Wednesday, December 10, 2008

Always Something

Long ago, before we all got older and there was a bigger chance for hard feelings, it was not all that uncommon for my group of friends to discuss salaries. Frequently during those discussions someone would make some sort of statement like 'If only I made X a year, then these money problems wouldn't be a concern anymore'. I'm sure everyone has said or thought something similar at one point or another.

And over time, I've become completely convinced that this is pretty much not the case. Except in really abnormal circumstances, there is always something you can't afford that you'd like to, consumption choices that have to be made, another more expensive/better version of something you used to be perfectly happy with, etc.

Unless you succeed where the bulk of the world fails and eventually reach a level where you can consistently live within or below your means, or are lucky/talented enough to become ridiculously wealthy, there will always something to spend the money on.

With that in mind, I was amused by this quote when I read "Profile in Panic":

[...]“Let’s take a guy who makes $5 million a year,” the banker suggests. “He’s paid two and a half million dollars of that in equity compensation”—Lehman Brothers stock. Plus he gets to buy that stock at a 30 percent discount, so he’s really getting $3.25 million in stock. “Plus appreciation? Over five years? That’s $25 to $30 million!

“Then let’s say a guy in that position borrowed $5 million against the $30 million in stock. It would seem a very conservative loan, right? Until the $30 million goes down to zero, which is what happened. So now he’s negative $5 million.”

True, that same Lehman banker got the other half of his compensation in cash. The banker nods. “For five years, he made two and a half million dollars a year in cash. So that’s twelve and a half million dollars. But of course he’s had to pay more or less 50 percent in taxes, so divide that and he’s got six and a quarter million. He’s probably spent that money over those five years—$1 million a year, it’s not so hard to do, right? So he has nothing—and he has to repay that $5 million loan.”

The key point is the claim that spending $1 million a year is not hard. On the surface of course, this is ludicrous. But in some ways I can understand it, at least in the context of the never ending Hedonic Treadmill especially in a position like Wall Street investment banker where there is pressure to live extravagantly.

There's always something to spend your money on.

[ Note that I am not trying to claim that the pressures of trying to balance a budget on 50k versus 25k are the same. This is all assuming we are talking about money over and above whatever is necessary to maintain some minimum standard of living. From there people almost always find a way to use up that discretionary income, and I certainly would not exempt myself from that generalization. ]

3 comments:

Brenden said...

Didn't they learn anything from Brewster's Millions? It is not easy!

Steve Eck said...

Of course that was a million a day, not a million a year. :)

Shawn said...

Great post... but why does the bulk of the world fail to live within or below thier means? Is it rampent consumerism, an economy built on credit, or jobs that simply don't pay enough?