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50/30/20 Rule Is It The Way To Go? 5 Problems with it

By

On April 9, 2021

In Financial Thinking, Personal Growth, Saving Money

If you are reading this chances are you follow some rule of money management or you might just be getting started. Either way, chances are you have heard of the 50/30/20 rule. This dictates you should spend your paycheck as follows:

  • 50% on needs (rent, healthcare, food, etc.)
  • 30% on wants (gym, gaming, take-out, etc.)
  • 20% should be saved 
tax documents on the table
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This rule was popularised by Senator Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan”. It’s seen as a straightforward way to get started with your finances. I suggest it as a starting point to stop living Paycheck to Paycheck in this article.

On the other hand, I don’t believe we should deal with absolutes. If anything money is personal and decisions will depend on your unique circumstances. Let’s go through the 5 flaws I have identified and how you can bend the rules to fit your lifestyle.

Only 20%?

set of black opened envelope and cash dollars
Photo by Karolina Grabowska on Pexels.com

If you follow this rule to the letter, you are ultimately encouraged to live wastefully. If you earn more than a median income (UK: £29,900 /US: $31,133) chances is are you could be saving more. Of course, this is contingent on the cost of living in your area and the localized median income. But if you earning a high wage this percentage can easily be increased as you no longer need to allocate 50% to your housing situation.

This is a cautionary tale when it comes to lifestyle inflation. It could be tempting to “upgrade” your life with a new phone or even a new flat. Yet. what is the point of a 10% raise if you increase your living cost by 9%? Following the 50/30/20 rule blindly will only lead to a loss of opportunity.

Understanding this has helped me go from saving 15-20% of my income to consistently saving above 40%. These savings are spread between my Emergency Fund and my investment portfolio that is hosted with an 80/20 split on both Vanguard and Trading 212. (article).

What are your goals?

As you embark or travel along your financial journey you need to set targets. You might be saving for your first house or because you aspire to achieve Financial Independence. Either way, you need to decide on what your financial goals are. 

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Photo by Engin Akyurt on Pexels.com

Based on your financial situation 20% might be too high or too little. If you are having a hard time deciding on your target check out Brandon’s article “How much money is enough?”. He dives into the numbers and shares 8 ways of figuring out what your answer is. I’ve quickly come to the realization that if I want any chance to achieve my financial goals, I cannot save less than 30% monthly. 

Additionally, if you have a high income, increasing your saving rate could help you achieve your goals faster. Of course, we all remain subject to compound interest and the time it takes to get the ball rolling.

Not as clear cut as it seems

When you read the rule at first it can seem very straightforward. Yet the 50/30/20 rule doesn’t account for the gray areas. The 6 pack of beer or the pack of crisps I bought aren’t essential. Yet I picked them up during my weekly shop. Doesn’t it qualify these items as needs? 

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Photo by Chris F on Pexels.com

Additionally, it opens the categories to interpretation. If you are a smoker and it will give you an inclination to include your cigarettes as a need. Although it would cause withdrawal symptoms, we can hardly put cigarettes and housing in the same group.

50/30/20 rule still needs tracking

Although the rule is presented as a simple solution, it still requires that you track your expenses. It isn’t possible to know where your money goes otherwise. You can decide to follow the 50/30/20 rule but without clear tracking, you will have no idea if you are hitting your targets or not.

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Photo by James Wheeler on Pexels.com

A good starting point here could be “paying yourself” first by investing/saving 20% on payday. This way you make the funds inaccessible and make sure you are progressing towards your goals. Automation makes your financial life a breeze. If you want to avoid the headaches that come with constant tracking Financial Minimalism is for you.

50/30/20 is a strain

As much as this rule could lead to wasteful expenses, it might not be possible on a minimum wage. We all have different circumstances and must adapt to them. How often do we hear gurus proclaiming “we can all be rich”. All you need to do is save $500 a month. That isn’t a realistic target for everyone and it’s ok. 

Comparing yourself to others and following arbitrary rules isn’t necessary. I know life can feel hopeless and tough at certain times but there are no certainties. Even if right now all you can save is $10 per month. Well, you are better off than last month. Rinkydoo Finance has a great article to get you started when your pockets are empty.

Should you use the 50/30/20 rule?

There is no 1 size fits all solution. It’s a great starting point to frame your saving strategy. The problem is just like everything else you must take it with a grain of salt. The problem of generalizing financial tips is that all of us have different circumstances. What applies to me might not apply to you.

It’s why I urge you to question everything and do your own research to find what fits you.

Do you follow the 50/30/20 rule or have you adapted it to your lifestyle?

four colourful houses

Financial Minimalism Builds Wealth Simply

By

On March 26, 2021

In Financial Minimalism, Financial Thinking, Personal Growth, Saving Money

Money doesn’t need to be complicated. Actually, it’s one of the key reasons people are scared to embark on their financial journey… it just feels too hard. Between the overwhelming amount of well-meaning misguided advice and scammers. Differentiating right and wrong can feel impossible. 

chili peppers placed on blue surface
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Yet, whether you are a beginner or advanced streamlining your finances is liberating. Not only do you gain a clear understanding of your Net Worth but budgeting and tracking become easier. The idea behind Financial Minimalism is to identify what you truly need and cut the superfluous stuff. 

What is Financial Minimalism?

To answer that question, I looked into what Minimalism itself is. The definition from the Oxford Dictionary is: “an artist, a musician, etc. who uses very simple ideas or a very small number of simple things in their work”. Just like beauty can come from simplicity wealth doesn’t need to be complex.

Minimalism has gained popularity as a lifestyle. Stereotypically we picture it as wearing the same thing every day and living in a tiny house. Yet, one of my favorite creators Matt D’Avella shares shows through his YouTube channel that there is more to it. Finding the most efficient and simple way to lead your life. It allows you to focus on the parts of daily life you value. 

Doesn’t sound so bad, does it?

Financial Minimalism in simply put terms is using a small number of tools to power your wealth journey. As it’s key to remember that simplicity doesn’t mean easy or bad. It’s quite simply the idea of streamlining your processes. Making your money management an efficient afterthought instead of a constant struggle. Radical Fire shares great insights into saving rates with a simplified look into them here.

What do minimalist finances look like?

As I started my journey into personal finance, I decided I wanted it to remain manageable. It’s the main reason I invest but don’t trade. Instead of looking for small advantages every day – my money is in it for the long run. 

So it led me onto focusing on 3 key points:

  1. Consolidation
  2. Optimization
  3. Automatization

Consolidation

The first step of my minimalistic journey was identifying all the different accounts, brokers, pensions, and more I was “using”. 

less is more
Photo by Kaboompics

Oh my gosh… there were so many. On the plus side, I was able to increase my net worth by 1.5% by finding accounts I forgot about. A financial spring cleaning if you will. Thankfully I didn’t find any new debt. Since then I have decided to limit myself. I know have:

  1. Joint Account
  2. Current/Checking Account
  3. AMEX Platinum Everyday Cashback
  4. Pension Pot
  5. Vanguard Stocks & Share ISA
  6. Trading 212 General Investment Account

Ok, it’s still quite a list… But you should have seen it before. All accounts now have a clear purpose and use. My biggest decrease was taking my credit cards from 3 to 1. I was always hunting for the best reward program. Until I realized I don’t spend enough for it to be worth it. The conclusion of my research was the AMEX platinum as it gives me 0.5% cashback. 

