $50-$60K (after taxes, $25-$30K) is more than what you save during the entire rest of the year.

That’s why – despite recent legislation – banks are unlikely to raise base salaries and lower bonuses: psychologically, we are more motivated by a one-time infusion of cash vs. an increased trickle over time.

And we’re also much more likely to spend a sudden infusion of cash foolishly (see: lottery winners).

So whatever you do, do not do anything stupid or risky with your bonus – put it all in the bank or in conservative investments so you have a cushion.

As a VP once told me, “You can piss away your salary on coke and strippers, but save your bonus.”

Keep Your Investing Plain, Simple, and Boring

Even after reading all this, you might still be convinced that you can defy the odds, save $100K+ in 2 years, invest in the next Facebook, and then retire as you cash out for $10 million.

But doing investing at all is very difficult as an investment banker because:

1. You don’t have time to day trade or research stocks in great depth.
2. There are many restrictions – you need to get permission for every single trade you make to ensure that you’re not pulling a Gordon Gecko and using insider information to profit.

So go with something simple and set up automatic contributions from your paycheck into your retirement accounts (or into your brokerage account), and then invest in a boring, diversified portfolio.

Save and invest what you can as a banker, but realize that you won’t have that much available until bonus season – unless you’re in a tax-free zone.

And in case that doesn’t work out and you end up with $30K of credit card debt, you can always hope that bonuses return to 150% of base salaries one day.

You continue on in banking, and move from Analyst to Associate – and beyond.

If you’re in the US, you might be wondering why you’d ever want to do this – but in other parts of the world exit opportunities are less hyped and many bankers actually remain bankers.

Plus, if you don’t get any buy-side offers you’ll have to stick around in banking anyway – so here’s how to get promoted and how to avoid turning into Patrick Bateman in the process.

Why Would You Want to Get Promoted?

The usual arguments for moving to the buy-side are strong:

• Improved hours (maybe)
• (Potential for) Better pay
• More responsibilities
• More interesting work

Of course, there are downsides to the buy-side as well and it’s not right for everyone.

If you’re a really social / “salesy” person who likes a fast-paced environment, staying in banking might be a better fit.

Plus, once you get to a certain level the “Show me the money!” arguments make less sense because any MD will make far more money than he has time to spend – even if he quits and moves to Buenos Aires.

How Common Is It?

The often-cited statistic is that 10% of investment banking analysts move on to become associates.

But that’s misleading because it doesn’t indicate a 10% “admission rate” – the majority of analysts don’t want to be promoted.

The top analysts usually leave for the top PE firms and hedge funds, and everyone else is too burned out after 2 years of 100-hour weeks to want to stay in banking.

But banks that desperately need to hire would much prefer a seasoned analyst to a freshly minted MBA – knowing how everything works saves months of time and piles of money.

So the option is there if you want it – but most analysts don’t, which is why you hear that it’s very difficult to advance.

What’s the Difference, Anyway?

The roles are not that much different since they’re both classified as junior bankers, but:

• Associates manage analysts and communicate directly more often with senior bankers.
• Associates get more client exposure and speak to management teams on more than just technical details of models, as analysts would.
• Banks assume that associates want to stay in banking for the long-term, whereas they know that many analysts will be gone after 2-3 years.
• When something goes wrong, the VP will blame the associate before the analyst since the associate was responsible for his work.

Hours may be slightly better for the associate, and base salaries and bonuses are both higher – good news if you have $150K or so of business school debt outstanding.

How Do You Do It?

First, you need to become a 3rd year analyst – that’s the standard in the US, UK, and pretty much all other countries.

The 3rd year offer comes via mutual consent – senior bankers approach you midway through your second year and sit down to discuss whether or not you want to stay on.

In 99% of cases they already know whether or not they want you to stay – that’s what happens when you spend 80-100 hours per week with the same group of people over 1-2 years.

So it’s more a question of what you want to do in relation to your performance.

In addition to all the usual qualities an analyst must have – attention to detail, not screwing up models, multi-tasking, and so on – you need a couple extra qualities to get a 3rd year offer:

1. Leadership – Do you mentor 1st year analysts and summer interns? Can you manage those below you without causing an insurrection?
2. Profit – Are you saving or earning more for the bank than you’re costing? Just like in PE, no one will keep you around if you have a negative ROI. This is finance, not non-profit land.
3. Senior Banker Fans – Will senior bankers in your group go to bat for you when it’s time to make a decision? If not, you need those types of relationships to get a 3rd year offer.

