The story of Rick Fuscone has got to be one of the most amazing falls from grace in personal finance.
A graduate of both Dartmouth and the University of Chicago, Rick went on to have a storied career in international finance.
Over the course of 21 years, he rose to become the Global Head of Fixed Income at Merrill Lynch, accumulating a multi-million fortune along the way and retiring in his 40s to become a philanthropist.
You could pretty much call him the pioneer of FIRE!
And then, less than a decade later, everything fell apart.
The global financial crisis hit Rick while he was both over-levered and illiquid. Just two years later, Fuscone filed for a spectacular bankruptcy just to keep a roof over his head.
To give credit where it’s due, he at least managed to get (and stay) rich for a period of time, however short.
Not so much for many of the people I’ve come across in my decade in investment banking, law, and consulting.
Despite multi-decade careers and cumulative earnings well into seven or eight figures, many folks are barely past first base when it comes to personal finance.
Once, over a drink at a fancy European ski resort, an MD-level banker in his 40s confided that he was still on an interest-only mortgage, having failed to make a dent in the principal for over 10 years.
Another former colleague had to yank his kids out of private school shortly after getting the chop (“what emergency fund?”)
Many others avoided going over the cliff yet had very little to show for years and decades of grueling effort in highly paid professions, continuing to work well into their 50s and 60s.
Which is all a real pity, because for the vast majority of people out there, a well-remunerated 9-5 career remains the absolute best way to get rich.
If that’s the path you are planning to follow, here are six things that can torpedo your quest for getting rich:
#1: You Aren’t Making THAT Much Money
A $300k or even a $500k salary may sound punchy, but in reality, it’s far from being an obscene amount of money that will make you rich.
This is especially true in higher-tax locations like some US states, Canada, or the UK.
Take California as an example.
Someone on a $100k salary makes about $71k after tax. In contrast, someone on a $300k salary will pull in $186k after tax.
The difference is $110k. Is that a lot of money? Sure.
But… it will take you about 20 years to compound those savings into a $5m nest egg. A great outcome but not exactly an instant home run, now that you are in your mid-40s or early 50s.
In the meantime, you’ve got to keep living on the equivalent of a $100k salary, which isn’t easy once you’ve got the bling in your eye.
In addition, few people start out at $300k. You’ve got to work your way up there over a number of years before you can really juice your investment account.
Will you end up well off? Absolutely.
Will you become obscenely rich, with a Ferrari, a mansion, and a private jet? Absolutely not. Sorry.
#2: You Spend Before You Make
Another great way to sabotage your financial future is spending like you are making $300k (or more) BEFORE you get there.
It’s an easy trap to fall into, especially as you watch your more senior colleagues rake it in.
“I’ll make it back”, you whisper to yourself as you put yet another luxury weekend getaway on your credit card.
Except many people never do.
Not everyone succeeds at climbing the career ladder. And those who do hit the proverbial bonus jackpot may realize that much of their comp is deferred, or awarded in worthless stock (Lehman Brothers, anyone)?
For folks in tech, the payoff is typically at IPO. It can work spectacularly well, but it can also backfire in an equally spectacular manner, leaving you with nothing to show for years of effort.
#3: Your Spouse Doesn’t Work
Here in London, I do know some couples where both husband and wife hold down high earning jobs as lawyers, bankers, or private equity professionals.
Usually, that means outsourcing pretty much all of household and childcare chores. Setups with three nannies (day, evening, weekend) + housekeepers is how they solve the inevitable time crunch.
Most people, however, end up making the decision that one of the spouses will take a step back professionally to allow the other one to pull those 80+ hour weeks with a highly unpredictable schedule.
From a lifestyle perspective, that’s great. For full disclosure, it’s a direction my wife and I are heading in as well.
But make no mistake, it’s a decision that bites hard financially.
Not only it’s punitive from a tax perspective, but there’s also a cognitive bias working against you here.
You think you are making $400k a year, but in reality, you are making $200k, and so does your spouse. And so, you just can’t afford to spend like someone on a $400k salary.