Additionally, a joint accounted with my partner makes bookkeeping for our flat and relationship much easier. I keep my money in a current account with Virgin Money as they have generous interest rates at 2% for the first £1000 and 0.5% for the balance of the account. I avoid changing bank account regularly as going from 0.5% to 0.6% interest rate isn’t worth the admin. 

Instead of relying on abysmal bank account interest rates I’ve consolidated my investments into my Stocks & Share ISA with Vanguard and hold about 10% of my NW in individual stocks with Trading 212. You can learn more about investing styles with my article “Trading 212 or Vanguard, which investor are you?”.

Streamlining my accounts simply helps me keep track and answer my own questions rapidly. No longer do I wonder how much I have in X obscure brokerage account. A straightforward account structure makes it easier to seize investment opportunities when they present themselves.

Optimization

composition of calculator with paper money and notebook with pen
Photo by Karolina Grabowska

Great you’ve now streamlined your accounts and feel 2 tons lighters. Does it stop here? Of course not, we can go deeper. I know this whole minimalism thing is feeling like a lot of work right now. Yet, it’s momentary pain for long-term gratification.

So what do I mean by optimization?

It’s simply the B-word… time for a good old budget. Although the way I like to approach it is to track my expenses and identify my spending patterns. This way I get to know myself and my habits. Following the trail my money left allowed me to find subscriptions I forgot about and sneaky platform fees. 

It also gave me a lens in how much I save without trying. I quickly realized I was consistently saving 25% of my income with close to no effort. Since then and by optimizing my expenses and increasing my income it has climbed up to 40% every month.

person holding gray pen sitting near laptop
Photo by energepic.com

By cutting superfluous expenses and optimizing my overall expenses I have been able to increase my monthly investments.

Automation

The hard work is behind you! Now that you have identified how much you can consistently invest and save monthly time to automate it. Using financial gurus favorite saying “pay yourself first”. I have a direct debit set to send 70% of my projected savings to my Stocks & Share ISA. The other 30% goes to my high yield saving account. 

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Photo by Luis J.

To become true to financial minimalism you want to have the less work possible. By automating every possible transaction you cover yourself from “forgetting”.

I used it first to build my emergency fund and now am saving to build my prospective house deposit. I was lucky enough to never have debt. If it’s your case focus on reimbursing your loans first whether they are credit cards or car payments. You can learn more about going debt-free with this article.

Once you have achieved a debt-free lifestyle it’s time to build your emergency fund! It might feel like you will never get to investing but having a strong financial foundation is the key to any strategy! Learn more about emergency funds here.

Are you a financial minimalist?

If you are reading this article you probably are. Yet there is always more we can do to simplify our finances. If there is one thing I want you to remember it’s that complex doesn’t mean good. 

Simply investing in an ETF tracking the S&P500 will outperform most complex portfolios. You might beat the market in 1 day but it’s highly unlikely in the long term. How have you simplified your finances?

It’s time to embark on your financial minimalism journey!

Comparing Yourself To Others Is Expensive

By

On March 10, 2021

In Financial Minimalism, Financial Thinking, Saving Money

Why do we do anything? Is it from an innate desire to succeed or is it to show off?

No matter what I undertake – my brain tends to compare myself to others. How is John doing on this project? Will he succeed and where I failed? Although I’m able to control these impulses better nowadays… it has been quite the journey. I used to see life as a zero-sum game. For one to succeed others must fail. 

game cartridges
Photo by Kevin Bidwell

As I grew and took a step back, I realized how nonsensical it was. As time progressed humanity grew. Yet, we arguably have never seen as many successful people. Paradoxically, mental health has been on the decline. As a result, I’ve decided to dive into facts and studies.

Is comparing yourself always bad? And most importantly how can we solve it?

As always sources and complimentary information available at the bottom of the article.

What does the research say?

30 studies or more have shown that constant comparison leads to both mental and physical ailments. Not only are we pushed into a toxic spiral but the impact varies in every case. There is no concrete evidence that looking up to someone or on the opposite saying that you are doing better than someone else helps you grow. 

The best way to recognize our biases and decision trees is by accepting our flaws. True introspection is shown to have decreased the negative spiral. Furthermore, instead of nurturing hate, understanding that we can learn from our perceived foes is key.

Simon Sinek clarifies that it isn’t only social media that is to blame. He indicates that we have a tendency to psychologically self-harm by creating rivals and only focusing on their strengths. Looking inward and focusing on our strengths opens us up to growth. By doing so he was able to learn from his former rival.

Additionally, consistently looking up to others leads to unrealistic expectations. Contrary to what gurus say it’s unlikely you will have a private jet or become a billionaire.

Studies have shown it is unsustainable to draw motivation from unrealistic goals. As you constantly fail to achieve them. On the other hand, Research shows a change in perspective can counteract it. 

As we understand that comparison is a vicious circle how does it impact our finances and investments?

The Financial Impact of Comparing yourself

Weirdly enough constantly comparing yourself can cost you thousands. October 2020 was when I finally pulled the trigger on Instagram. I said goodbye to the temptation of showing off in Stories or posts. The amount I have saved isn’t quantifiable but my saving rate has increased and my impulse buys have diminished.

black and white people bar men comparing themselves to eachother
Photo by Gratisography

Purchasing behavior

Since then I’ve focused more on the utilitarian side of purchases. When shopping for groceries or medicine, I go to the store-brand. The quality is on par and no one will know the difference.

Although, my friends have purchased beautiful german cars. I realized that in the long run it will cost them more than a beat down car. Additionally, we earn the same income why spend more upfront?

Recently, I wrote about how much we can truly afford. As impulse and status buy often end up costing tenfold in the long run. You can learn more in “How Much Can You Really Afford”.

person shopping online
Photo by cottonbro

Furthermore, peer-pressure is a strong component in your purchase decision tree. By including and seeking the opinion of others we influence ourselves. This plays into the hand of marketers and “fake gurus” leading you to believe outlandish claims or programs. Multi-Level Marketing bases most of its strategy on this.

Additionally, studies have shown that we gravitate to shopping sprees to boost our self-esteem. This is built on the idea that something new will make you feel better. On the contrary, a study shared on the “Oxford Academy” shows that when you have low self-esteem you will gravitate to lower quality products. Therefore not only does comparing ourselves to others lead to lower self-esteem and impulsive purchases but it’s a vicious circle.

A Study by HEC Paris found that:

“We found that the willingness to pay for status products did result in self-repair, but only for the people who saw the ad with no tagline.”

Although, there is a positive impact from status products as soon as we let ourselves be influenced by external forces… the positive impact is lost. 

Realizing that most of my “want” purchases were based not on my desires but societal pressure has lead me to save substantially more. Since coming to this realization in September has helped me skyrocket my savings rate by 4%. Learn how to stop living paycheck to paycheck here. 5 Ways to Stop Living Paycheck to Paycheck.

pen business eyewear research
Photo by Anna Nekrashevich

Wealth insecurities

Whether it’s on social media or in the news we are constantly bombarded by wealth signals. To such an extent that we don’t question how the money was made or if it’s truly affordable. The problem is we only see the positive online.

