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I find it funny how many people have this misconception that a bonus is just free money. For people who earn bonuses that are large relative to their base salary, the bonus is generally a form of deferred compensation. In other words, it represents a commission of sorts on work done during the year that wasn't paid out at the time.
So when you hear about Wall Street bonuses, keep in mind that bonuses are simply deferred compensation for work performed during the year. So even in bad times, bonuses will be paid out since people are still doing work and earning commissions for that work. Think of it like this: you're a real estate agent working for a large broker. Due to the economic conditions, the broker has had substantially negative earnings over the past six quarters. Regardless, you've managed to sell a good number of houses during the year. The compensation system at your firm pays you a very small base salary but gives you a lump sum payment covering all your commissions at the end of the year. Do you deserve your "bonus" or not? I can't see how any reasonable person would say no. And that's similar to how it is on Wall Street.
I agree people working for a struggling company should not expect as much money. And that's exactly what we've been seeing on Wall Street. But you have to understand that the people actually responsible for the losses at most banks were a very, very small number of the total employees, most of whom have now been fired. Many of the other bankers are still working the usual 80-100+ hour work weeks and producing profits for the firm, even if substantially less than before due to the economic conditions.
To address your other point, a lot of end-of-year bonuses are a HUGE portion of total compensation. On Wall Street, even for first year analysts out of undergrad, their base salaries were only $60k while their bonuses were over $90k for the best employees (these were 2006-2007 numbers -- it was a lot lower in 2008). For people higher up, base salaries could be around $200k while bonuses would be $1mil+. So you're saying someone with that sort of compensation structure should only rely on their base salary despite over 80% of their compensation coming from their bonus? Of course not.
I find it funny how many people have this misconception that a bonus is just free money. For people who earn bonuses that are large relative to their base salary, the bonus is generally a form of deferred compensation. In other words, it represents a commission of sorts on work done during the year that wasn't paid out at the time.
So when you hear about Wall Street bonuses, keep in mind that bonuses are simply deferred compensation for work performed during the year. So even in bad times, bonuses will be paid out since people are still doing work and earning commissions for that work. Think of it like this: you're a real estate agent working for a large broker. Due to the economic conditions, the broker has had substantially negative earnings over the past six quarters. Regardless, you've managed to sell a good number of houses during the year. The compensation system at your firm pays you a very small base salary but gives you a lump sum payment covering all your commissions at the end of the year. Do you deserve your "bonus" or not? I can't see how any reasonable person would say no. And that's similar to how it is on Wall Street.
I agree people working for a struggling company should not expect as much money. And that's exactly what we've been seeing on Wall Street. But you have to understand that the people actually responsible for the losses at most banks were a very, very small number of the total employees, most of whom have now been fired. Many of the other bankers are still working the usual 80-100+ hour work weeks and producing profits for the firm, even if substantially less than before due to the economic conditions.
To address your other point, a lot of end-of-year bonuses are a HUGE portion of total compensation. On Wall Street, even for first year analysts out of undergrad, their base salaries were only $60k while their bonuses were over $90k for the best employees (these were 2006-2007 numbers -- it was a lot lower in 2008). For people higher up, base salaries could be around $200k while bonuses would be $1mil+. So you're saying someone with that sort of compensation structure should only rely on their base salary despite over 80% of their compensation coming from their bonus? Of course not.
$200k/year is MORE THAN SUFFICIENT to live off of. It's not hard.
When you do your budgeting (which people don't do, and that's the problem), you take into account how much money you can count on receiving on a recurrent basis with minimal margin for deviation.
So using your example, if I know I will always take home at minimum $200k, that's what I plan my budget around. Not 1.2 million dollars, because logic dictates that amount is not consistent and guaranteed. The 200k is consistent and unwavering, generally speaking. So what do I do?
Buy a home: I look in a price range that's reasonable and results in a monthly mortgage payment that is not excessive and can be covered using my minimum take home.
Buy a car: I look in a price range that's reasonable and results in a monthly car payment (if any, or I could just pay it off) that is not excessive and can be covered using my minimum take home.
Buy food: I determine how much I need to buy to feed myself and/or my family every month. I determine what percentage of my minimum take home that entails. I identify what is optional vs. required expenses (i.e. going to McDonalds instead of grilling the burgers and fries at home for a fraction of the price).
Buy gas: I determine how much it costs to fill up my car(s), how frequently fillups are required, based on my minimum take home. I then see if there are opportunities to minimize my travel/mileage, change my driving habits, get maintenance done for gas mileage efficiency, or even consider getting a more fuel-efficient car (not necessarily a hybrid, but also not a gas guzzler).
Do you see the common theme there? It's as simple as A-B-C:
A: Assess your debt load based on your minimum (not maximum) take home income, either on an annual or monthly basis.