#4: You Keep Moving Around
In many industries, the way to ascend the career ladder is to move around geographically.
In some cases, the company will designate you as one of the future leaders and will want you to get experience across a number of divisions and geographies.
And in some other situations, you may want to be opportunistic. Why wait three years for a promotion in NYC if there’s an open slot right now in Mexico City?
This is all fine and dandy as long as you are mindful of the financial drawbacks.
One is that it further reduces the likelihood that your spouse will be able to work.
Yet another is that it reduces the government social security you will get when you retire. For example, if I was to leave the UK before working here for 10 years, I will get absolute zilch from the UK government when I retire.
It doesn’t seem like much, but assuming a 3% SWR, even a $100/week payment has a headline value of $173k. Nothing to sneer at.
But most importantly, moving around may preclude your ability to build home equity.
You either end up renting for big chunks of your life, or you end up selling and buying houses so often that transaction costs decimate any equity you’ve built up.
In other words, tread carefully.
#5: You Don’t Make The Effort To Manage Your Money
Believe it or not, but well-paid professionals can be really bad at managing their money.
For some, it’s a function of the role – you can hardly expect technologists, consultants, or lawyers to be 100% fluent in personal finance matters (although they are certainly intelligent enough to learn).
That being said, the finance professions have zero excuse here – and yet I always found it striking just how bad they can be at personal finance.
People who advise their clients on multi-billion M&A deals often don’t take the time to understand how easy it is to become a pension millionaire, get free money in their Lifetime ISAs, or even minimize fees on their investments.
And that’s before we get into some of the more bespoke areas of personal finance.
Around Covid, the value of my vested shares had dropped significantly below the award price.
As such, I made the obvious decision to sell my shares, generate a capital loss in my taxable accounts, and re-purchase the shares in my ISA, waiting for the inevitable recovery.
When I outlined the manoeuvre to a few of my colleagues, they all looked at me as if they saw a unicorn.
They were all “too busy” to do the same – and all ended up with six-figure tax liabilities once the shares rallied in late 2020.
#6: You Only Have One Source Of Income
Given the long hours involved, you will rarely find lawyers or consultants building up side income streams. There’s just not enough time in the day.
In addition, many if not most highly paid jobs come with an explicit restriction on your ability to make money on the side.
You are expected to declare all outside business activities to your manager and get written permission to engage in any work outside your day job.
Ditto for private investments, whether it’s real estate, venture capital investments, or passive business stakes.
Now, it’s possible to get approval (as I do for every single property investment).
But It’s a process that’s fraught with career risk (“why are you doing all of this on the side?”) and designed to discourage you from spending your waking hours on anything but company business.
And that, my friends, is one of the biggest reasons many high earners will never get rich.
A well paid 9-5 job can and will allow you to accumulate a decent chunk of initial capital.
But the ONLY WAY you will ever get rich is to re-deploy that capital into attractive, growing businesses where you have proper skin in the game and full equity upside.
The only reason I am able to entertain the idea of early retirement at 40 is the fact that my wife and I have own a seven-figure property portfolio and continue buying about $1m of real estate a year.
Was the process of accumulating that portfolio alongside a full-time banking gig painful at times? Sure.
But you know what’s even more painful? Being a 40-year-old banker and realizing that you’ve got another 10+ long years ahead of you before being able to hang up the gloves.
Of course, real estate is not the only option. But whatever you do, be careful:
You don’t want to get so caught up in your high earning job that it leaves your salary as the only source of income.
As always, thank you for reading – and good luck!
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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Preach!
Hi Damien – another great post…..as always thought provoking and insightful. One question: you say “You think you are making $400k a year, but in reality, you are making $200k, and so does your spouse. And so, you just can’t afford to spend like someone on a $400k salary”. However, don’t 2 earners of $200k take home more than 1 earner on $400k because each has tax allowances and can use lower thresholds, etc? So isn’t the danger more with the person on 1 salary of $400k?
You’re spot on – it is. This is what I was referring to when I said it’s punitive from a tax perspective.