From your colleague’s brand new car to the gains your favorite influencer has made. You never get to see their Profit & Loss (P&L) statement. Without that, it’s impossible to know their true position.

black calculator beside coins and notebook
Photo by olia danilevich

If an influencer was truly making 6 figures a month by trading or with dropshipping. They wouldn’t need to sell you a $50 course. Don’t get me wrong not all courses are scams. But it’s impossible to make a 2% gain daily constantly that would be over 600% a year. 

Warren Buffet is often regarded as the greatest investor of all time. Over the past 30 years, he has returned on average 20%. Which makes it highly unlikely that someone selling their signals would help you achieve anywhere near this. 

Constantly comparing ourselves to unachievable targets leads to us chasing returns. Asking the question “why haven’t I bought into Tesla, Dogecoin, or GME?” Without understanding that by the time a stock has hit the news you probably missed the train. And it’s ok! My friend Steve, the Frugal Expat, goes in-depth in his article “How Chasing Returns is a loser’s game” a brilliant read that shows how flawed this idea is.

Stop comparing yourself start building 

man working with turning machine and wood
Photo by Anna Shvets

Overall taking a step back and focusing on growth gives you time to build. It’s the main reason I don’t share the exact value of my Net Worth. Instead, I want to focus on growth, diversification, and progress as percentages. 

Recognising we all have a different path and expectations was what allowed me to truly embark on this journey. Wealth and Life aren’t a competition as nobody will ever walk the same path. I invite you to discover my Financial Origin Story to discover more of my philosophy. 

This research has comforted me in the idea that; although I’m not alone in the journey – it’s mine to travel. My key takeaways were:

  1. Comparison leads to impulse buys
  2. Envy leads to unnecessary risks
  3. Jealousy leads to a lack of productivity

How do you deal with comparing yourselves to others?

Sources

business paper finance decision

Why I Invest But I Don’t Trade

By

On March 3, 2021

In Economic Concepts, Financial Thinking, Saving Money

Investing and Trading use similar tools but are extremely different. Neither is inherently better than the other. Both of them work by buying assets on the stock market with the goal of a Return on Investment.

The big difference is the approach. When it comes to investing, you buy assets and hold them for years. You bet on the future of a company and how well you believe it will do in the long run. It sounds boring, right? Well, my strategy is boring. I focus on the long-term returns, not the thrill.

On the other hand, a trader focuses on short-term appreciation to make gains. The objective is to maximize returns on a daily, weekly, or monthly basis. Some would call it speculation and gambling. At the end of the day, both investors and traders are betting on the future of a company whether it’s short or long term.

Morgan Housel puts it beautifully when he says:

“Every investor is making bets on the future. It’s only called speculation when you disagree with someone else’s bet.”

Morgan Housel

His article “When Everyone’s a Genius (a Few Thoughts On Speculation)” is a gold mine. It showcases the importance of storytelling when it comes to investing. 

It’s time to dive into why I focus on investing for more than 80% of my portfolio. As I see myself as a Sheriff when it comes to investing. I’m open to some risk but want controlled exposure for a long-term return.

Different kind of traders and investors

When it comes to investing or trading your wealth there are a plethora of styles.

Investors 

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Photo by Jordan Benton on Pexels.com

Investors tend to focus on real-estate, equity, bonds, or angel investing. The majority of casual investors, myself included, focus on index funds and ETFs. These particular tools allow me to diversify my investment and bet on the market and not specific companies. 

A real estate investor will look at purchasing multiple properties with the objective of flipping them or renting them out. The problem of real estate investing is it takes considerable initial investment. It’s, therefore, less accessible and takes more time to get rolling. Yet it remains one of my diversification goals. Currently, I stick to REITs (Real Estate Investment Trusts) as they allow me to tiptoe into space before my first property. 

As for Angel Investing, it is a whole other can of worms. It takes substantial capital and is a long-term bet on start-ups. The goal of an angel investor is to bring expertise and finances to a burgeoning company with the hopes of a high return in the long run.

Traders

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Photo by Black ice on Pexels.com

I personally don’t trade anything that I cannot afford to lose. My total trades in the past year amount to less than $500 dollars. I’ll simply stick to summing up what each type of trader does. 

  • Day Trader: seeks to make profits on short trades throughout the day. They hardly hold any funds overnight.
  • Scalp Traders: only holds their position over a few minutes/seconds and never overnight.
  • Swing Trader: surfs on trends and looks at making a profit on trades over a few weeks/days. 
  • Position Trader holds positions for months to years but always has the goal to sell for a profit.

The style of trading you decide to follow depends on the time you will hold the stocks or options. Recently with the GME short squeeze, we saw retail traders become position traders and hold with the hope to swing the price. 

Overall whether you are trading or investing your decisions will depend on your risk tolerance, knowledge, and time you have at hand. Time is key as being a hobbyist day trader isn’t possible.

Success rate for Traders and Investors

When researching investing at first, I kept bumping into day trading gurus. They were selling a magical system to make millions day-trading. As always, I was cautious about things that sounded too good to be true.

It’s not to say that you can be successful day-trading it is a job in itself. My eyebrows simply rose… why would you need to sell me a course if you made that much money? Recently in a discussion with Coffeezil (Youtuber), Jason Calacanis an angel investor. Explored the fact that successful entrepreneurs and investors share their knowledge for free with retail traders. They don’t need your $300 dollars to make a profit.

Learn more in the video below.

First of all, there are 2 ways to start trading either you go professional or head out solo. When you join a financial firm, your salary itself is set but additionally, you can expect a 10%-30% bonus on the profits you realize. Of course, the returns are capped. But the losses do not impact your wealth.

On the other hand, most traders go out solo. Not only is the capital small at first but you have no safety net. Learning about charts and signals is a step. The only problem? On average successful day-traders will make an annualised return of 10%… Even with a starting fund of $30k you would only be making $3k a year…

Stock options then become a tempting idea as they allow you to swing bigger wins. The only problem is it’s a double-edged sword. As you are exposed to higher losses. 

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Photo by Anna Nekrashevich on Pexels.com

In a study by the University of Sao Paolo and the Sao Paolo School of Economics, it was found that it’s virtually impossible to make a living day trading. When analyzing all traders that began day-trading between 2013 and 2015 they found 97% lost money when trading more than 300 days. 

Additionally, despite the high risk, only 1.1% earned minimum wage. Only 0.5% earned the equivalent of an entry-level bank teller. 

In Taiwan, day treaders were studied for 15 years from 1992 to 2006. The results were only marginally better. With only 1% achieving what they refer to as abnormal results. 

What about investors?

ETFs and Index funds have consistently outperformed day traders. Not only is it easier to get started as you are able to bet on the overall market. For example, using the VUSA, Vanguard’s ETF tracks the S&P500. As long as the S&P 500 rises so will your portfolio. 

photo of person holding ceramic mug
Photo by Anna Nekrashevich on Pexels.com

Over the last 100 years, the S&P500 has returned an annualized return of 10%. Don’t get me wrong investing in index funds is boring. Yet, I much rather prefer boring to terrifying. It also is a terrible place to put your money in the short term. Not one year is guaranteed to be positive. Yet the S&P 500 has never had a negative return in any 20 year period. 

You can learn more about my portfolio and investing mindset here. If you haven’t started investing with Trading 212 yet. Today is the day – if you invest as little as £1/$1 using my link, we will both receive a share worth up to £100. 

Why do I Invest and not Trade?

I acknowledge that I don’t know enough. That I’m not good enough to beat the market. My objective is not to be rich tomorrow or even next week. Actually, I’ve set my target at 25 years from now. Yes, you read that right. 25 years. 