There’s no quick-fix solution to achieving any of this, so you need to be thinking about these points from day 1 and actively working on them as you move from your 1st year into your 2nd.

Examples

To be more specific, here are a few examples of behavior that won’t get you promoted and behavior that will get you promoted:

• Non-Promotion: You give a 1st year analyst a set of public comps to complete and check his numbers before giving it to the associate or VP.
• Promotion: You give the analyst a set of public comps, but in addition to checking his work you think of another company that would be good to include because it boosts the valuation significantly. You run the idea past the associate or VP and point out that it may help with winning the deal.
• Non-Promotion: You look through a 1st year analyst’s operating model for a client and find that all the numbers are correct before giving it to your associate.
• Promotion: You look at the analyst’s operating model and find cost-saving opportunities for the client, which you can pitch to PE firms as an easy to boost their returns if they acquire the company. You also teach the younger analyst how to create scenarios in his model to support this.

Neither of these examples is a big deal by itself – it’s more about going above and beyond what you’re asked to do consistently, over 1-2 years, than discovering the magic bullet promotion solution.

…And Then From There

Once you’ve become a 3rd year analyst, you then need to get an associate offer.

You need to demonstrate the same criteria as what’s listed above, only more of it – rather than just informally helping out new analysts, you need to give analysts instructions and see pitch books and models through to completion.

At this level, more senior buy-in is required - your group head needs to like you, and the senior bankers need to say, “We like this guy/girl, he/she has run a bunch of deals and acted like an associate for us, and is ready for the role.”

This is a lot of self-selection here – if you want to continue in banking, chances are you’ll step up and start contributing more.

And if you don’t, you’ll probably be going home early every day or waiting to bounce when your new job starts anyway.

Boutiques vs. Bulge Brackets

Some argue that it’s easier to get promoted at boutiques because they need the manpower and because there’s more competition at bulge brackets…

…which can be true, but it’s definitely not a rule.

The key difference between small and large banks holds true here as well: it’s more random at boutiques.

You might be at a boutique where the loss of 1 key associate means they need someone ASAP; or you might be at a bank where turnover is low and hardly anyone moves up.

At bulge brackets, by contrast, the process is more standardized and you’ll most likely catch neither a lucky break nor an unlucky break.

Other Groups

On the sales & trading side, there’s not quite as much confusion over analyst to associate promotions because that’s where most associates are coming from anyway – MBA hires with no S&T experience are rare.

Most traders move up the ranks because they’ve made a lot of money, not because they went to a top business school – so the profit part of the equation above is even more important if you want a promotion there.

Analysts and associates exist at other institutions like hedge funds, private equity firms, and so on, but sometimes there are limitations on how much you can advance.

For example, if you’re hired as a private equity analyst right out of undergraduate there might be no option to advance to the associate level – the firm might expect you to go to business school or move elsewhere after 2 years.

Is an MBA Required?

Nope, and the degree won’t necessarily help you.

Finance, unlike most other industries, is driven more by results than internal politics.

No one’s going to say, “This guy got an MBA from HBS – therefore he should be promoted to VP over this other guy who doesn’t have an MBA.”

Instead, they’ll say, “This guy has really good reviews and worked on a bunch of high-profile deals – clients love him, and he’s starting to develop relationships of his own. Let’s promote him.”

Some bankers argue that even if you don’t need an MBA, you should go back to school anyway to gain a broader perspective and network.

There is some merit to that argument, but most bankers who go back for the degree use it as a 2-year vacation.

You will learn a lot and meet a lot of people – and that may make you a better associate.

But it’s a stretch to say that an MBA is required to advance.

But Will They Pay For It?

No.

When times are frothy some banks may cover the expense if you agree to return in 2 years, but that is rare.

There’s no actual difference in pay or responsibilities if you get an MBA vs. if you just advance naturally – there’s far more of a difference between the associates with no banking experience and former bankers.

In sales & trading, you may be at a disadvantage with an MBA – direct promotes are usually given a portion of the trading book, but you won’t have that if you’re graduating and moving to a new firm.

What About Exit Opportunities If You Make the Analyst to Associate Move?

Don’t hold your breath.

It’s easier if you’ve been an investment banking analyst, but there’s still a strong bias against hiring associates because they’re perceived as “career bankers.”

So don’t use an associate offer as your backup plan unless you’re 100% set on banking – otherwise you will be pigeonholed.