Grossly unfair income isn’t taxed at a family level, penalizing those with stay-at-home spouses.
Plenty of ways to even it up with tax planning. (Having done this in uk, france and Oz tax jurisdictions so far)
I think you can play around on the edges, but my issue is more of a philosophical one.
There shouldn’t be a difference between one spouse making $400k and each spouse making $200k.
And in an ideal world, there shouldn’t be a difference between someone who makes $4m over 10 years and someone who makes $4m over 20 years. Same total income, except person A chooses to work hard now and relax later while person B spreads it out.
No no no to family taxation. It discourages women from building their careers which puts women in an even more disvantageous position if divorce happens because they are lower earners than they would be otherwise. It also assumes you have a nuclear family, but of course most families are a lot more complicated than that with many people paying child support for their own children from a first marriage while living with step children and maybe their own children.
I want to be taxed in exactly the same way as anyone else irrespective of my marital status, thank you.
Look at the terrible situation many older women are in because they relied on their husband for their NI contributions – and that’s without the complications of divorce!
So just NO!!
All fair points and I agree with you. You don’t want to end up with a counter-effective solution.
But don’t you think it’s unfair to a family where the wife makes $400k and the husband stays home to pay more in tax than a family where both work and make $200k each?
Agree with you that it disadvantages those in non-nuclear families or with unique setups, but would hope that can be solved with a tax credit system of sorts.
Interesting to hear bankeronfire that you hold your properties each in a separate company (OpCo), with a Holdco above. More admin and returns but I suppose it’s greater visibility of the profitability of each one and allows money to be passed up and down. Still not clear why it’s not easier to just hold all your properties in one limited company?
A few reasons:
– Bank financing is usually secured against the corporation that owns the underlying asset, not the asset itself. As such, you want each loan to only be secured by one property vs. all the properties you own (cross-collateralization). Makes things easier if you were ever to default
– If a tenant sues you, the court can freeze all of the corporation’s assets for the duration of the proceedings. Once again, don’t want more than one property impacted
– Can divi cash up and down the corporations tax-free
There are many jobs requiring extensive disclosures, but no actual means of validating the responses from staff. Owning property is not a matter of public record and although income from side hustles need to be declared on the tax return, HMRC don’t share it with employers. I would say keeping quiet and being discreet is still a prudent approach.
True. I gave this some thought and came to the conclusion I may want to hold property in a limited company. While property ownership isn’t a matter for public record I’m sure you know being a company director is.
I opted to take the disclosure route and seek permission from my employer to set up a company for this purpose. I now have the written permission so as far as I see don’t need to gain this again so long as any company I become a company of can broadly be described as being involved in property.
Indeed.
The challenge in my situation is that I’ve set up a full structure (HoldCo at the top and OpCos below it that own one property each).
As such, I need to set up and declare a new OpCo for each property I buy, so roughly once a year. A bit of a hassle but all doable.
It all depends on how focused your employer is on compliance.
Banks are SUPREMELY attentive to any outside business activities, and can impose significant penalties (dock your bonus, or even fire you for cause leading to a loss of deferred equity)
As such, I’ve always gone for the full disclosure route.
Spot on as usual. I actually think in many cases making $200-300K can lull you into a fall sense of feeling rich. You can spend with ease, but after-taxes it still takes planning, hard work, and years of earning at this level to actually reach your financial goals.
Yeah, very true actually.
Can probably “relax” a little bit (but not too much) on $500k+
But very easy to dig yourself a deep hole on $200k without even realizing it!
Not just spending… can get a whole heap of debt (mortgage and otherwise)
I’ve always taken the view that I’ll buy stuff when I can afford it and whenever signing up for big expenses (eg school fees) I’ve made sure I already have the assets to cover future liabilities.
I’m also tight and don’t give a shit about driving a banger which is handy!
Good point. Nothing like signing up for a $2m mortgage while you’re making $400k and then trying to carry that mortgage on a $200k salary.