It might be faster if luck strikes and I’m able to pick some good real estate investments or funds. But overall I’m in no rush, I would rather a consistent 10% return that compounds to my benefit. Then going out every day to risk my wealth on some options. 

If any of you decide to go the trading route. I wish you every success and hope that you will be in the 0.5%. On my side, I will stick to my 85% index fund strategy.

person signing loan agreement for purchase of apartment

5 Ways To Stop Living Paycheck to Paycheck

By

On February 12, 2021

In Financial Thinking, Personal Growth, Saving Money

No matter how much they earn, people end up living paycheck to paycheck. Whether you are a professional athlete or a student with a side job you might be in this situation. But stay positive, because you are struggling today doesn’t mean there is no hope.

person signing loan agreement for purchase of apartment
Photo by Gabby K on Pexels.com

Although, many will have managed to save some money during the pandemic. It’s often down to having fewer opportunities to spend no more clubs, restaurants, or shops. The likelihood of us going on a spending spree diminished greatly.

“Act your Wage”

DAve Ramsey

It would be naive to think that once the opportunities return, spending will remain in place. So why not create healthy habits now and protect ourselves from temptation and expenditure?

The vicious circle of living paycheck to paycheck

32%, you read that right 32% of people, surveyed in 2020, were in financial distress. Whether they earned $40,000 or over 200,000 the result was the same 30% or more ran out of money before payday. Unsurprisingly, below that threshold people ran out closer to 40%.

Whether it’s taking on debt early in life or succumbing to Lifestyle inflation. The continuous chase for more leaves many behind grappling at straws. When your checking account approaches the inevitable overdraft – credit cards become a saving grace. 

Summers might be easier but when winter hits and the energy bill goes up things can change drastically. That new iPhone or brand new car might seem like only a few hundred per month now… In the long run, monthly payments and debts add up.

“If you can’t pay for it twice cash don’t buy it”

Peter Saddington

Lifestyle inflation is the culprit when wages go up, we tend to want to live “our best life”. Worse than that we increase our expenditures with the hope of a windfall. That is nothing short of lunacy. In an episode of the Fast Track Podcast, Peter Saddington shares the spending habits that brought him to 1milion net worth at 26!

Of course, it’s easier said than done once you have reached Financial Independence. Yet you need a backup plan and solutions. Time to dive in:

How to escape living paycheck to paycheck

You aren’t as smart as you think

I know it hurts to hear… But studies show that 71% of people have an inflated perception of their Financial Literacy. Only 34% of people were able to answer basic Financial Literacy questions.

That percentage rings a bell, doesn’t it? There might be no correlation but it seems like an unlikely coincidence. If you want to test your knowledge follow this link.

cutout paper illustration of hand with coin above jar
Photo by Gabby K on Pexels.com

By accepting our true knowledge we make a giant step towards saving more money. Lower financial knowledge leads to riskier investments. Not only does it mean you are taking more risk you lose track of your portfolio. 

Take the time to educate yourself and learn there are many resources out there to get yourself started.

BUDGET BUDGET BUDGET

If you want to get out of this vicious circle… you need to know where your paycheck is going. Track all your expenses and money sinks. Don’t be ashamed of where the money is going but try and understand why you are spending it. 

A great rule of thumb as a beginner is to follow the 50-30-20 rule. No more than 50% of your expenses go towards needs, 30% towards wants, and 20% towards savings. 

The 50/30/20 rule to avoid living paycheck to paycheck

By reverse engineering a budget you can make it fit your lifestyle. The biggest problem with budgeting and following plans is the same as with fad diets. They don’t fit you or your lifestyle. 

Build your budget from the ground up to protect yourself from financial trauma. Understanding why you are saving money and where it’s going will also give you a clear purpose. It’s also likely to help you stick to your habits! 

Debt First

Paying back your overdue debt is the highest guaranteed investment you can make. Credit Card debt is typically 15% and higher interest. If you stick to minimal payments and max out your credit line… You will quickly be in over your head.

concept of waiting for cash credited to bank card
Photo by Gabby K on Pexels.com

At a 20% interest rate, your debt will have doubled within 4 years. The compounding effect isn’t always your ally if you aren’t ready for it. Paying back debt should be your number 1 priority.

Debt will trap you into the vicious circle of living paycheck to paycheck.

Sneaky Influencers

man in white crew neck top raising hi left hand to meet the like button. He lives paycheck to paycheck as he is trapped
Photo by Oladimeji Ajegbile on Pexels.com

Our generation deals with a new kind of financial pressure: social media. Seeing people living their amazing lives on Instagram or quitting college to hustle on Twitter… It’s enough to drive anyone incoherent. 

Schwab’s “Modern Wealth Survey” showed FOMO is the leading cause for spending. 35% of people surveyed spend more than they can afford to join experiences. 34% will make unexpected purchases based on Social Media.

This is where lifestyle inflation often hits the hardest. Now that your salary has increased you need to show it through your lifestyle. You make $50k a year, so you definitely deserve a brand new BMW worth 40k. It doesn’t matter that you will be making a $600 payment monthly. 

The other trap is moving to a higher cost of living area to fit with your new lifestyle. The biggest fixed cost often is rent. Once you’ve signed a contract for 2 years you are stuck. No matter what happens you will be shelling out “the appearance cost” of your apartment. 

house luxury villa swimming pool paycheck to paycheck
Photo by Chris Goodwin on Pexels.com

By “improving” your lifestyle and de facto increasing your expenses you negate the effect of a raise. By relocating to a cheaper neighborhood, downsizing your flat, or finding a flatmate you will effectively decrease costs.  

Living in a mansion isn’t worth it if you end up bankrupt. If you want to learn more about how to avoid lifestyle inflation and other financial sins read my article “7 deadly Personal Finance Sins”.

Prepare for the worst

You’ve finally gotten out of debt and cut out most of your superfluous expenses! Congratulations. Unfortunately, you aren’t quite ready to invest yet. I know this feels like it’s taking forever but you are getting there!

Before, investing you need a security net. It will protect you from falling back into old habits and lose all the progress you have made. This magic tool is an Emergency Fund. Typically, an emergency fund is anywhere between 3 and 6 months of expenses saved. Having it at hand guarantees that you are ready for let’s say… a global pandemic?

Emergency Fund Piggy Bank

This is not a future “enjoyment” fund it’s the last resort. Having an emergency fund allows you to keep your head cool when a medical emergency arises or you lose your job. Additionally, you will feel at ease when looking at your bank statements. 

Breaking the Vicious Circle!

Now that you have the tools, how are you going to use them? Learning about Personal Finance and how to manage my income has changed my life. I’ve been on this journey for a little over a year now and would love to see you join me!

There is always more to be done and to be learnt. Living paycheck to paycheck isn’t a necessity. What was your first step towards living a Financial Stress-free life?

Passive income is alie

Passive Income, it’s all a lie!

By

On February 5, 2021

In Financial Thinking, Making Money

We all dream of it… the coveted passive income! Picture that income flowing in and no need to work! Truly a dream come true. We’ve all seen the YouTube ads, this one simple trick will allow you to unlock unlimited income! What if I told you passive income is a lie?

There I said it – there is no such thing as passive income. At least not entirely. You can earn some income on the side with low effort. But there is no such thing as completely work-free income.

