Treat bonuses as variable money, not income you rely on

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 13:11

   advice to someone who's receiving a bonus and maybe doesn't know what to do with that money? You're right that most people do not think of it as a bonus, like by the definition of that word, they think of it as deferred compensation. They are owed that money. It is part of their compensation. This happened to get all of it in December. I remember many years ago, I was speaking with a guy who was at the time, I think he was the head of HR at Google. It was maybe 10 or 15 years ago. And he said the way that they think about it at Google is people live off their salary, play with their bonus and retire on their stock. This is like a rough framework for how to do it. And I think that there's actually some wisdom in there that if you are counting on your bonus to live off of, by definition, it's not a bonus. That's just part of your deferred

2. 13:49

   salary, but it's probably not. So many companies, bank or people in finance realize this very starkly. When you have a year in 2008, your bonus falls 80% or whatever it might be, or maybe it was zero. And if you are counting on that bonus to live off of, that's trouble. And so I don't know if I have much advice other than everything in finance is about expectations. And if you expect your bonus, it's not a bonus, and you're almost certainly going to be disappointed someday.

3. 14:16

   And so any kind of non-standard windfall that I've had in my career, I've invested. And I think the reason that I invested is because I know that if I spend this, it's It's going to become part of my expectations that I also need to spend this next month and the month after and the month after. And it's not going to be there. And you can make a ton of money and be disappointed if you expect all of it.

4. 14:37

   If the gap between your expectations and your circumstances breaks, it doesn't matter how much money you make, you're going to become disappointed. And I think it is the most fraught and the most troublesome when your bonus becomes your expectation. So how much of that money do you think, or just in terms of spending, I know you're writing a book about this, should be the money that we play with. And I love that term you said, bonuses of playing with. But you said, when you had a big windfall, you've invested it.

5. 15:04

   How do you think about play money? To what extent should we be spending on frivolous things? I will paraphrase Scott Galloway, who I think has said this many times, where I'm paraphrasing him, I don't want to put words in his mouth, but he's like, once he hit his number, he spent money frivolously and gave a lot of money away. He said it much more eloquently than that. But I think what's important to that is that he waited until he hit his number. How I've always thought about it for my whole career is always having this calculation I have in my head of if I get laid off or if everything collapses from here, how long can I support this current lifestyle that I have if things get real nasty? That's always been really important to me. And for a lot of people, that answer is zero. That if they got laid off next month, they'd be in deep shit. And I think

6. 15:48

   that's like bonus season is a good time to reevaluate that. Because if you are in that situation, then the answer is how much of your bonus should you play with? The answer is probably none of it. You should probably save it. That's always been really important to me because every single one of you, me, you, everyone listening to this at some point in their career will come across a big unexpected problem in their career, in their health, in their marriage, in the economy, whatever it might be. And your ability to endure that is going to be completely based off your ability to do it financially at least is completely based off of your ability to defer your previous compensation and so if you don't have any of that cushion uh and and that calculation of if things get bad how long can i last if your answer to that question is not good then you're the answer

7. 16:30

   to what you should do with your bonus is probably save it absolutely and also it seems like building in that habit is a really important thing like just the habit of knowing that every year when i get this amount of money i'm just going to put it away i'm going to put it in the stock market it's also true that you can overdose on that mentality and you know if you talk to a lot of financial advisors they will tell you that one of the biggest problems that they face with clients is you have clients who have saved up a ton of money retirement. They've done, they, they won, they won the game. They saved up millions of dollars for retirement and now they're 70 years old and they cannot spend it. They can't even spend a very reasonable amount of it because saving money and watching their net worth go up became core to

8. 17:07

   their identity and they cannot break away from that. That's, that's a problem too. And so if you can use money as a tool to give yourself independence and to live a great life and spend money on things that make you happy on you and your family and friends, but never let it become part of your identity so much that it is controlling you more than you use it as a tool.