For the five years after college I worked as a trader. Well, the first year was spent doing coffee and lunch runs while learning how to trade. Oh so glamorous. Trading is an interesting business. Profits, and thus paychecks, have huge variability from year to year and a lot of floor traders trade with their own money which makes these swings even more noticeable. Personal finance is not discussed a lot in the trading pits, but when you stand next to people all day every day, you get to know a lot about them. In my five years as a trader, I picked up a few things from the traders who managed their money well.
1) Save Your First Windfall
This is one of the best pieces of advice I have ever received and it came from an older trader when bonus season rolled around after my first year of trading. The exact advice was ‘save your first big bonus’. By trading standards I never received a bonus that could be considered a ‘windfall’, but the idea behind the advice holds for anyone. Do not start spending a lot of money until you have a lot of money saved. Out of college it is easy to feel like a millionaire after receiving a paycheck or two. But if you actually want to become a millionaire, save for a few years before upgrading your car or buying a house. The truly wealthy do not buy fancy cars or homes until they have money in the bank.
2) Factor Your Job Into Your Investing Strategy
There were several traders I knew who kept all of their money in bonds and I have only grown to understand the wisdom of this over time. Trading is a very risky business and total compensation is often highly tied to how the stock market performs. When the stock market goes up, trading is good and bonuses are large. When the markets fall, bonuses are small and the chance of a trader losing his job increases. Therefore, since traders’ incomes are so highly tied to the stock market, these traders took less risk with their savings and diversified into bonds.
So how does this apply to you? Think about the riskiness or stability of your job when investing. Let’s take two extremes. We already discussed a trader who has very unpredictable income from year to year who needs to have less risk in his investments as a result. On the other hand, if you are a tenured professor your job is very stable and your income is likely very predictable from year to year. With this type of a job you can afford to take more risk with your investments.
3) Pay Off Your Mortgage
After spending a couple of years on the trading floor, my young naive self actually assumed most people paid cash for their house. A disproportionately large number of traders own their homes outright. There was no talk of mortgage interest tax deductions or earning more money in the market. Many traders paid cash for their homes and then enjoyed all the reduced stress and freedom that goes along with it.
Time has shown me the reality that it can be a struggle to even save 20% for a down payment on a house. And there are instances where it does not makes sense to pay cash for your house or pay down your mortgage quickly. However, as soon as we are in our ‘forever house’ I plan to get rid of our mortgage as quickly as possible.
*Photo by yuan2003 via flickr
This is great. It is true that having a job like that out of college gives you all sorts of misconceptions about what is ‘normal’. Still some good lessons to learn.
I know. Sometimes I think I’m still discovering what ‘normal’ is. Traders live in a bit of a bubble.
Great post! A lot of people aren’t prepared for the basic risks of something going wrong with their job until it happens, but maybe it’s less visible for them than it is for traders.
I’m working on a combined approach of reducing the mortgage and increasing investments instead of just focusing on one thing but that goes back to how risky your income is. As a business owner I’m a bit less exposed than a trader so I need to venture into the stock market to get more
Thanks, VI. I definitely like the hybrid approach of paying down your mortgage while also investing. This is something I’ll fine tune if we ever find a house.
I don think that it’s important to always be financially savvy but if there’s any time in your life when it’s best to take risks, I say it it’s in your early 20′s–after college, but before marriage.
I agree- if you ever want to take financial risks, definitely do it early on when you have time to make up for any potential mistakes and when no one else is depending on you!
Great advice!! I’m just starting to look into investing and these are certainly some ideas to think about. Thanks.
My field is also in a bit of a bubble. It’s strange when you talk to people outside of the bubble because most of my friends exist inside of the bubble.
1) I save all of my “windfalls” aka cash and stock bonuses. Every single penny after taxes. Some of my friends spent them on fancy cars and you could say I bought my car with mine, but after saving it and a lot of money each month. My budget keeps growing to be a larger portion of my monthly salary, but I’m still saving every penny of my bonuses and they’re going up each year.
2) I know very few people who actually keep their 401(k) matching or our stock bonuses in our company stock. My parents, however, thought that was a great idea! I don’t think they realized that I would see $12,000-30,000+ per year in my employer’s stock. I now transfer the matching funds out of my employer’s stock every trading window and into the S&P 500 Index fund in my 401(k). And I sell all of the stock bonus shares and treat it as a cash bonus, divvying it up into savings as I otherwise would have, had it been cash.
3) I don’t want to pay down the mortgage on my condo aggressively, but I will pay it down slightly while saving up cash towards buying a house in an unspecified period of time. If I choose to not have kids, then I would throw that cash against the mortgage. Having more cash affords you such amazing flexibility. My plan is to split discretionary savings evenly between taxable investments, pre-paying the mortgage, and cash savings towards a down payment on a house.
Sage advice in this post.