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Tag: Saving Money

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%?

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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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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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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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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?

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

alarm clock lying on multicolored surface
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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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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.

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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.

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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. 

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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?

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