If anyone promised a completely work-free income it’s a major red flag! They are lying or looking to scam you.

What is Passive Income?

At the end of the day, we are all in the pursuit of carefree income. Therefore holding onto the mirage of passive income is wonderful. It feels dreamy and special. Just like someone playing the lottery we hold out with the hope of a consistent payout. 

To figure this out let’s look at the proper definition of passive income: “Passive income has been a relatively loosely used term in recent years. Colloquially, it’s been used to define money being earned regularly with little or no effort on the part of the person receiving it.” Investopedia

Navigating as if Passive Income exists

I don’t believe a single job out is lucrative with no work. To get behind this we need to understand what it takes to get a profitable and regular passive income. It usually will come from investments, entrepreneurship, or royalties. All of these need varying amounts of work to set up.

So yes passive income might exist but it’s hardly completely hands-off.

What is real passive income?

The idea behind passive income is to build new income streams. The average millionaire having 7 income streams. They will vary in activity level but will all need a level or another of supervision.

Isn’t it exciting the idea to work from home and get money funneled to your account regularly? But all 7 income streams have some kind of maintenance. Even the epitome of passive income: dividend stocks or bonds require maintenance. You need to pick the right portfolio and stay diversified! You can learn more about that in my article “Trading 212 or Vanguard? Which investor are you?”

What are your options?

What do people mistakenly take for passive income? The list is long I will tell you that. Whenever you find an article titled “top 5 passive incomes for 2021” you should probably run. Let’s take the time to list out the commonly touted options and understand why they aren’t so passive after all.

  1. Airbnb or House hacking
  2. Ecommerce
  3. Youtube
  4. Podcasts
  5. eBooks and Courses
  6. Blogging/Medium
  7. Affiliate Marketing

All of the above are often cited as sources of passive income. Ways to become your own boss. Yet what most omit to share is that you need to work extremely hard to set up these income streams. Let’s look into what each of them needs to be set up.

AirBnB

House hacking sounds easy, right? You’ve got a spare room put it on Airbnb and boom regular easy outcome. Sounds great! Easy income from a spare room that would otherwise drain energy. 

passive income from AirBnB

This is vastly miss understanding Airbnb. The best way to drive consistent bookings and revenue is by being a “Super-Host”. To become one you need to have had 10 guests stay and leave a high star review.

Becoming a “Super-Host” is all but easy. In order to get high reviews, you will need to create an experience. Remember the sensation you feel when your bed is set up in the perfect way. Some soap and shampoo in the bathroom and maybe a guide of the city!

That makes all the difference. But getting your spare room ready multiple times a week to incur “passive income” seems like work to me. What do you think about it?

eCommerce

Just set up a store and find something to flip and sell online. Just pop over to Teespring. Create a viral design and start selling T-shirts. Not only do you need to acquire the skills for basic design and the communication skills to sell your designs. 

What about flipping items? Well, let’s say you decide to flip tech items such as vintage consoles. You need to:

  • Research Them
  • Test and buy them
  • Find a buyer

Repeat this for every item and marginal gains. Once more you might be able to set yourself up and get evergreen designs that will sell months after publishing them. These designs will payoff regularly with low effort on your side. This is still disregarding the past work needed.

YouTube, podcast, and blogging

Any of these 3 needs a strong amount of work. They might, in the long run, lead to consistent revenue from your portfolio. Yet setting them up in the first place is insanely difficult.

YouTube keeps you from earning revenue until you reach 1k subscribers and 4,000 hours of watch time. It takes on average 22 months of consistent posting to reach this milestone. Almost 2 years and no income? Doesn’t exactly sound like passive income to me. In the long run, it might return dividends but nothing is guaranteed.

Content Creation for Passive Income

Podcasts take months to earn an income. You need to build a loyal fan base and stand out from the crowd of similar products. You’ll also need to find a way to advertise your product and drive consistent income. There are some fantastic podcasters out there like Yasi at Fast Track Life and seeing her drive I can tell you there is nothing passive about it!

Blogging/Medium with a blog you start at a loss. You have to pay for hosting fees and produce content consistently with the hope of an increase in Domain Authority and on Google’s rankings. 

Find your balance and push but more than anything writing is a passion. I wrote on Medium for 6 months before starting Cent by Cent and made $12. 26 articles for $12 and I still loved it. Remember that on Medium only 7% of writers make $100 or more a month.

If anything these creative outlets is a form of passion income more than passive income. Down the road, you might see some regular revenue but right now you do it by passion.

eBooks and Courses

Both of these can become a great and regular passive form of income. The only problem? It takes an immense amount of work ahead of publishing it. Graham Stephan created the YouTuber Academy and he says it took a month of 18hour workdays to be ready to publish it. Even with 1000 newsletter followers and thousands of subscribers, he sold 1 course in the first 24 hours.

Learn more about it in his interview with the Colin and Samir podcast.

Courses can lead to a regular income screen but even with a loyal following, it can be hard to have a regular income. If you want to make income from educational content you will need to build a strong community around you first!

Affiliate Marketing

Similarly to courses, you will need to be trusted and build a strong community. Whether you create an affiliate marketing blog or do it via Social Media it won’t be easy. Building an audience can be done in a few months. But we can’t expect a reliable income. 

Once you manage to set up your community you will need to consistently market your products. It will always take a certain amount of work.

Not so Passive after all

Whatever angle you look at it… true passive income is a myth. You won’t sign up for a new service and receive money daily for free. It always takes a certain amount of work and dedication to be launched. 

Your income-generating assets always need some looking after however small. So if you are thinking about setting up a new income stream. I have one piece of advice that was given to me by Matt the Financial Imagineer. Look for your passion income if you can do it for free the revenue down the line will be a bonus.

So how are you going to set up your passion income to create some passive income?

Universal Basic Income could it be THE Answer?

By

On January 27, 2021

In Economic Concepts, Financial Minimalism, Financial Thinking

What if the government covered your living cost? Would you still go to work? What even is Universal Basic Income? Could it work?

2020 was the biggest challenge our social systems have seen in a long time. It forced countries to become creative and find new solutions. One of these solutions was Universal Basic Income or UBI. Whilst it’s not a new concept it bounced to the forefront of our attention. We saw different examples last year from the American stimulus checks to the travel grants in Japan. 

The first hurdle the policy faces is its definition. Some call for a replacement of welfare by UBI and others for an addition. The longest-standing “experiment” of UBI is the Alaskan “oil dividend”. Which sees any permanent resident of Alaska receiving an annual monetary stipend.

Oil Dividend Alaska Monthly Stipend

This monetary stipend has not had an impact on employment or wealth imbalance in the area. It has seen an increase in part-time work and “evening” studies. We will explore this more later.

I believe that UBI could open the doors to Financial Independence to many as well as giving more time for meaningful work. Less risk of living paycheck to paycheck and higher chance to make a valuable contribution. This ties in with the ideas I explore in “Financial Goals: I was wrong“.

So today let’s explore what Universal Basic Income is, what it means for the economy, and the pros and cons.

What is Universal Basic Income?

Universal Basic Income is quite easy to define it’s the idea that every adult should get a monthly stipend. Although, it sounds utopic and simple. It’s far from easy to put in place. There are many different takes on it from a no questions asked to check to a restricted special use debit card.

This concept has been around since the 16th century and is back with a vengeance currently. Tough economic situations suggest a radical solution. UBI is one of the options. The perfect amount is not a matter of economics but politics. The one rule the policy would abide by is that no matter who you are, what you do, or what you believe you are entitled to it.