B: Budget according to what you need, and only what you need, unless your minimum take home allows a little extra to buy what you want. Make sure your needs are met before you buy the wants.
C: Consumption should be reviewed, and adjusted as needed to cut costs. Consumption should be based on your minimum take home - the money you know you will get every pay period regardless of economy, performance or anything else. Do your budget based on what is consistent, not what is variable. Any overage should be put away for a rainy day.
In any given month my bonus/commission/whatever might be $500. It might be $5million. Point is, if I do my budget properly, that extra money is just that...extra money, not critical to my lifestyle, and therefore, not a crutch.
$200k/year is MORE THAN SUFFICIENT to live off of. It's not hard.
When you do your budgeting (which people don't do, and that's the problem), you take into account how much money you can count on receiving on a recurrent basis with minimal margin for deviation.
So using your example, if I know I will always take home at minimum $200k, that's what I plan my budget around. Not 1.2 million dollars, because logic dictates that amount is not consistent and guaranteed. The 200k is consistent and unwavering, generally speaking. So what do I do?
Buy a home: I look in a price range that's reasonable and results in a monthly mortgage payment that is not excessive and can be covered using my minimum take home.
Buy a car: I look in a price range that's reasonable and results in a monthly car payment (if any, or I could just pay it off) that is not excessive and can be covered using my minimum take home.
Buy food: I determine how much I need to buy to feed myself and/or my family every month. I determine what percentage of my minimum take home that entails. I identify what is optional vs. required expenses (i.e. going to McDonalds instead of grilling the burgers and fries at home for a fraction of the price).
Buy gas: I determine how much it costs to fill up my car(s), how frequently fillups are required, based on my minimum take home. I then see if there are opportunities to minimize my travel/mileage, change my driving habits, get maintenance done for gas mileage efficiency, or even consider getting a more fuel-efficient car (not necessarily a hybrid, but also not a gas guzzler).
Do you see the common theme there? It's as simple as A-B-C:
A: Assess your debt load based on your minimum (not maximum) take home income, either on an annual or monthly basis.
B: Budget according to what you need, and only what you need, unless your minimum take home allows a little extra to buy what you want. Make sure your needs are met before you buy the wants.
C: Consumption should be reviewed, and adjusted as needed to cut costs. Consumption should be based on your minimum take home - the money you know you will get every pay period regardless of economy, performance or anything else. Do your budget based on what is consistent, not what is variable. Any overage should be put away for a rainy day.
In any given month my bonus/commission/whatever might be $500. It might be $5million. Point is, if I do my budget properly, that extra money is just that...extra money, not critical to my lifestyle, and therefore, not a crutch.
I don't see a problem with people being able to spend what they earn and buying what they want if they earn the money. Your saying that people should budget on what they need - but what is a need? Do you need cable tv and 3 pay channels? Probably not. Do you need a 3-bedroom house when you have no kids? Nope. Do you need organic groceries or go out to eat 3 times a week? Definitely not. There are very few items in the world that is a need. Majority falls under the "want" category.
If you earn your compensation, regardless of whether it is base pay of bonus, people are entitled to spend what they want with it. I don't know if you work in finance/banking, but it is a industry where bonus pay is a big part of your compensation. Don't get fooled by what you read in the papers, the execs and senior folks with that million dollar bonuses only make up a small % of the company. There are plenty of people that make no bonus or as little as 5% of base. People get into this field with this understanding, and most of the time it's the only reason why they choose this profession. I can guarantee you nobody was complaining a few years back when people were making millions hand over fist because of these same bankers that they blame now.
If you want living within your means, then everyone will live in a small house with a inexpensive car, cooking basic dishes at home everyday and shopping for clothes when the old ones are no longer wearable. Is that how you live? I doubt it. You bought a 65" DLP TV with your base salary because that is what you earn and budget. But if you received a $20K bonus every year, would you really have saved every penny and keep saying your base until you had enough money to buy the TV? No - you would take your bonus and buy it right away, maybe even splurge on a plasma instead of a DLP. Not because it's within your means, but because you earned it all year and entitled to splurge on something for yourself.
As for the person in the article, his "commission" helped him buy a house and a big screen tv. He might've never been able to afford the house without his commission checks, so I see nothing wrong with his decisions. I'm sure with his base, he is able to cover the mortgage - but his total comp is what helped him. Now if he forecloses and winds up filing for bankruptcy, then I agree with you 100% that it's his fault for not managing his money better.
Revelated and I are two components of a rare breed in our nation nowadays---the minimalists. We micro-manage our budgets to always ensure that we have more than enough left over for a "rainy day," even if it means forgoing some luxury items we'd like to have in our possession in order to defer that money for the "what if" that often does tend to arise down the road. I'm tiring of hearing all of these sob stories from people who trapped themselves in adjustable-rate sub-prime mortgages with no down payment and are now at risk of homelessness. If you and your children end up on the street, then it serves you right for being so financially illiterate. There's absolutely NO reason why those of us who DO live within our means ought to be "expected" to fork over our hard-earned dollars in order to "bail you out."