If you do realize you want to move to the buy-side, do it quickly – it’s much easier to move over as a newly promoted associate than as a 3-year veteran.

OK, But Do You At Least Get Some Nice Perks?

Usually you’ll get a signing bonus comparable to what new associates would get – around $40K – plus a few weeks to a month off and the option to attend “training.”

If you’ve been an analyst for 3 years, “training” has no value for you so it’s really just a long vacation.

Those are the main perks – plus, of course, you won’t be treated like a newbie who knows nothing about banking.

So, Should You Do It?

Choosing to become an associate is more of a career choice than moving to the buy-side or going to corporate development at a Fortune 500 company – in those roles you have more mobility and you can hop around to different positions.

But at the associate level, you’re expected to stay in banking for the long-haul – so if you’re not 100% committed, do not use it as a backup plan.

Staying in investment banking for the long-term can be a good career, but you will be more limited if you make the leap.

And After You Get Promoted…

You’ll get more responsibility, you’ll have to formally manage analysts, and you’ll need to start thinking more like a VP.

You won’t be expected to pull in clients yet, but you do need to start building relationships and making yourself known as more than just another nameless analyst.

The hours may be a little better, but you won’t see a big improvement until you’re more senior – and even at the MD level, ruined weekends and being on-call 24/7 are still expected.

And yes, pay improves as well, but you still won’t be making $1 million+ until you’re a more senior VP or MD – which is not easy to do.

If you do well and prove that you can execute deals with little supervision, you might just get promoted to VP.

The VP’s Dilemma

But lots of promising bankers stall out at the VP level because you have to balance 2 huge, often conflicting tasks:

1. Executing deals and making sure all the presentations, books, and meetings go as planned.
2. Bringing in clients and developing relationships.

If you devote too much time to #1, #2 suffers – and vice versa.

Because of this dual responsibility, your hours may not even improve much – you’re busy with potential clients during the day and you’re occupied with deals at night.

And while MDs are also under a lot of pressure to bring in clients, that’s all they do: they don’t need to juggle sourcing with execution.

The VP to MD transition is the toughest one in banking, and that applies on the buy-side as well – going from due diligence, model-crunching mode to sourcing investments is a delicate balancing act.

If you’re a star, you might move from VP to MD or Senior VP in only 2-3 years; more often it’s around 4-5, and if it takes longer than that you’ll probably be making a trip to the conference room in the near future.

Is It Really This Hard?

Did you really expect to make millions of dollars per year without putting in a lot of effort?

Of course it’s tough – if you’re looking for something easier, though, I hear Best Buy is hiring.

Yes, everyone knows that M&A is supposedly more technical than other areas, but what about other industry and product groups?

Some of that has been answered with coverage of ECM and related groups – and today we’re going to fill in more of the puzzle via an interview with a reader who works in an industrials group.

Here’s what it’s like, how it’s different from other groups, who does the work, and how you get recruited into these groups:

Definitions

Q: I get a lot of questions on which group is “the best” and how modeling and technical work is split among industry groups and product groups (M&A, LevFin, etc.) at a bank.

What has your experience been so far? Do the product groups do most of the heavy lifting?

A: Generally the product groups, such as M&A and Leveraged Finance, are more modeling-oriented – but the analysts there also don’t get much of the industry exposure that you would get from being in a strong coverage group.

The three-statement model or standalone operating model is the standard model used in any industry coverage group, so you do get exposure to that.

Many people assume that more modeling is always better, but like anything else it’s a trade-off – for me, the “best” group is the one that gives the most well-rounded experience and lets me work with companies I’m interested in.

I like being in an industry group because I get to work on a wider range of deals, rather than just M&A or just debt offerings.

I’m also more interested in industrials than other groups – I prefer to read about railroads rather than semiconductors.

While the work itself in a technology group and an industrials group may not be that much different, I find myself far more interested in the latter.

Q: Is an industry group always “an industry group?” What determines how much marketing work (pitch books) you do vs. how much deal and advisory work you do?

A: That’s a good point – there are actually a couple group variations:

1. Origination – These groups just do marketing and pitch for new clients, especially on financing assignments.
2. Advisory – This is the traditional M&A work that banks are associated with.
3. Coverage – In this group there are elements of both origination and advisory work, but you’re focused on a particular sector.

Since I’m in a coverage group I do both marketing and client work – I bring this up because a lot of people incorrectly assume that an industry group is 100% marketing and a product group like M&A is 100% deal execution.