Additionally UBI is not a plea to make people work less. It’s the power to enable them to a job that matters. It not only means an increased chance to work according to your values. It empowers workers in less enviable positions as they gain leverage to request higher working conditions. 

Implementing it could be as a supplement to the welfare offered by the state which would increase the overall cost and tax at higher incomes. Or replace it partially/fully and become a new and fairer approach that has diminishing returns as you go up the income ladder. All in all, it is an effort to bridge the wealth gap. But can it work?

How could UBI Work?

Negative taxation?

At the end of the day, UBI starts with tax reform and implementing a negative income tax (yet another name for UBI. To help you visualize the situation in table 1. You can see the impact on your taxes and net income. The data is based on the European Average tax level in 2019 39% and the global average of 31%. As well as a £1000 per month income or £12000pa.

Universal Basic Income Breakdown

If you are more of a visual thinker the curb looks like this :

Universal Basic Income Gross Income vs Net Tax Rate

As you can see with a negative income tax as the basis for UBI taxes would normalize fast. Instead of creating an inflationary situation it would lead to the redistribution of wealth whilst giving an equal footing to all.

Regional Currency?

Gyeonggi province in Korea has had a basic income for under 24-year-olds for some time now. The idea was that they get a quarterly stipend of 100’000won or 85USD which they had to spend in local business with a revenue of under 830,000USD. (article link) 

The program has now been expanded to the whole of the adult population since the start of COVID-19. It allows the state to subsidize small businesses whilst empowering and protecting its people. With the spending restricted and limited to certain regions.

By directing the cashflow via local spenders and increasing the regional GDP – the population is also enabled to invest. Not only in stocks but in themselves. It empowers workers to focus on their education and retrain new skills. This is particularly important in a country with a strong increase in automation.

Why not check out the video below from the Wall Street Journal which visited a recipient of this variant of UBI.

Replacing Welfare?

Welfare can often feel like a trap. With clear thresholds that are arbitrarily set and rarely updated. By generalizing aid and removing constraints you give a chance to recipients to use the funds as growth support. Supporters of the cause call for this to be funded by existing welfare funds as well as with saved administrative costs. The OECD (Organisation for Economic Co-operation and Development) says its members spend on average 20% of their GDP on welfare. Or 8700USD per capita in 2019 raising to 22.7k for Luxemburg.

Social Welfare Cost OECD

This data excludes 2020 were due to COVID-19 relief efforts the value is certain to raise. It also excludes the cost of administration for such efforts.

What are the risks of Universal Basic Income?

In this category, it’s essential to differentiate perceived risks and risk themselves. In this case, I will explore the biggest perceived risks and whether or not studies see them as founded or not.

People will stop working

A big if not the biggest sociological fear around UBI is that people will stop working. The idea that UBI which causes higher taxes and a stronger base for a living will incentivize people to stop working. 

Evidence shows that indeed working rates significantly decrease when focusing on child labor. Although it only made it disappear in 8/19 studies it did show a decrease in hours worked in all studies! Which in turn led to an increase in school attendance and literacy.

As for the adult workforce, cash transfers did lead to a slight decrease among the elderly and those that care for dependants.

People will misuse the funds

But wouldn’t people just use the money on booze and cigarettes? A 2017 University of Chicago study on “Cash Transfer and Temptation Goods” has shown that when offered a basic income or subsidy the expenditure has a significant negative effect with a -0.18 standard dev. Studies have therefore been showing that concerns around tobacco and alcohol consumption are not applicable! 

Indeed the research paper also points out that temptation goods are subject to high substitution effects When one unlocks the fund for more valuable substitutes they tend to gravitate towards them. These alternatives include a higher education with uptake in reskilling as well as health-based replacements such as nutritious foods or exercise equipment.

How about inflation?

The worry of inflation is linked to the decrease of work in relation to the income earned. As seen above UBI doesn’t lead to a significant decrease in working hours and thus should only mildly impact inflation. 

Seeing it as a general raise is correct. A great example being Alaska’s oil dividend once more. Prices in Alaska although inflated rank 41st in the country despite supplementing income far from the likes of California, DC, or New York. 

Additionally, an approach in line with Gyeonggi pay would make sure UBI would be redirected and consumed within the region. Boosting the local economy in turn. In a study by the Roosevelt Institute on the Macroeconomic Effects of UBI, they point out a potential uplift of the GDP by 12.56% over 8 years.

They also conclude that there was as of 2017 no empirical data that such a program would lead to an inflationary economy.

Why Do We Need Universal Basic Income?

It often feels like the status quo is fine. It’s comfortable and easy as we know how it works. The goal of this article is to challenge your understanding and try and give you an alternative point of view. We grew up with our social system in place but go back 70 or 80 years and Paid Time Off was unimaginable. 

The strength of humanity is its constant evolution. With 2020 in the rear mirror and 2021 looking just as bad, the question stands are we doing enough?

The Wealth Gap

UBI inequality growth
Graph by David Leonhardt - NY Times Aug 7, 2017

This graph shows the striking difference in income growth between 1980 and 2014. We seem to think that the rich get richer was always true. Yet a measly 30/40 years ago the trend was reversed. With a wealth gap that was shrinking.

Of course, it would be delusional to think we could go back to the economic growth of the past. Yet redistributing the cards at the top of the range would make a large difference. Systemic poverty is engrained and not moving as the wealth gap increases.

An egalitarian UBI would give the chance to the 98% to bridge the gap and start working towards a greener future. Currently juggling multiple jobs with a constant fear of losing them leaves no space for hope or betterment.

Often when working towards Financial Independence we forget that the deck was stacked in our favor. Of course, there are exceptions and inspiring stories. Yet recognizing my privilege and looking to help others grow is equally important.

A security net

If COVID-19 has taught us anything, we can’t be prepared for everything. With 40% of British people between 22 and 29 having no savings at all. Many have found themselves in dire situations as the age group was the hardest hit. 

With no social security net or protection in place in the United Kingdom, the jump below the poverty line is very fast. 

Not only does the crisis happen but it’s foreseen that 1 in 4 Americans will lose their job to automation in the next 12 years. UBI would allow peace of mind whilst these workers retrain for newly profitable jobs. 

Of course, it would be easy to say prepare in advance but when living paycheck to paycheck that is an option many can’t sustain.

Entrepreneurial Boost

Entrepreneurial Take Off thanks to UBI

With the rise of platforms like Patreon we see an increasing amount of creators relying on donations from their followers to live. This is no different than a basic income provided by self taxation. UBI is no different and would allow the extension of such principles to a bigger share of the population.

By paying, a consistent stipend and delivering what is effectively an income floor. Residents are empowered to take more calculated risks and create their own path. In turn, creating employment and boosting the economy. 

Ask yourself, how often do you hear people wish they could afford to start a company. But it’s just too risky they might lose everything. The impact knowing one can feed his family has on ambition is astounding.

Conclusion

My goal here wasn’t to convince you we need to adopt UBI. It was to dispel preconceived notions of economic downfall. Of course, just like every societal revolution, there will be repercussions and tradeoffs. 

Yet it doesn’t mean we will be taxed to all hell. Of course, we can expect an increase in taxation in the short term. Yet the chance of creating opportunities for everyone equally is worth it in my eyes. UBI, when tested, has led to an increase in GDP, education, and morale. 