I live in an area with a median household income far below both the state and national averages, yet with the number of people here building McMansions, the proliferation of upscale gated townhouse communities around every corner, and the high proportion of luxury SUVs and sedans one would think we lived in an affluent suburb of a major city. People are quite literally in debt up to their eyeballs here. I work in retail sales, and the number of customers whom I assist who need to whip out credit card after credit card in order to find one that still has a balance available on it (or better yet those who put 1/3 of the balance on three different cards) is mind-boggling. I almost want to tell the customer "I'm not selling this to you because you're obviously NOT capable of living within your means."
I have no sympathy for most who are "struggling" in our current recession because most of the loudest whiners are those who are merely being served with a reality check---the fact that if you're making $40,000 annually and are living off of a daily Starbuck's latte and dining out every evening then it is your OWN FAULT if you're struggling to pay your winter heating bills. This impending depression is a Godsend in disguise. All of these people living far beyond their means will have to come back down to Earth. I earn under $20,000 annually, and somehow I manage to make ends meat. Is it easy? No. However I just truck along knowing that someday after graduate school things will improve.
I don't see a problem with people being able to spend what they earn and buying what they want if they earn the money. Your saying that people should budget on what they need - but what is a need? Do you need cable tv and 3 pay channels? Probably not. Do you need a 3-bedroom house when you have no kids? Nope. Do you need organic groceries or go out to eat 3 times a week? Definitely not. There are very few items in the world that is a need. Majority falls under the "want" category.
If you earn your compensation, regardless of whether it is base pay of bonus, people are entitled to spend what they want with it. I don't know if you work in finance/banking, but it is a industry where bonus pay is a big part of your compensation. Don't get fooled by what you read in the papers, the execs and senior folks with that million dollar bonuses only make up a small % of the company. There are plenty of people that make no bonus or as little as 5% of base. People get into this field with this understanding, and most of the time it's the only reason why they choose this profession. I can guarantee you nobody was complaining a few years back when people were making millions hand over fist because of these same bankers that they blame now.
If you want living within your means, then everyone will live in a small house with a inexpensive car, cooking basic dishes at home everyday and shopping for clothes when the old ones are no longer wearable. Is that how you live? I doubt it. You bought a 65" DLP TV with your base salary because that is what you earn and budget. But if you received a $20K bonus every year, would you really have saved every penny and keep saying your base until you had enough money to buy the TV? No - you would take your bonus and buy it right away, maybe even splurge on a plasma instead of a DLP. Not because it's within your means, but because you earned it all year and entitled to splurge on something for yourself.
As for the person in the article, his "commission" helped him buy a house and a big screen tv. He might've never been able to afford the house without his commission checks, so I see nothing wrong with his decisions. I'm sure with his base, he is able to cover the mortgage - but his total comp is what helped him. Now if he forecloses and winds up filing for bankruptcy, then I agree with you 100% that it's his fault for not managing his money better.
You didn't bother reading the article did you?
He was not able to afford the house on his base salary. That's why he says he's "struggling" now. Clearly he has expenses that now exceed his base salary, meaning he was not living within his means, and was throwing money away on goodies instead of putting money away for a rainy day. That's his fault.
If people want to buy nice things, that's fine...within your means and within the scope of what you truly make - your base salary, nothing more. If you took $100k/year and took care of all expenses, and end up with a bonus of $10k, that bonus should go in the bank about 4-6 times over before you start splurging. That's equivalent to roughly 5 or so months of regular pay, in that example. If you lost your job right after you did that, and you found yourself "struggling" the first month out the gate, you overextended yourself. When you plan such a purchase, you need to ask yourself: If I didn't have my bonus, could I still afford this and survive comfortably? If the answer is no, don't buy it!
In this guy's case, he was gambling with his life...and lost. All I'm saying is, people need to get smart and stop gambling with their money. Plan around the money you make consistently, not the money that's not guaranteed. Why is that hard to understand?
Again, even for you minimalists, could YOU not struggle if your salary was cut in half??? It has nothing to do with how much they make, what they bought, etc. and everything to do with losing 1/2 of your income? Could someone making 30K suddenly live off 15K? Doubt it.
Again, even for you minimalists, could YOU not struggle if your salary was cut in half??? It has nothing to do with how much they make, what they bought, etc. and everything to do with losing 1/2 of your income? Could someone making 30K suddenly live off 15K? Doubt it.
Yes, I could live. However, I would have to adjust my lifestyle. That's common sense.
