Short-Term Thinking Destroys Long-Term Wealth: Do A Cost-Benefit Analysis

Before making any big financial decision, always do a cost-benefit analysis. Focus on the costs because most people are too mesmerized by the benefits. Great marketing and perennial optimism can lead to great disappointment.

In the post, The Second Biggest Financial Mistake You Can Ever Make, I made the argument to never expect your income to always go up. If you do, you run the risk of buying things you cannot comfortably afford.

The expectation of always getting paid more, despite a bear market, is odd to me. When I worked in finance, even if we performed well, we sometimes were paid down if the overall firm was doing poorly.

If you always feel entitled to more, no matter the economic environment, this may be detrimental to your long-term wealth. With your back never against the wall, you won’t be motivated to find new ways to make money.

Let me share a passionate disagreement from a reader who is a lawyer. He believes employees should always get paid more, no matter the economic environment. It’s a great example about how two can see capitalism differently. I’ll also explain more about my decision long ago.

Believing In Always Deserving More

I’m not sure I’ve ever disagreed more with an article you’ve written than this one, in which you attack New York Times’ 1,100 unionized workers for requesting a reasonable pay raise as part of their legally protected collective bargaining rights, and seemingly encourage folks to voluntarily opt-out of contractual benefits their employers promised them.

You note that “More importantly, The New York Times stock price (NYT) is at a three-year low!” as if that has anything to do with properly paying a workforce for the labor they provide.

The NYT spent $150 million on a stock buyback on February 2, 2022 — if they had $150 million then, why do they lack funds now when it’s time to pay the employees? They’ve also paid 34 cents per share (or roughly $57 million) in dividends just this year. You’re telling me they can afford to buyback stock and pay an (increasing) dividend at a cost of over $200 million per year. But get to plead poverty when it’s time to pay the actual people doing the work? 

That $200 million+ spent on stock buybacks and dividends could have given every one of the 1,100 New York Times union employees $181,818! Why not cut the one-time, completely discretionary stock buyback to $100 million, and then spend the $50 million instead on raises over the next 5 year contract ($50 million=$45,454 per unionized NYT employee).

I’ll also add your analysis ignores the fact that the NYT’s workers’ wages were NOT increasing as the NYT saw its recent highwater marks in value/subscriptions, and haven’t been increasing with the recent inflation. They aren’t asking for a real pay raise — the future pay increases would help get them to where they would have been/should have been all along if NYT paid them properly/indexed wages to inflation.

Not Asking For MBA Tuition Reimbursement Is Dumb

Then there’s your confession that “After a couple rounds of layoffs in 2004, I dared not ask for my MBA tuition reimbursement one semester. Although it was a company benefit, to ask would have put my employment in jeopardy.”

Are you kidding me? You VOLUNTARILY gave up a contractually promised benefit from your employer and thought that was smart? I mean….that’s simply crazy to me.

You weren’t working for a small mom-and-pop shop — you were working for a global investment bank! Which presumably wanted you to get that MBA because it made you more valuable to market to clients/increase the bank’s returns!

The bank promised you that benefit, they had that amount built into their budget already. And I guarantee you when layoffs came around, they’re not looking retroactively at, “Well, Sam with his MBA cost us $12k more due to tuition reimbursement than Joe without his MBA, so even though that’s a sunk cost we already incurred and won’t matter at all going forward, Sam has to go.”

You gave an investment bank license and permission to commit wage theft (or, I suppose, tuition reimbursement theft) from you.

Take your contractually guaranteed benefits. Ask for your fair wage (particularly when the employer is a publicly held company that would otherwise just spend the money on useless share buybacks). Companies should return shareholder value, but they also NEED to pay their workers fairly.

The War Between Management And Employees

I can feel the fire! The reader makes good business points.

During times of difficulty, there is greater friction between executives and employees.

Executives want their share price to go up because they work for shareholders. If the share price outperforms, executives get paid more because most of their compensation is in stock.

Employees, on the other hand, want as much compensation and benefits as possible. They may be paid partially in stock, but it is likely a minority of their overall compensation.

It’s easier to argue for employees when you’re not the one paying the employees. It’s kind of like being pro tax hikes for the greater good, so long as you don’t have to pay more taxes yourself.

Getting paid a “fair wage” is subjective. But let me shed light on the second half of the reader’s comment. It’s cogent for the cost-benefit analysis topic.

In a nutshell, I believe not filing for $12,500 in tuition reimbursement helped me earn at least $1 million more.

Running The Cost-Benefit Analysis On Tuition Reimbursement

In 2002, I applied to UC Berkeley’s part-time MBA program because I needed a backup plan in case I was laid off. I had just joined Credit Suisse in 2001 with a pay raise and a promotion.

Previously, I was at Goldman Sachs in New York City for two years. Based on a lucky phone call, I overheard I wasn’t going to be offered a third-year analyst position. So I decided to jump ship.

Luckily, I escaped because, within the next couple of years, 80% of my analyst classmates who were offered third-year analyst roles got let go.

The 2000 dotcom bomb caused a great hangover in equities. From 2000 – 2009 the S&P 500 offered negative returns. It was the lost decade for stocks.

As a finance employee, you are aware of your lack of job security. Boom-bust cycles are more prominent in hyper-competitive industries. As a result, you try to work as hard as possible and not piss people off.

Short-Term Sacrifices For Long-Term Benefits

As someone who likes to create contingency plans, going to business school part-time was a good hedge.

Credit Suisse had a tuition reimbursement program that was offered to all frontline employees. In exchange for doing your job to 100% satisfaction and promising to work for three years after graduation, Credit Suisse would reimburse all tuition.

I didn’t want to go back to school, but I feared for my future. I had already felt lucky to have escaped the firing squad by leaving New York. People seldom get lucky twice.