That said, there is definitely an emphasis on knowing the sector in coverage groups.

Q: Right, so it sounds like “industry groups” should really be labeled “coverage groups” if we wanted to be more accurate.

What kinds of companies do you cover in industrials and how is the group divided into different sub-industries?

A: Most investment banks divide industrials into capital goods (machinery, equipment, anything used to produce other goods) and transportation (railroads, trucking, and so on) groups.

Sometimes there’s overlap with related groups such as natural resources and chemicals; for example, a metals and mining group might fall under industrials or it might be classified under natural resources.

One of the areas I work on is aerospace and defense, which is usually a sub-group within industrials (capital goods).

Dealing

Q: What types of deals do you work on and how is the work divided between your group and product / other groups?

For example, let’s say you’re working on a sell-side M&A deal – who would be responsible for the buyer list, the Information / Offering Memorandum, model, management presentation, and final negotiations?

A: We get exposed to all types of deals, but my group is strongest in M&A advisory followed by high-yield debt; we don’t do many equity issuances.

There is also some restructuring, for example, in the airline industry – though that is more of a transportation sub-sector. Aerospace works with the parts manufacturers (ex: Precision Castparts, Spirit Aerosystems, etc..) instead.

The split between different types of work depends on the deal and who’s busy at the moment, but usually coverage analysts run operating models for clients because we’re more familiar with the industry.

The rest of the work and other models may go to the M&A team, with input from us – especially on industry-specific issues such as identifying appropriate buyers.

If I were working on a high-yield debt offering, I would still be responsible for the operating model but the Leveraged Finance team would come up with the optimal pro-forma cap structure and do the analysis on credit ratios and other debt-specific modeling (ex: pricing).

If the assignment were even more specialized – for example, a restructuring deal – then the restructuring team might manage the entire process with the coverage team helping with tasks like finding buyers and summarizing the state of the market.

Q: That makes sense – I think the division of labor is dependent on the bank as well, but those are some good guidelines for anyone who’s wondering about this.

Is there anything specific to valuation or deals with aerospace and defense companies that you don’t see elsewhere?

A: The mechanics of models are similar – a merger model is a merger model, after all – but there are specific metrics and drivers for aerospace and defense companies that you don’t see elsewhere.

For example, for airlines you use metrics like revenue passenger carried, revenue passenger miles, and available seat miles.

When you’re making projections for aerospace companies you use drivers like the order backlog, capacity utilization, and the airline sector’s overall health (N.B: measured in the number of planes in the air, or how many are kept parked).

Defense companies rely on government contracts – which have long lead times – and the defense budget, so you need to factor those into any models you create.

You also have to be up on the industry and the latest trends to figure out which specific areas within companies might have room for growth (e.g. persistent intelligence, surveillance, and reconnaissance) and which might see decreased spending (e.g. C-17 Globemaster).

I would highly recommend the equity research report “Deciphering Defense – An Industry Primer” by Ronald J. Epstein, Bank of America Merrill Lynch, September 2009 if you’re interested in learning more about the sector.

Lifestyle, Pay & Recruiting

Q: What’s your average day like? Do you work more, less, or the same as analysts in other groups?

A: Hours are comparable to other industry groups – in other words, long, and definitely longer than more markets-based groups such as ECM or sales & trading.

I’m not sure how it compares to M&A or other product groups, but once you get to a certain number of hours per week you can’t sense much of a difference.

I usually start each day by reading the news and looking for details of companies in my industry “exploring strategic alternatives” (banker-speak for “looking to buy or sell”).

I also pay attention to developments such as management changes, government contract awards, and inventions and patents within the set of companies I cover.

After that, it really depends on what’s going on at the moment – I might spend a lot of time on an operating model for a company if we’re working on a deal, or my day might consist of working with other groups and providing input on pitches or deals they’re working on.

Q: Right, that seems consistent with what you mentioned before about how coverage groups operate.

I also get a lot of questions on how bonuses compare in different groups. At the junior levels I would assume that most product and industry groups are very similar – is this accurate?

A: Yes.

Q: Finally, how do you actually get placed in an industry group? Do they focus more on lateral hiring or recruiting straight out of universities / business schools?

A: Most of the time analysts are recruited directly from the undergraduate training pool (and associates from the MBA training pool).

Recently, with the market picking up, many firms have been hiring lateral analysts with experience in investment banking as well [N.B.: As of mid-2010].

Q: Great, thanks for your time.

A: No problem – enjoyed speaking.