Lifestyle Creeps by 10KDiver
Get a cup of coffee.
In this thread, I'll help you understand Lifestyle Creep, and why it's important to minimize it to the extent possible.
This will help you answer the most important question in all of personal finance: should you get that daily latte or not?
As we get older, we tend to have more money.
At work, we become better skilled and more experienced at our jobs. So we get promotions and raises.
Also, our investment portfolios and 401(k)s become bigger -- as compounding starts to kick in.
So we feel richer.
Over time, this feeling of being richer leads us to consume more (ie, spend more money).
We buy bigger houses. We drive nicer cars. We treat ourselves more often to nice meals at fine restaurants.
As we splurge, we get accustomed to a more comfortable, more pampered, life.
And for most of us, this is a one-way street: it's hard to go back to our spartan ways of yesteryears.
Our new, more luxurious, lifestyle has slowly "crept up" on us.
This is Lifestyle Creep.
Background - Mark Mivervini is the author of Trade Like A Stock Market Wizard and Think & Trade Like a Champion. He has been featured in Stock Market Wizards and America's Top Stock Traders by Jack Schwager.
I am currently reading his book, "Trade Like a Stock Market Wizard" as complement to the Nicolas Darvas book I just read. I also follow him on Twitter and avidly watch his interviews and presentations on Youtube. I thought his personal rules for wealth creation is worth sharing.
1. Go where the money is. I chose Wall Street because there is unlimited opportunity. If you develop great talent, the sky is the limit. If you are looking for a sunset, you must head west.
2. Forget about money. Instead, focus on being the best. The best in any field get paid very well. Invest in yourself and develop talent. Money is a natural bi-product of being great.
First you get the knowledge.
Then you get the experience.
Then you get the skill.
THEN you get the money.
3. Think in decades not years. We tend to overestimate what we can do in 3-5 years and underestimate what we can do in 10-20. Wanting it too fast will make you quit too early.
Rule of 72 by @10KDiver
/Start of Thread
1/ Get a cup of coffee. In this thread, I'll walk you through the Rule of 72 -- and related "mental math tricks" for investors.
2/ As humans, we tend to think linearly. When we see a curve, we like to mentally approximate it by a straight line. This helps us cope with changes in the world around us. Changes that happen a constant pace. Changes that don't need our attention for very long.
3/ But in finance/investing, we need to think exponentially, not linearly. Money compounds. Growth doesn't happen at a constant pace; it accelerates over time. Most of us are not programmed to intuitively "get" compounding -- over the long run.
4/ So we need some "mental shorthands". Rules of thumb that help us develop intuition about exponential growth. Tricks that help us do "compounding math" in our head. One such trick is to think of compounding as a process that doubles our money every so many years.
5/ So the question is: how long does the compounding process take to double our money? The Rule of 72 gives us a simple approximate formula for this:
Browsing through my 2020 goals and realising how deformed my lists are, is a bit melancholic. I was eager to attend seminars, lectures and FI-RE meet-ups but that didn't bode well due to lockdowns. And by the looks of it, we aren't going back to pre-COVID normalcy anytime soon. However, there is more to life than this stupid virus and to continually live in FUD is egregiously unproductive.
Moving on from 2020, I will embody a "Think more. Execute Ideas More. Everything Else is a Noise." mentality this year as guided by Anton Kreil's 10 Secrets. What I mean by thinking more is simply generating as many ideas as I can, prioritising them and executing the best based on what I want to achieve. A zero ounce of energy would I waste on anything other than the latter.
Read 21 books related to finance and investing.
Complete 2 online finance courses per quarter.
Listen to finance and investing podcasts only.
Consistently post on my Youtube channel.
Post at least twice monthly on this blog.
Journal once a week.
Create a 10-position portfolio in eToro.
Double Revolut account.
Invest monthly on Bitcoin.
To the Moon - 2020 Investment Gains!
The market took a nose-dive reacting to the worsening Coronavirus spread in the first quarter of the year; only to bounce and catapulted to the moon partly driven by the perpetual quantitative easing of Central banks and ensuring zero interest rates. For what is worth, the market is artificially inflated but it is also indisputable that many sectors profit from the lockdown like eCommerce, Social Media, Digitisation, Cybersecurity, Biotech, Gaming, and other Stay-at-Home Stocks. SPACs getting popular as an alternative route for companies to go public; Bitcoin at all time high, dragging other crypto-assets along with it. When vaccine approval was announced, the hospitality and travel stocks rebound. In return, indices are ripping. Perhaps even the gloomy, dooms-like 2020 has silver-lining.
How this translates to my portfolio? Let's take a look.
