Welcome to April and happy Spring 🌻
This month I bring you a special edition on money! 💵
Money is tricky. Many of us would like to be comfortable enough to not think about money. But, to get there, we first need to think about money. As a life’s necessity, we can’t afford to be bad at money management.
In the end of this newsletter, you’ll be better equipped to do it.
Those who want to be better at managing money but don’t know where to start;
Those that are good at managing money and want to start investing but don’t know how;
Those who want to achieve financial independence with a proven path.
Anybody can retire a millionaire (or be wealthy, if being a millionaire is not your goal). The simple but hard strategy to do so is:
Spend less than you earn.
Stay away from debt (or get rid of it if you have any).
Invest the surplus in an index fund, consistently.
Avoid people who sell complicated financial products and/or promise great returns.
Financial freedom is when the money from your assets pays for your expenses. Let’s say you need 1000€/month (12k/year) to pay for your lifestyle. If your assets generated 10%/year, you would be financially free once those assets got to 120k in value (10% of 120k is 12k). Obviously, this is risky. If any year the return is less than 10%, you would run out of money. This is where the next concept comes in.
Safe withdrawal rate is the amount you can sell from your assets each year without running out of money. While the market has averaged a 10% return annually for the past 100 years, it doesn't achieve this every year. How much is safe? A study done by economists with many simulations showed it would be around 4-5%. This gives you enough margin to never run out of money. Translation: if you accumulate 20-25x your annual expenses, you are financially free.
Retiring as a millionaire is simple, but hard. This is because:
You need to invest consistently.
You need to invest for a long time, depending on how much you invest. Delaying gratification for a few days is hard. Delaying it for an entire career…
You need to control your emotions. This includes greed, the appeal of status symbols, the gut-wrenching feeling of “losing” 30% of your portfolio in a few days due to market crashes, and the ever-present desire for flashy tech and latest generation stuff.
You need to resist the urge to try to beat the market, even if you've read many books on investing. (This is more of a note to myself, but don't ignore it).
Avoid debt at all costs. With exceptions such as housing and (maybe) a business loan, stay away from debt.
Stay away from people that promise you big returns. Investing and managing your money is simple. Keep it to yourself and avoid high management fees.
Step 1: engineer your life in a way that allows you to live on half of your income. (This could mean reducing/optimising expenses or increasing your income or a mix of both.) It’s hard when you can barely make ends meet, but doable if you think long-term. If not half, aim for what you can right now. Use salary increases to invest, not to finance lifestyle inflation.
Step 2: Stay away from debt. Get rid of it if you have any. Start with the highest interest rates.
Step 3: Invest the remaining in a low-cost index fund that tracks the market. For my European readers: while index funds are hard to access, exchange traded funds are a great alternative. You can buy a fund like these through most brokers (I use and recommend Trading 212.)
Step 4: Stick with your plan your entire career, and you can retire once you save 25 times your yearly expenses. You can simulate when in this website.
I recommend the book as a good starting point, but it falls short in explaining how to achieve a high savings rate. If you are able to save 50% of your income (or more), you should be well financially, even without investing. Saving half of your take-home pay? Not so easy. So, how do you do it? That’s where a proper money management app comes in. 👇
Being frugal is not the same as cheap. Being cheap is trying to spend as little as possible, whenever possible. Being frugal is choosing what’s important to you and spending on that.
I’ve tried most money management apps out there and recommend YNAB. It is an envelope-based budgeting app. It forces you to be intentional with your money and think about what matters, before you spend. This makes all the difference. When you receive some cash, it forces you to decide where you are going to spend it. Every euro/dollar has a job. Provided you care about your budget, you are able to see whether you can afford something or not.
Until I release the app I'm developing, this should be the best option for most people 😊
Let’s say you have 1000€ in your account. You want to buy a new phone for 300€. Looking at the balance, it seems obvious that you an afford it. What if you have an insurance payment due in two months for 500€ and rent is due in two weeks? Suddenly, your 1000€ turns into 100€ available. You cannot afford that phone. Your bank balance lied to you. Budgeting saves you from this type of problem.
There are many ways to reduce expenses and to engineer your life to live on half of your income so I won’t list them all here. Being aware of your expenses and being intentional about them gets you most of the way there (Pareto principle).
If I could give only a few pointers:
Most people's biggest expenses are housing, food, and transportation. Examine these first 👇
Do you need such a big house or to live in a big (expensive) city? Can you live with roommates for a bit longer?
Are those takeaway dinners bringing you joy or are they the result of poor planning?
Do you need a car? If you do, do you need to drive everywhere or is biking possible?
After the main three, examine what comes after. Ask yourself: "is this bringing me tons of value or could I be happy without it?"
After examining expenses, redirect your focus into increasing your earning power. Learn, improve, repeat.
I wanted to write a single lesson here but I will cheat this month and write a few. These impacted me the most; hopefully that brings you more value than a single lesson.
Saving a few cents on coffee won’t make you rich. Enjoy that coffee ☕️
By far, the variable that impacts your savings rate the most will be your income level 💰
To increase your income level, you need to be valuable. To be valuable, you need to be good at something and that only happens when you do it for long enough. Find what you enjoy and make it your contribution.
Never stop learning. 📚
There’s a limit to how much you can save but no limit on how much you can earn.
Be grateful. Your “need” to buy stuff is inverse to how much you appreciate your life. 🧘♂️
The true cost of something is not the cash outflow of the buy, it’s how much it depreciates in your possession. They are not always the same. 📉
Casinos have made many people rich: their owners. 🎰
The most important cost is not the absolute (the buy) but the relative: the buy divided by the use. A 50€ dress worn once is more expensive than 100€ shoes that you wear daily.
Related to the above, sometimes a better quality item is the better buy if it means you will use it more (i.e. last longer).
Most times, neither the cheapest nor the most expensive options are the best.
Everything follows the law of diminishing returns. (For example, the newest phones are usually 10% better than last year’s but cost 50% more.)
At any job, you should learn or earn. Either is fine. Both is best. When it’s none, quit.
You should either learn to build or learn to sell. If you do both, you’ll be unstoppable 🚀
That’s it from me. As usual, I’d love to hear your opinions on this month’s newsletter. Feel free to hit reply to this email.
See you in May!
Fábio
No posts
Comments
Nothing yet. Say the first thing.
Sign in to join the conversation.