As studies have shown an increase in mental health across the board!

I would love to hear your thoughts and ideas around this issue! How would you reform societal help?

Sources

2020 in the rear mirror

2020 Retrospective: 10 Important Lessons

By

On January 2, 2021

In Financial Minimalism, Financial Thinking, Saving Money

The time has come to say goodby to this awful year. Finishing the year with a retrospective is a great way to appreciate our growth. Yet at the same time… Saying the past year was tough is an understatement.

Like many, I was determined not to let 2020 go to waste. It would be easy to wallow and think that we wasted 365 days. Inaction is always the easy route. This year especially required creativity to grow and improve. 

On the other hand, despite all its flaws 2020 was an amazing learning opportunity from self-improvement to personal finance. Never has my life changed this much. This article is an opportunity for introspection and a window into my mind.

Embrace uncertainty

If I had to take 1 thing away it uncertainty is unavoidable. I always thought I could design my future. 2020 showed me you must make the most of the cards you are given. 

It was liberating as it taught me to be more laidback. I take things as they come and enjoy the moment.

Better late than never

Before 2020 my investment portfolio was all of £200. I had tiptoed into using a roboinvestor but it had never really stuck as a habit. That was until I discovered the power of compounding interest. 

When I realized that £500 per month for 20 years would be worth £312k with an interest gain of £173.7k. I became impatient and had to start that instant. If you want to get into investing check out my article on “Investing with Vanguard.”

It would’ve been easier to think why not wait an extra year? As I had already lost the first 2 years of my career. On the other hand, I could start today and reap bigger rewards. 

It was a no brainer

coins in front of a clock money is time

Just start

As I grew up, I had a flawed idea – I believed in perfect timing. There was no point starting something if all the stars didn’t align. If I wanted to work out my body needed to be in top shape. 

Yet as I spent most of the year on furlough. I realized that appetite comes as we eat. The first minutes of exercise, writing, or cooking might feel dreadful. But as it goes on the result feels more rewarding and empowering. 

All I need to do is get going.

Define yourself

I grew up in a family of very hard-workers. Coupled with the societal belief that your work defines your identity. As I was sent home for the foreseeable future in March – I felt directionless. 

My goals and purpose had been solidly tied to my job and before that to my studies. For the first time, I had no given path. It left me with an empty feeling. Until my partner helped me wake up and showed me life had more to give. 

As 2020 went by I rediscovered what mattered to me and how I would build myself. This lead to Cent by Cent and countless memories!

Remain true to your values

values Strong like an oak

My own mortality

I was always aware that I will die. Luckily, I’ve always been in good health. Never had the thought will this be my last breath crossed my mind before 2020. As I was struggling to breathe in March – the thought dawned on me. 

“I might not wake up tomorrow”

The hospitals were full… people were dying and the UK was in crisis. I was laying there wondering how I would draw air in. There were no regrets to be had but I was lost. The situation only truly became apparent as I looked into my partner’s eyes. She was sharing my pain. 

I have lived a life that leaves me with no regrets. Every decision has led me to where I am today and for that I’m thankful. Yet one thought kept ringing in my mind.

It’s too early I still have so much to do, see, and create.

Creativity is within us all

My talent for the arts is close to none. I can’t draw or paint and you most definitely do not want to hear me sing. On the other hand, I’ve always been drawn to art – the need to create was buried within. 

The game-changer was writing. As I started publishing on Medium I found my voice and strived to help people on their Personal Finance Journey. Do my early articles make me cringe? Undoubtedly but they are a sign of progress.

Unlimited

It was easy to think that I wasn’t:

  • Talented enough
  • Creative enough
  • Funny enough

2020 is the year I realized. I create my own limitations. It’s up to me to set my limits and break them. There is no limit to my personal growth. The only way I stop growing is when I stop learning. 

A lifelong learner is unstoppable.

Agility is key

This year was a nightmare for all control freaks. Everything went out the window. Rules society relied on for decades were gone. Some reacted by closing themselves up and throwing up the white flag. Others used 2020 as a catalyst and put down the fight of their lives. 

A situation although immovable is what you make of it. 2020 could have been a lost year but I decided to make it mine. 

Was it perfect?

Far from it. 

But I adapted to this ever-changing world and made the most of it. My friend the Financial Imagineer shared this bit of wisdom: 

“When the wind of change blows, some build walls, some build windmills.”

An old Chinese saying

money in a tissue box

Money isn’t important

Sorry for misleading you. It is. But not as much as we think. Money is a tool. It allows us to purchase freedom and peace of mind. On the other hand, money isn’t the key to happiness. 

Have you ever tried hugging a stack of banknotes?

It’s cold and probably feels very lonely. Wealth is important as it allows you to focus on your true values. Falling in love with money is greed personified and a slippery slope to loneliness.

I explore this more in-depth in my article “Financial Goals: Why I Was Wrong”.

Never Alone

The grind is often sold as a 1 player game. Work as hard as you can neglect your relationships and build your wealth. On the other hand, you’ll reap the rewards down the road they say.

I have a simple question what is the point?

Throughout this year I was lucky enough to move in with my Significant Other, spend time with family and friends. After all, I found a community of like-minded people online that I’m excited to grow with. 

2020 might’ve been the year we were all a part but for me, it shone a bright light on my relationships. Don’t give up building meaningful relationships in pursuit of wealth. Life isn’t made to be lived in isolation.

If unfortunately, you had to spend the Holidays in isolation or alone. Please know that you are loved and valued whoever you are.

2020 retrospective

This year was full of surprises good or bad. But looking back, never have I grown and learned this much. Although, it came with its load of troubles 2020 counted double in many cases. 

The end of the year doesn’t mean the end of the pandemic, unfortunately. Yet it’s a great time to reflect and learn. What have you drawn from 2020 and how will you apply it in the future?

fireworks on 2021

5 Easy Personal Finance New Year’s Resolutions for 2021

By

On December 23, 2020

In Financial Thinking, Saving Money

New Year’s Resolutions or Financial Goals

Every year the same dance begins. We look back onto the last 365 days and realize we haven’t turned our life around. What’s the next logical step you might ask?

It’s easy we engage in the yearly ritual of New Year’s Resolutions. 2021 is a blank slate that we are determined to transform into a new chapter. From new diets, learning a new language, or more exercise everything will change. Instead of seeking a gradual change, we decide to make drastic changes.

Surprise, surprise…

We never stick to them. How many times have I told myself: “Next year I will exercise every day” more than I would care to admit. Unfortunately, I cannot say I’ve stuck to it so far.

So why not try a new type of New Year’s Resolutions? Let’s set financial goals and build the base of new healthy habits. Whether you decide to try out all of my tips or only to set 1 goal is up to you. Remember small changes are always preferable to no changes.

1. Build an Emergency Fund

If you don’t have one yet this should be at the top of your list. If 2020 has taught me anything it’s that life is highly unpredictable. Building an emergency fund is a great way to cover your back. 

You are ready to face any curveball directed at you. Take a look at your essential monthly outgoings from food, rent, and energy. Then keep in a high-yield saving account the equivalent of 3 to 6 months of these expenses.

Learn more about building your emergency fund for 2021 with my article “How To Build An Emergency Fund”.

