Wednesday, 21 August 2013

Watch out for those golden handcuffs

The golden handcuffs is an often used expression to describe a workplace that is pretty unpleasant but pays so well that you are actually tied to your job because you would not get paid close to enough anywhere else.  You are, in effect, trapped by how much you earn at that particular place of employment.

Investment banks are one of the classic examples of this but they are certainly not the only one.  In fact there are many industries where this applies.  Strangely enough it tends to apply closer to the top of the hierarchy where the pay is much better and the options for achieving equal pay elsewhere is virtually nil.

The golden handcuffs don't work if your expenditure doesn't rise with income

Another, almost cliché, expression is that expenditure rises with income.  Since I was quite young my parents (and my dad in particular) drilled it into me that you need to watch your expenses and not get ahead of yourself so it was with some surprise that I realised that I had fallen into this trap like a lot of other people.

I recently did a post on what my real 'non essential' expenditure was - that is, the expenditure I was not willing to give up each month.  I ran these numbers past my brother who is studying at university and he was truly shocked at how much money I spent each month.

If you think you have not fallen into this trap then think of this

  • How much money did you need to 'get by' when you were in university?  
  • How much did you save in your first year of work?
  • Have you been spending more in absolute terms as your income has gone up?
  • Do you eat at better restaurants?  Go on more frequent holidays? Spend more on these holidays?
  • How much do you spend on a night out and where do you go on a night out now?
The chances are, that you are able to justify an increase in your standard of living because your income has gone up.  This is not an absolutely bad thing and I am not saying that you need to live the life of a hermit (or that of a uni student for that matter) but you need to keep your expenditure in perspective!

The golden handcuffs don't work if your expenditure doesn't rise to exactly meet your income!  You are less likely to be chained to your job if you spend $5,000 on a holiday rather than $15,000 (by the way if you think I'm exaggerating on that last number - you should see what my investment banking friends spend on their holidays).  You are less likely to be chained if you buy a $500,000 house than a $2,000,000 house.  

All this seems rather obvious but most people don't stop and think about what they are committing themselves to when they commit to a certain lifestyle.

Employers,,,especially ones which employ the golden handcuffs...encourage this lifestyle

When I was at investment banking training in New York, one of the most well known academics in the finance world told us one very important thing...and it had nothing to do with the course he was teaching us.  He told us to be wary of buying the fast cars, expensive apartments, expensive suits and other trappings of wealth.  

He told us that this limited our choice.  It limited our choice about what we would do with our lives and our careers.  He said that when we thought about this we should not be burdened with financial commitments which would tie us to one job or one employer.  I didn't realise how profound his words were at the time.

Employers which use the golden handcuffs often encourage a certain lifestyle and behaviour.  They encourage expensive living and the high life.  The more you participated in this life the harder it was to go back to what you used to live and the more you needed the firm and the pay check.

Don't get sucked in.  Keep the golden handcuffs at the front of your mind!

Whether your workplace encourages it or whether you are just the type to spend more money if you have more money, always keep thinking of the golden handcuffs.  Never put yourself in a position where you have to stay in a particular job.  

Note that I'm not saying that obligations and commitments like mortgages are bad things - I have a mortgage myself.  I'm saying to make sure that everything is manageable.  To make sure that you are not stretched so tight that the thought of losing your job or having to move to a lower paying job makes you lose sleep.

Keep those golden handcuffs at the front of your mind when you're making decisions and re-evaluate what you do every so often to make sure you're not getting sucked in to a lifestyle that is unsustainable.

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