My average return for the year is 28% with only 1 instrument in the red, which is $VUKE. My best performer is BTC, a highly speculative and the riskiest asset that I own. Not a bad return for my trading accounts considering I only started this year actively doing so. A bull market really makes people feel smart about the financial market which is incontestable with the rise of Fintwit superstars coming from nowhere posting their thesis and 100 baggers stock picks. I am not dumb not to know this and I am taking action to ensure that I could still operate in a bear or kangaroo market.
Overall, my investment allocation is as follows, 50% ETF/Index, 49% Trading Accounts and 1% Bitcoin. For 2021, I will increase my Vanguard allocation by 10%, cap trading account contribution to 35% and BTC at 2%. I am not adding to my Revolut Investment anymore. My eToro gets a boosts next year as I build my trading track record. My overtime money goes to my Trading 212 account as usual.
I will not make changes on my currently owned equities except for $VUKE where I will de-risk my exposure by buying the entire UK market. I am no longer comfortable that out of the 100 biggest FTSE companies, only 1% is Tech. However, I will not sell at a loss. I am also bullish on Brexit.
I will increase my BTC position to 2%.
I will protect my capital at all cost and build an actively managed long and short positions.
I will complete 2 financial courses per quarter.
I will only read finance and investing books for the entire year.
Covid sucks! London in Tier 4 lockdown, new Covid mutation spreading in the UK and everywhere else, many are still hospitalised and die on a daily, Christmas is de facto cancelled. When is this global nightmare going to end? Nobody knows for sure and even the medics and epidemiologists are as equally baffled. However, life has to move on and therefore, I'll review my 2020 budget and check how COVID impacted my overall inflows and outflows for the year.
Income 1 is my main salary as a nurse (after taxes and pension contribution); Income 2 is my supplementary active income (Overtimes and Agency Shifts). I automatically invest (45%-70%) once I receive my salaries (Save First) but the total invested amount will be more as I invest my end-of-month spare change as well. Therefore, my total income for the year is £34,084.72 and my total investment is £20,109.43. I've lost potential agency shift earnings of approximately £1500 due to COVID. This is because, my employer has to cancel all elective cases to convert our Operating Theatres into ITU to accommodate ventilated COVID patients. My investments are spread into 4 accounts, Investment1, Investment2, Investment3/4, and Investment5.
My top 3 expenses are rent (59%), giving (20%) and food and beverages (10%). Overall, I spent £13,653.44 which is less than my budget of £14,400/year. Without COVID, I would probably spend a bit more on eating out, Caffe Nero cappuccino, Lions games tickets and lager. I haven't bought clothes this year.
I would also like to include the total remittance I sent to the Philippines which is not entirely part of the budget table.
Reasons for these remittances are educational support for my brother, back-up support to my retired parents and opening a new business venture. Over half a million pesos sent this year.
Overall, I did well this year despite COVID. The 20K investment (nearly 60% Savings Rate) is a great achievement considering I live in Central London. Given the above data, I could retire in 8.3 years as per Networthify retirement calculator.
Investing sucks? Lost -£1473.84.
On March 11, WHO declared Covid-19 as a global pandemic phenomenon. It didn't take long before the market crashed on March 24, a day after PM Boris also announced UK national lockdown. Before the crash, I was aware that my portfolio started tanking right after the Rona virus was spreading in Wuhan, China. This was all over the news but predominantly downplayed by China and WHO. At this stage, I decided not to do anything; for one, I didn't need the money and, secondly, I have fully financed emergency fund.
Three months later, Covid cases and deaths rose astronomically all over the world with lockdowns imposed all over. I stayed with the course all these times, buying my funds on my Vanguard account and catching falling knives on my stock picks to average down. I wasn't actively participating in the market nor was I affected with my PnL (Profits and Losses). I was guided with the FIRE mindset, where, over the long term, my positions will recover so the status quo wouldn't matter.
Until my yahoo finance and google market alerts were jam-packed with V-shaped recovery narrative, Tesla parabolic and Tech stocks ripping; I decided to follow the news, check stocks on the daily and started trading. I understood the basic concept of chart reading and interpretation prior; but executing them in real time and making quick profits were new to me. I made 20+ more trades using small position sizes to prove my "strategy" and I was convinced that I could actually do it. With the market "mooning" and convinced with my newfound skill, I decided to stop the bleeding and closed all my individual stock positions in July. My realised PnL for that month was -£1473.84.