2. Invest in being debt-free

Consumer debt is a plague in today’s society. The average Personal Debt in the US was $16,529 in 2018. You might think if everyone has it why do I need to pay it back? Isn’t it just part of life? I’ll make more money by continuously investing. 

If you are an Index Fund Investor and invest in an S&P 500 tracking fund such as VTI or VUSA. You can expect an annual return of around 7% although it could very well fall. On the other hand, Credit Cards charge an APR of 16+%. 

When you invest you are hoping for a return nothing is guaranteed. All you have to do to get an instant return on investment of 15+% is repay your debt. It’s the first step towards Financial Independence.

If you can’t afford to pay the balance in full, work towards paying more than the minimum deposit. Future you will thank you!

grow your investments graphs going up

3. Plant the first seeds

2021 is the year to invest your first $1. It might sound scary, risky, or even pointless to invest so little. Your mind is more at ease with the cash in a savings account. There is 1 simple problem with that…

High-yield saving accounts earn around 0.6% at most in 2020. Whereas inflation is on average at 1.2% in the US. You effectively lose 60 cents by 100 dollars you keep in the bank. 

You can start investing easily today with Vanguard for example that offers a wide array of index funds. If you were to invest $1 per day into an S&P500 index fund you would have 16,949. The power of compounding interest is mind-boggling.

If you want to learn more about investing with Vanguard and Index Fund investing discover my article “How To Start Investing With Vanguard”. If you want a no-fee and easily accessible trading, I use “Trading 212”. Give it a try with as little as $1 and if you use my link you will get a free share valued up to $100.

Change your life  by getting a headstart on your New Year’s Resolutions by starting today.

4. Learn Something New

If you are like me you need to know what you are getting into. It might be the Swiss in me but I like planning ahead. On my side, I use 2 tools books and financial podcasts. My favorite is adding a book to my library as I can always come back to it and grow my knowledge. 

If I had to read 1 book on the subject it would be “Your Money or Your Life” by Vicki Robin. If you are one of my regular readers you probably can’t stand me talking about this book anymore. But it truly changed the way I view money and my relationship to finances. I won’t spoil any more of it but it will change your life.

As for podcasts, there are thousands out there, I was lucky enough to be on an episode of “The Art of Money Saving” that you can find here. Otherwise, I strongly recommend fasttrack.life as Yasi Zhang regularly receives high-profile guests that breakdown the essentials of Personal Finance.

a desk with increasing returns

5. Just Talk

This New Year’s Resolution is simultaneously the easiest and hardest. The best way to grow your wealth and hopefully achieve financial independence is by talking about it. 

That’s it?

Well no… but it’s a great start. Sharing your experiences and asking experts about their’s will lead to a higher understanding. You liberate yourself of stigma and make financial decisions more rational. Yet one of my favorite quotes comes to mind:

“Money is the last taboo. People will talk about their sex lives before they discuss their finances.” Marvin H. McIntyre

Money is kept in a sacrosanct position. Society and big firms will have you believe that it’s a private matter. Yet, knowledge is power. So start talking! 

What will yours be?

Now it’s time to decide what will you do? Don’t pick too many choose 1 and get started. It doesn’t need to be suggested here. I personally have the goal to have £10,000 invested by the end of 2021.

To achieve it I will need to increase my monthly contributions as soon as I get a raise or am able to monetize Cent by Cent. I also aim to make my blog a secondary source of income for 2021 and further.

What will you be doing to better your financial future?

Money Talk

Money Taboos Cost You A Fortune, Time To Start Talking

By

On December 7, 2020

In Financial Minimalism, Financial Thinking

“Money makes the world go round.”

“Don’t share your income.”

“Don’t talk about your money goals.”

“Spending money will make you happy.”

Money is part of my life whether I like it or not. Yet, I’m not supposed to talk about it. I need to be smart, invest, save, spend, etc. But by default, seeking advice is tough as people get cold feet when talking about this hidden divinity that is cash.

Just like everyone else I dream of Financial Independence. Imagine being able to work for pleasure not thinking about having to make ends meet. Money Taboos are counterproductive. 

How am I expected to reach freedom, if I can’t be open?

I was lucky, my family always talked freely about finances. Whether it from downturns to investments. It made money mundane instead of some kind of deity. We need it to live — but it’s nothing more than a tool. Vicki Robinson’s “Your Money or Your Life”, completely transformed my understanding of money.

What relationship do I want with it? 

Should it govern my life? 

How much do I need?

That last question hit me hard. When am I going to have enough? I’m not a dragon… No need to hoard as much as I can. What would be the point? Her book helped me realize that juggling multiple side-hustles, a normal job — isn’t making a living. We are dying at work. When do I get the time to live?

Money Clock

No More Shame - No More Taboo

How many times have you bought something on a whim?

How many times did you look at the object shamefully?

Yeah me too… 

The number of times I spent money on a “must-have”  is unmeasurable. When I started questioning why I didn’t share my expenses more. I realized it was because of this inherent shame. 

What are they going to think about me? 

Who spends that much on tech?

It was much easier to keep it for myself. At the end of the day it’s none of their business, is it?

That’s that I’m not sharing. But what if I did? I couldn’t shake the thought off. Some day I took the step. I started small. Talking about my overall rent with some colleagues. My gosh… it’s like a weight was lifted. By listening to their tips, tricks, and struggles. I felt like I was seeing light. Then the dreaded “Why?” came. Why do I spend this amount? Why not more or less?

This epiphany made me realize that not only am I not alone. But we are all going through this existential crisis. 

Opening up about my expenses allows me to understand why I’m spending. The need for a strict budget has passed me over. I must understand what my values are. As long as my spending reflects them — I’m doing well. No point in being ashamed either. Ridding myself of Money Taboos made me realize: What is spent is spent. Discover more about this thought process with my article Why I Was Wrong About My Financial Goals.

Monkey Money Taboos

What Am I Worth?

An intense yet important question. We are encouraged by society to keep our income to ourselves. It’s simply bad etiquette to discuss salary. Truly the most engrained of Money Taboos. But how am I supposed to know what I deserve if I can’t talk about it?

Another head-scratcher. The answer was easier. I didn’t want to sell myself short. How are the different roles compensated? Opening the discussion with my colleagues, friends, and family was a mixed bag. It was easier with my generation. We have similar roles. We were all in the same ballpark. On the other hand, it meant we had less to learn from each other.

Although starting a conversation with older generations was tough. It was beneficial when the shell started to crack. Not only could I learn about future potential earnings within my job. I learned a lot about multiple income streams. Whether it was rental income, dividends, or general freelancing.

This topic is paramount when it comes to blogging and freelancing. As we all adventure on our journey to creativity we are blind. The community and people being open about their revenue online is what gives us referral points. 

By opening up the conversation around income. I discovered options for future revenue streams. It set expectations for my financial future and a benchmark for my blogging. But most importantly, I understood my worth isn’t tied to my income.

Investments around the world

Let's Get Rid Of Money Taboos Together

Understanding money is a tough nut to crack. You can’t do it alone, yet sharing is frowned upon. By opening up about my finances – I liberated myself. I realized that I’m not alone. Sharing both my fears and my successes means they become real. The only way to deal with something is by acknowledging it.

Not only has it empowered me it has helped people around me. 

Having money talks is beneficial. It made me understand that my income doesn’t represent my worth. It is a building block I use to reach fulfillment.

I would love to hear from you. What helped you break the Money Taboo? How to you go around Money Talks?

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