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I’m confused. Is Banker on Fire living and working in London, UK, and talking about UK tax affairs, but converting it to USD? Or is Banker on Fire American talking about american finances but living in London? I’m just confused when reading everything in dollars and yet the article talks about London, England, Government Pension etc. So I struggle to understand whether he’s talking about punative American taxation system or punative British taxation system. Why the dollars? (I assume the answer is the readership is American so it has greater appeal? but then they’re reading about a British banker, so surely that isn’t relatable?)
Yeah. I find this confusing as well. I suspect he’s using dollars just to make it easier for the bigger, US-based readers base? I’m speculating.
BTW – Damian, what would you recommend to people to read/study/research/do to up their personal finance game and get that sorted/optimised to the fullest?
Thanks. As usual great read.
Cheers Jon – see my response to Ollie above. Less of a reader-targeting exercise and more a reflection of my somewhat peculiar background.
As far as books, depends which “stage” you are at. Simple Path to Wealth is great, and also The Psychology of Money. This link has a few more favourites: https://bankeronfire.com/recommended-books
Ahh, great (and very valid) question.
So the story goes as follows: I grew up across the pond but moved to the UK for a career in investment banking about a decade ago. The long-term trajectory was always to go back at some point – have surprised myself by clocking 10 years here to be honest.
Hence the duality of earning in £ and dealing with the UK tax system, but thinking (and tracking my net worth) in $$ and making all my property investments outside the UK.
Hope this clears things up!
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Great post.. And well done on the thought of doing bed and ISA when stocks fell.. its counterintuitive, and no wonder others reacted the way they did. I believe though, this thinking comes from a real conviction in the long term game of investing.. The predominant view people have (at least those in my circle) about stocks and markets is short term.. more likely to spot a stock that has fallen 10% and must be bought today, but rarely would they talk about long term opportunities of rebalancing, bed-and-ISA etc.
Fully agree.
Sadly, the topic of taxation makes pretty much everyone’s eyes glaze over but there’s a lot of value to be created with some foresightful planning.
Monevator had a great series on defusing tax liabilities on shares by the way, very worth a read: https://monevator.com/an-example-of-defusing-capital-gains/
Well done, you made a fortune with leverage on real assets during the most convex tail end of an epic rates bull run. It reads as smug when the truth is mostly that you were lucky, and dishing it out as advice is foolish, because the next 10-15 years will not be like the last.
Don’t think that’s a fair comment unless you were intentionally looking to offend me (in which case you’ve succeeded).
I explicitly say it does NOT need to be real estate. The hard truth, however, is that most high earners will not get rich without having some skin in the game, whether it’s a property portfolio or a stake in their brother’s business.
Also, would encourage you to reconsider the thought that you can only make money in real estate during periods of cap rate compressions. Hundreds of years of evidence prove you wrong. It helps but it’s not a pre-requisite.
Finally, those who read this blog on the regular know that smug isn’t my style.
Lol this is me in a nutshell again. Are you stalking me or something?
This seems to be what you call HENRY as per Financial Samurai. High wage, high cost of living. Enjoying the good life, but got to work for it at the same time.
I think HENRY is different – a high earner who will be rich eventually (just not yet)
This is a story about high earners who will never get rich.
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Great Article!
#4 moving around really made my path herd. I moved 10 times in 10 years! moving is expensive and shakes you out of any good routines you had started. I had some great opportunities but it also wore on me.
-Cheers
Thanks Adam
And indeed. Always takes a while to settle into a new place, which is a drag on your personal productivity
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Regarding “the obvious decision to sell my shares, generate a capital loss in my taxable accounts, and re-purchase the shares in my ISA, waiting for the inevitable recovery.”, I’m not familiar with the ISA but was just wondering if there is a wash-sale rule of any kind in this scenario or it’s understood that one needs to wait the appropriate amount of time before re-purchasing the sold shares?
Excellent question. At the moment, there isn’t a tax trigger – the maneuver itself is called a “Bed and ISA”:
https://www.vanguardinvestor.co.uk/need-help/answer/whats-a-bed-and-isa-and-how-do-i-do-it