Again, even for you minimalists, could YOU not struggle if your salary was cut in half??? It has nothing to do with how much they make, what they bought, etc. and everything to do with losing 1/2 of your income? Could someone making 30K suddenly live off 15K? Doubt it.
You could if you didn't maximize your spending to match your growing salary. I'm likely going to be earning a starting salary in my chosen profession of $42,000 in a rather expensive metropolitan market. I'll rent a cheap 1-bedroom apartment, continue driving my 1999 Ford sedan, and clip coupons when grocery shopping. I have the potential to earn approximately a $10,000 raise after my first year of successful employment. What will change? I'll still clip coupons, live in my 1-bedroom apartment, and, barring any unforeseen circumstances, be driving my Ford. Much of that extra $10,000 will go towards a "rainy day" account (i.e. a hefty down payment on a new car when my sedan finally goes kaput!)
I'd eventually earn nearly $100,000 in this career path, and I'm not likely to have a family of my own (by choice may I add, as I'm tiring of people having children they know they can't afford and then whining about "struggling"). What will change? I'd still live in the same apartment. I'd have a new car by then, but more than likely it would be a Focus or Corolla, not the Audi or BMW that my peers would be driving to show off. I'd still clip coupons and look for sales. My one "luxury item" I'd prefer to have someday would be a hot tub, as my back is often in pain from extreme stress.
In this sense if my salary were to be slashed from $100,000 to $50,000, then yes, I COULD conceivably still live off of that income. It's time to start telling people to stop being so darn materialistic, selfish, and spoiled. Did the subject of this article NEED a McMansion? Did he NEED the high-end vehicle he likely drove? Did he NEED the large-screen television? No. Those were all "wants." He could have lived in a condo, driven a Ford, and purchased a medium-range television. There's always excesses to cut back upon. If I'm still "struggling" on $42,000 annually, then there's always other means for me to cut back. I'll stick to a basic cell phone plan and drop our residential land line. I'll stop internet service and go to the public library. I'll drop cable television and read more frequently for entertainment. I won't dine out every Friday night with friends, preferring instead to dine in.
So many I know whine, whine, WHINE about this and that when our standard of living as Americans is already so much HIGHER than most other nations. Instead of whining that you can only afford an Audi A6 instead of an Audi A8 or that you can only purchase a flip-phone instead of a razor-phone or an iPhone, why not be grateful for what you do have?
By the way, thrifty shoppers can still look and feel good about themselves. On my first-ever visit to the King of Prussia Mall in suburban Philadelphia I went shopping at Armani Exchange and purchased a tight-fitting shirt that I wear running in the warmer months. I receive many compliments on how it looks on me. Best of all? It cost me $15. I wonder how many suckers went to Abercrombie & Fitch at one of the malls in my area and spent $45 on something similar?
Probably a case of buying too big a house, its usually someones largest payment each month. Old rule of thumb was to target 2.5x your income as a price for a home, maybe 3x top. But housing prices got out of hand, that a couple with take home of 80k would almost have to spend more than 250k on the house...let alone on the East coast or California. And lenders were offering much more than that...easy credit.
Buying a house by including your 'bonus' in cost estimate is foolish. As earlier post said bonuses are optional, and different than commissions which usually one can calculate.
Again, even for you minimalists, could YOU not struggle if your salary was cut in half??? It has nothing to do with how much they make, what they bought, etc. and everything to do with losing 1/2 of your income? Could someone making 30K suddenly live off 15K? Doubt it.
You're missing the point. He did not lose half of his "salary". His salary actually increased by $20k a year.
You're being blinded to the same issue as the guy in the article; you're lumping salary and bonus/commission/whatever into one big package that you're budgeting around because you think it's all "your salary". It's not. His salary is the $100K. The bonus/commission/whatever has nothing to do with salary. Don't let the economy confuse for you the terms "salary" and "income". They're not the same thing.
"Salary" is a stated rate of pay provided to an employee on a recurrent basis, based on job function and/or merit. Note the word recurrent, meaning that once you start making a salary, it generally only goes up. In this economy, some are going down, but that's the exception and not the rule.
"Income" is the total amount of whatever: cash, checks, stocks, or other financial incentive that you receive, including salary pay. In this guy's case his income did decrease, but his salary actually increased by a significant amount. In this economy he should be jumping for joy. That's assuming he was budgeting himself better.
It's simple math, people...come on.
Salary is recurrent and generally goes up: stable, consistent, reliable...plan around it.
Income may fluctuate based on factors both in and out of your control: variable, unreliable, unstable, inconsistent...note it, but do not plan your life around it. Plan around the minimum amount that your income could be at any given time, which should exactly or at least closely equal your salary. The only exception to that would be those that are 100% commission. In those cases, yes...I would see a $60k drop in commission as a significant pain...but the guy in the article is not commission only.
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