How a Quant Does Money

Photo credit: 3844328, CC0 Public Domain.

The following is from an email conversation with an anonymous 30-something quant at a large high-frequency trading firm.

How much are you making?

Tax year 2016, my gross comp was $600K. That breaks down as roughly 1/3 base, 1/3 cash bonus, 1/3 deferred compensation (if I’m a good boy and my firm doesn’t blow up, I’ll see this money in a few years). On top of that, I have some de minimis (to me anyway!) income from investments ($50K) and my wife’s salary as well.

Of course, of that amount, I paid $200K in federal + state income taxes, not to mention Social Security + Medicare + rich people ACA Medicare surtax + rich people ACA capital gains surtax. It’s a bit scary to realize I paid more in taxes than the income of almost everyone I know.

How do your earnings compare to your expenses? Are you earning “enough,” whatever that means to you?

Earnings >> expenses. Whether I earn “enough” is an extremely loaded question. I work with lots of people who earn way more than I do (and lots who don’t). In the sense that I live quite comfortably and never have to worry about my personal finances, I’d say I earn more than enough. In the sense that I wish I could move on and do something more interesting and better for humanity, not enough.

What are some of your major expenses? Do you know how much you spend every month?

I didn’t know the answer to this question until quite recently. I started keeping rough track of my expenses to help plan for retirement and figure out exactly how much income I’d need.

My monthly expenses are…wait for it…~$13K. The majority of that is child-related. ~$4K on childcare (my wife works and we pay our nanny somewhat generously since it’s important to us that she feel financially secure). And another ~$2K every month in the kid’s 529 plans. I consider that more an expense than saving since it’s not like I can withdraw the money easily and use it for my own purposes.

Those expenses should die down in a couple years when the kids enter public school, but then I’ll have to budget for summer care, extracurricular activities, going out with friends, etc. The next biggest expense is rent (~$3K). Miscellaneous stuff makes up the other $4K (credit cards, utilities, car depreciation, etc).

Do you have any debt?

Nope. I went to a public school for college, so no student loans to worry about (and tuition was dirt cheap back then). I have always lived within my means (even it meant subsisting on ramen noodles and free pizza in college) so no credit card debt.

I will probably buy a house pretty soon since our rent is getting out of control and before interest rates rise too much further. Given my investment returns and with rates as low as they are, I’ll probably try to find the loan with the lowest payment possible since I’m better off investing my income rather than sinking that money into a house.

How about savings?

Lots. My total assets are approaching $2M. That number is kind of an abstraction to me, though. Just something I see when I login to Fidelity every couple weeks. I don’t really think of that as money I can spend.

Retirement savings?

I max out my 401(k) + IRA every year. I wish I could stash even more in tax advantaged accounts — taxes destroy my investment returns. Like most rich people, I own a ton of muni bonds.

What is your goal for your money this year?

Um, break $2M in savings? 😀

Sorry, there’s no way to answer this question without sounding like a privileged rich guy.

Where do you want to be financially five years from now?

This is going to sound even more privileged. Five years from now (assuming I’m still employed — my profession is a very high-risk/high-reward type of deal), I would like to be within spitting distance of retirement. And by retirement I don’t mean sitting on some beach with a piña colada. I’d go out of my mind after a few weeks of that. I’ll probably still be employed (something part-time or contract work) earning enough so that I don’t need to save and can cover some of my expenses, with the rest coming out of interest/dividends on my accumulated cash horde. But I’d like to work on projects I find interesting, have more time to travel and pursue my hobbies, and sleep until 10 a.m..

What do you think you do really well financially, and what do you wish you could do better?

Things I do well: While most people probably think my monthly expenses are out of control, I actually think I live quite cheaply compared to my peers. I work with people who take Uber to work every day because they don’t want to deal with public transportation, spend $20 on lunch every day even though our firm provides lunch, and own the kind of sports cars you read about in magazines. And many of the people who do this earn less than I do.

I’m also shocked at how little many of the people I work with know about investing (and these are people who work in finance!!!). It’s not complicated. Just put your non-rainy-day funds in SPY (or an SP500 mutual fund if you don’t want to pay trading commissions) and be done with it. You can get fancier later but the compounding effect is real and every year that your money sits in cash is like a paper cut. And enough paper cuts will kill you (ok, that analogy is a bit over the top).

Things I could do better: At my level of income, these are not the sorts of things that most people think or worry about. My investing is not as disciplined as it should be. I don’t pay much attention to asset allocation, I’m far too obsessed with tax-efficient investments, I keep waiting for the right time to buy, and I focus too much on high-yield investment vehicles.

Since I’m way past the tipping point where my assets are bigger than my income, I live in constant fear of the next stock market crash. I’m mentally preparing myself for losing multiples of my annual salary in my investment portfolio. And it also makes me realize how invested I am in our current economic system. The prospect of something like 2008 (or worse, since we’re waaaay overdue for a market correction) happening again scares the shit out of me.

This is a first-world problem, though, since I highly doubt the janitor in my building is all that worried. I wish I could just sit back and enjoy being the top 1 percent, but not a day goes by without me worrying about something bad happening to my family, my job, my savings, or my country.

What advice do you have for Billfold readers?

Pretty much any answer I give here will make me sound like a condescending prick. There’s no way to sugarcoat the fact that it’s easy to be rich if you make $600K a year. But lifestyle creep occurs at all levels of income. If you make $60K/year, picture how someone who earns $30K/year lives. If you can live like that and save the difference, then for every year you work, you’re “saving” one full year’s worth of salary. That means that if you work for 20 years, you can retire 20 years early. That same math applies to me, the only difference being I’m living a $300K/year lifestyle when I could be living a $600K/year lifestyle.

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