I allocated 2 hours per day and 6-8 hours on my days off of study - following the market, reading concepts and theories, testing strategies, reading qualitative analysis on substack, discovering hidden gems on twitter and reddit. Very quickly, I learned to use financial websites, identifying bucket shops for pumps and dumps, momentum, short positions, SEC filings, etc. I have devoured countless hours of trading and investing content on youtube and finally, could relate to the Chat With Traders podcasts I have been listening for almost a year now. I became immune to the Covid news, then finally, stopped following it altogether.
Trading became my new normal and I loved it.
As can be seen on the chart, I have recovered all my losses last month and more (including unrealised gains). I have made many mistakes but learned a ton. I believe that if I could streamline my trading strategy whereby, regardless of the market condition, I'll make money more than I could possible ever make with my full-time job. I love taking risks, and if I could decrease such risks using my brains, much better. I could discuss what I have been doing per month but I think it is pointless, I'll remind myself in 2 years once I have a lengthy track record. Maybe then, I'll consider talking about my experience.
Retrospectively, all I wanted was to recoup my losses and make smart decisions with my stock picks with high conviction; it morphed into the creation of big ideas I would never have considered before I started trading. I am ankle-deep under water, I want to keep going until I find myself fully submerged. No turning back from here.
In January 20, 2020, out of the blue, I made a challenge were I should invest £20,000 (Php1,300,000) on or before December 20, 2020. Details of the challenge can be found here.
Today, my total investment is £19,084.42. I fell short, not miserably but I failed nonetheless. I would have made it if Santa came a bit early but didn't - I am talking about my salary (lol).
Anyway, my investments were allocated to the following:
Addendum: My workplace's salary for December was distributed on the 22nd. I invested £1,025 of that income; therefore, my total investment for the year is £20,109.42.
My Vanguard account is tax-wrapped (ISA) so it made sense to prioritise it. I have a with-profits savings account with Sheffield Mutual that I am paying £130 per month. This is tax-wrapped, with life insurance account and is invested mostly in the UK. For the month of August, I invested all my savings to Trading212. By November, I opened Revolut and eToro to trade using a dollar-denominated account. Lastly, I explored BTC this year. I reckon it doesn't hurt if I invest to an instrument that is gaining institutional interest this year at less than 1% of my portfolio. But that's just me of course.
Also, another requirement for this challenge is to hit the annual Stocks and Shares ISA limit of £20,000 before the next tax cycle that starts April every year. Hence, I will need £7,472.13 to hit that target. Given my current allocation, I would miss this by 25%. Not fun to be a nurse but I would probably make another challenge starting January. Maybe £21,000 (Php1,400,000) before end of 2021?
P.S. Article adjusted with my December income.
Monthly investment here.
Building-up a savings buffer
Photo by @camilo_jimenez on @Unsplash
I had a casual conversation with my friends when the topic pivoted into finance and the stock market. I chimed in that I usually put off investing when my Emergency fund is not fully funded (6 months of my monthly expenses). Shockingly, one of my friends innocently admitted that she has no clue what an Emergency Fund is.
I can't blame her. I knew about Emergency Fund when I was already 22. I was young but should have known the concept when I started working full time at 20. To add, I figured it all out myself. My parents didn't teach me about Emergency funds nor did we sit down as a family and talk about money matters in general. My mum, however, had a monthly budget and was frugal. No wonder I budget in detail and turned out to be frugal too (lol).
Anyway, if you are like my friend, say no more. Pag-usapan natin to!
What is an Emergency Fund?
This is an easily accessible cash buffer to protect your other assets when life's mishaps happen. When your car or boiler breaks, the roof is leaking, your child caught a bug requiring hospital care, or your boss did an "eeny, meeny, miny, moe" and fire you, an emergency cash reserve allows you to deal with these issues without using the money you saved for more important things like retirement or investment.
I was searching the internet about the EF concept in the Philippine setting, luckily enough, I stumbled upon a study conducted by the Central Bank of the Philippines (BSP) in 2015.
Interestingly, in relation to saving money, it documented the following:
* 4 out of 10 Filipino adults (43.2%) currently have savings, 32.3% used to save in the past but have stopped saving money, while the remaining 24.5% have never experienced saving money
* 7 out of 10 adults (68.3%) who are saving money keep their savings at home. 32.7% of adults with savings put their money in banks while others save through cooperatives
At a glance, there are so many things that are wrong here based on how Filipinos manage our money but let's focus on bullet 1.
For those that have savings (43.2%), even though BSP did not categorise where this money is being saved for (i.e. emergencies, cellphone, car, vacation, life event) making it unclear, actually, it doesn't matter. This only shows that almost 60% of Filipinos potentially has ZERO emergency fund, and for savers, is likely that the money is saved for something else. This study was conducted in 2015 so who knows behaviour may have changed for the last 5 years but I am yet to see statistics for the present.