If Credit Suisse laid me off, at least I could convert to a full-time MBA student. If Credit Suisse didn’t lay me off, then I could still earn my compensation and get the ~$25,000 a year in tuition paid for.

Based on my cost-benefit analysis, going to business school part-time sounded like a win! Then things got dicey.

Reality Is Often Different From What You Imagine

It’s one thing to come up with a contingency plan if something bad happens. It’s another thing to stay calm and collected while that bad event is happening.

When I started my MBA program in 2003, Credit Suisse’s stock price had fallen from a high of $51 in 2001 to $17. I was getting pressure from my manager to work harder because he was getting pressure from his bosses to boost revenue.

The fact that I was attending business school part-time was the exact opposite of what he wanted me to do. Getting my MBA part-time required 15-20 hours a week of classes and group work.

Ideally, my boss would have wanted in the office until 9 pm every evening. If I told him I had to leave at 6 pm to do a group project, he wasn’t happy. I could have lied, but I didn’t have kids, a wife, or health issues to use as an excuse to leave at the time.

During bad times, everybody is under more pressure. In an industry where feeling constant pressure is normal, going to business school while my company’s stock was cratering put me in a bind.

The Fear Kicks In

There is a common employment belief in finance called LIFO, or Last In, First Out. In other words, if you are one of the last people to get hired, you tend to be one of the first to get fired. Since I just joined in July 2001, I felt I was most at risk of getting let go.

After submitting three semesters’ worth of tuition reimbursements totaling ~$38,000 in 2003 and 2004, I felt like I had gotten away with something. During this period, my firm went through two rounds of layoffs. Yet I survived, got further educated, and had it all paid for.

Then I was hinted that more layoffs were on the way. Further, never once did my manager show enthusiasm that I was getting my MBA. I had to run a new cost-benefit analysis due to a change in variables.

Deciding To Take A Pause In Asking

When it was time to file the paperwork for another semester of tuition reimbursement, I decided not to. My manager seemed extremely stressed. Giving him more paperwork to fill out that would lower the team’s profit & loss seemed like a career-limiting move.

Further, it was the second half of 2004. Bonuses are always determined in the second half of the year. Unless you’re great at managing up, managers seldom remember what you did in the first half of the year.

Sure, I would love to have received another $12,500. The tuition reimbursement was part of the company’s benefits. But it just didn’t feel right at the time. I was making enough where I could easily afford paying full tuition.

Again, I was fearful of getting let go. It didn’t seem prudent to give my manager more ammunition for firing me. At the very least, I thought maybe my bonus would be better-than-expected.

The “Gamble” Paid Off

In the end, I survived the lost decade. Not only did I not get let go after the dotcom bubble burst, I ended up getting promoted to Vice President two years after graduating from business school. With the promotion came a pay raise well over the $12,500 I had lost.

Surviving the 2008 global financial crisis was a win. During that two-year period, there were over 10 rounds of layoffs. In fact, I actually got promoted to Executive Director in 2008, which came with another base salary raise.

Then in 2012, after 11 years of service, my manager was kind enough to lay me off with a severance package that paid for five years of normal living expenses.

So yes, I had the right to my $12,500 in tuition reimbursement. But at the time, I did a cost-benefit analysis that concluded $12,500 wasn’t worth the risk of getting laid off. If I got laid off, I would lose valuable time on my journey to financial independence.

My #1 goal was survival.

Survival enabled me to accumulate a one million net worth before age 30. With this financial base, I was able to take more investment risk that paid off thanks to a lucky bull market that lasted until 2022.

Emotional Intelligence And The Bigger Picture

If I wasn’t so sensitive to situations, I might have gotten that $12,500 tuition reimbursement AND kept my job and pay. But at the time, I had to make the best decision possible with the information at hand. It’s easier to point out mistakes in retrospect.

Being overly thoughtful is why I didn’t start Financial Samurai until 2009. I had come up with the idea in 2006. At the time, I didn’t feel like I had enough credibility until I had gotten my MBA and worked in finance for at least 10 years.

But then in 2009, I witnessed a 26-year-old fella with no finance background, who was also not rich, write a bestselling book on how to be rich. It was then that I realized I should be more selfish for myself.

Nobody really cares how you get to the top so long as you do. I was inspired to finally start!

A lack of emotional intelligence can cost you a fortune. It’ll be harder for you to create $2,000 e-courses, pump and dump SPAC positions, backstab colleagues to get promoted, and misappropriate $8 billion of client funds for your hedge fund.

Who are we if we don’t have lots of status, fame, and money?! Kidding.

At the same time, having high emotional intelligence can make you much happier, less lonely, and more proud of your work. It feels good doing what you think is right. Hence, the choice is yours in deciding what you ultimately want.

It’s OK Even If You Lose

You don’t have to always optimize every single dollar. Sometimes, there’s a greater benefit of peace of mind and convenience.

If I still got laid off after not asking for my $12,500 in tuition reimbursement, I would have sulked. Then I would have tried to get reimbursed by saying I had forgotten to ask. Surely my firm would have honored their commitment. And if not I would have let things go and tried to find another job.

Always do a cost-benefit analysis before making any financial decision. Sit and think. Be thorough about writing out all the cons. If you do, you will become more aware and minimize regret in case you make a suboptimal choice.

Reader Questions And Suggestions

Do you think I should have risked asking for that semester’s tuition reimbursement? What type of cost-benefit analysis do you do when making decisions? What are examples of some poor decisions you made in retrospect? Share some sacrifices you made that turned out well?

To help you make more optimal decisions, pick up a copy of Buy This, Not That, my instant Wall Street Journal bestseller. Buying the book may be your best cost-benefit analysis yet.

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