How much cash
There are a few arguments on how much money is saved in an emergency cash reserve pot. Papa Dave Ramsey for example, preaches $1000 Emergency Fund first, pay-off debt next, then at least 3 months of monthly expenses, then 6 months. For the risk-averse, they can go as high as 12 months to at least 2 years of monthly expenses in cushion.
Quite frankly, for my personal circumstance, 1 month cash reserve is enough as I work as a nurse with one of the highest vacancy rates in England. I also rent so I don't need cash for house fixes and I don't own a car. However, as a member of the Sandwich Generation Club, based on my calculations, I need at least 6 months of emergency money just in case shit happens back home in the Philippines.
How much money to be kept in this fund is therefore case by case basis. Having a preview of what could go wrong in every facets of your life is a good start and then adjustments could be made along the way.
I opened a separate bank account sole for this. It earns the crappiest interest yield but earning interest out of this fund is not the point. Although others do hack their Emergency fund by saving it into a high yield savings account. It also makes sense to me that this fund is put on a different account so I don't mix my regular incomings and outgoings. And when it comes to shove that I need to mobilise the reserve, I would know how much exactly I used and then simply refuel it back at full. Again, in my case is 6 months of my monthly expenses, which is £7200.
I also predict that as I grow old past the wealth accumulation stage of my life, I would propel my safety margin to at least 1 year. Or on a contrary, I could press it a bit down to £6000 should I see opportunity like a dip in the market for example.
About 4 months ago, my mum got seriously ill to the extent that she could no longer work. After the initial lab tests and doctor's appointment, the clinician was unable to determine the exact cause of her deteriorating health. This was clearly an urgent matter and therefore, I mobilised my Emergency Fund so she could get specialist appointment and treatment - Ophthalmologist, Cardiologist, and ENT. She was prescribed multiple drugs and diagnostic tests after these appointments. This is exactly, how important having AND maintaining an Emergency fund is. I had access to that fund stat without me touching my investment portfolio. And then when things got better, I just replenished my emergency shield back up.
Having an emergency fund is a powerful tool to ensure that other important assets are protected when unexpected events happen to your life. It is beneficial to separate this from your main account. The amount is dependent on your personal circumstances and risk tolerance. If used, replenish as soon as possible.
Before Christmas break last year, a colleague and I were just talking about how careful should we be on our extra hours as earning £50,000 per tax year in the UK would qualify one to be taxed on a higher rate at 40%. Confidently, I mentioned that I wouldn't reach that earning for the tax year as my annual salary is only £24,214 and even if I max out 20 hours of extra work every week, my total annual salary would still be under £50,000 before tax. She agreed but was astound to know that my annual pay is only £24,214 when it should have been £26,220. Yup, a difference of £2,006 since the start of the tax year, April 2019. She quipped that I should have my pay reviewed the soonest as it would take several months to be rectified as this happened to her and another colleague.
When I heard the news, I genuinely felt that I have let myself down for not noticing the err on my payslip. I budget down to the last penny, yet, ironically, I failed to notice that I was on the wrong pay scale. Although I was disappointed of myself, I knew, there was no point in crying over spoilt milk and should just focus my energy on what I could control moving forward.
So, what exactly I could control?
My employer's payroll is a third party company and since that time was a holiday, there was no way I could call them to explain my dispute. I could, however, create an escalation ticket via our intranet portal; then compose a draft email to be sent immediately to my line manager after the New Year. That's exactly what I did.
The timeline - I created the ticket on December 24, received a reply on the 30th. I sent my drafted email when I got back to work on the 2nd of January, received a reply from payroll on the 6th (also apologising for the delayed correspondence as the latter have just returned from Leave.) On the 24th, shockingly, my payslip has been updated with the correct pay and arrears for the 9 months I paid wrongly. Issue resolved. Happy days!
What a way to earn a little under £4000 for a month (Php265000). I may never get this again so pardon me for my unmatched elation (although, I have plans on how to boost my income in the next 1-3 years).
What happened to the extra income?
My frugal mentality whispered that I should put 55% of that to my Vanguard and Trading212 accounts; and I delivered. I didn't treat myself to a nice meal from a fancy restaurant nor bought new things because #IDeserveIt. No, not on my watch. I was happy to invest that extra money, that is all that matter.
I am thankful for that colleague of mine for challenging me to correct my pay and for my employer for the quick, hassle-free rectification of my dispute.
Now, I have to live off on the remaining 45% of that income for the month of February. My heart is full.