Two tips that will help your financial planning

Plan future expenses

To ensure that your financial planning is set up properly, it’s NOT enough to consider only current expenses. It’s very important to take into account for future expenses, particularly those that you know will appear.

Let’s run a simple scenario as an example. For simplicity sake, imagine your after-tax take-home income, from both you and your spouse, is $100,000 a year. You expect to get two promotions in 2025 and 2028, which will increase your income by 15% and 10% from the year before respectively. Except those two years, your income will grow on average by 3% every year till you retire. Regarding current and future expenses, here are the big items:

  • Your current monthly expense is $4,000. The natural increase in this expense line item is 2% a year, unless specified otherwise.
  • You plan to have two children. One born in 2025 and the other in 2028. It will cost approximately $20,000 to deliver each kid.
  • The first kid will see the monthly expense grow to $5,500 and the second will push it to $7,000.
  • The estimated amount that you want to give them for college tuition fee is $100,000 each by 2043, when they are 18 years old. Hence, the combined college fund will total $200,000 by 2043.
  • You and your spouse understand that unfortunate events can happen to anyone. As a result, you both want to set aside 10% of your annual take-home income for emergencies.
  • For investments, you budget it at 20% of your annual income.
  • Life is short. You want to see the world and travel. Hence, travel will take 5%, if possible.
  • Whatever left will go to the disposable fund that can be used for any purposes.

Using the information above, here is what the numbers look like every year between 2023 and 2035

If you notice, I am pretty conservative with the income estimate. Growing the top line, as long as other expenses don’t grow proportionately, will bring more flexibility, freedom and choice. This is why folks want a higher salary or have a side gig. One source of income isn’t sufficient to sustain various financial needs. Also, I don’t include the fund for retirement which can be $2 million for person. The exclusion is driven by the fact that our 401K already comes out of our paycheck prior to the scenario and that the Emergency, Investment, Travel and Disposable Fund, if unused, can all be funneled into retirement.

Regardless, it’s obvious that the paycheck now doesn’t seem very big any more, does it? If it’s not possible to grow income sustainably, then there must be restrictions on the number of financial needs and there must be also compromises. That fancy car that you dream about, that new TV and furniture set that you crave or that yearly trip to Europe that you brag about, they need to be either axed or paid for by money slated either for emergencies or investments. It all comes down to preferences and willingness to compromise. But without an exercise like this, a normal person with little adequate personal finance awareness would get themselves deep into debt or make decisions that would not leave much margin for accidents.

Nobody knows what their future holds. Hence, the point of this exercise is not to be 100% accurate. Rather, it’s about putting more thoughts on one’s financial status and life priorities, which is ultimately what all this boils down to.

The 2x Rule

I “stole” this tip from a book called Just Keep Buying: Proven Ways To Save Money And Build Your Wealth. Essentially, this rule dictates that anytime I want to splash money on something, I must put the same amount of money on investing (most likely an index). This simple tip is a brilliant way to tamp down my urge to spend impulsively or too discretionally. It creates a moment of doubt in your mind and makes you wonder how much you want the item at hand and whether you are willing to pay double for it. For example,I have told my wife numerous times in the past year that I wanted to buy new Apple gadgets, but the thought of having to put the same amount in investing deterred me and made me realize that I didn’t need those new toys that much. The end result is that I am still using a 10-year-old Mac and a 3-year-old iPhone.

Personal finance, as the name may already give it away, is very personal. What works for me may not work for you. These tools are helpful, but their usefulness depends on how you use them, whether you do so religiously and what your life circumstances are. Mike Tyson said it best: everyone has a plan till they get punched in the face. Nonetheless, it’s better to be prepared to some extent than to be caught completely off guard.

Weekly reading – 7th May 2022

What I wrote last week

Apple’s Q2 FY2022 results

Book Review: Just Keep Buying

Business

DTC brands are slowly warming up to Amazon. The ability to tell stories and appear authentic to shoppers on Amazon is hugely important. The commission may cut deep into margin, but Amazon commands the kind of online traffic that few others can rival. Some retailers now use Amazon as an acquisition tool. Sell part of the catalogue on the site, lure shoppers to their own native page and hopefully convince them to buy what is not on Amazon. It’s not as straightforward as it should be, but if you can’t win every battle, you may as well pick the ones that can help you win the war

Amazon Will Close Six Whole Foods Stores in Four States. I look forward to seeing how Amazon’s physical store strategy unfolds. Will it transition all Whole Foods to the cashierless version that Amazon Go pioneers? Will it keep both brands at the same time? Or will it designate Amazon Go as the flagship store brand moving forward?

Snapchat’s flying camera Pixy. Kudos to Snapchat for making a portable, small and allegedly easy-to-use drone. There is certainly a niche market for Pixy: consumers who want to film drone footage but can’t afford a drone or do not want to carry a heavy one around. I am certain that Snapchat will iterate furiously to improve Pixy: longer lasting batteries, higher quality cameras, better integration into the Memories section and more AR effects. Snapchat is already great at software. Hardware is hard, but if it can be great at it too, it’ll be formidable (ask Apple).

Formula One Finally Found a Way to Get Americans to Care. Cracking the America code is fantastic for Formula 1 as a sport and a business. A long-time fan of Formula 1, I noticed the difference after Liberty took over. Prior to the take-over, clips in which experts explain aerodynamics, rear wings or floor of F1 cars didn’t exist. Beautiful charts that discuss where one driver is slower than another in a lap were the stuff of imagination. For a global sport such as F1, it was unfathomable to think that it didn’t even have a subscription app to watch races. The Americanization of the sport is not perfect. I am not a fan of how much Drive To Survive excessively dramatizes F1. Just ask Max Verstappen or a few other drivers about it. Having more than one race in the US is…nice, but the final verdict should wait till we get a feel of how the new tracks are. Austin is a great spectacle that provides awesome racing. Miami and Vegas should offer a gigantic boost in popularity, but I am not sure about the racing. We’ll see. For now, I am happy for the sport that I have loved for the past 17 years.

Mercedes-Benz Says Self-Driving Option Ready to Roll. Mercedes is the first car manufacturer that achieves an internationally valid certification for self-driving level 3. This looks a big progress in this space. From the technology perspective, I am excited about self-driving cars. From a practical perspective, I still don’t grasp the actual benefits of driving a driverless vehicle on busy urban streets. Accidents happen all the time. Reliance on computers just makes careless drivers more careless. Plus, if you are in a car and don’t have to drive it, what could you do in the meantime? It’s not like you can go to the back seat and have a nap…

TikTok’s Work Culture: Anxiety, Secrecy and Relentless Pressure. The older I am, the more put off I become of a workplace like TikTok. Imagine needing marriage therapy because you spend your dinner time with your husband on the phone discussing work.

American Consumers Are Shopping, Traveling and Working Out Like It’s 2019. Among a slew of bad news such as high inflation, supply chain constraints and stock market crashes, this is probably the best silver lining for companies. The question is: how long can this strong consumer spending last?

Other stuff I found interesting

103 Bits of Advice I Wish I Had Known. A lot of goof stuff that I wish I had known 10 years earlier

The Arc of the Practical Creator. “A Practical Creator doesn’t view a boring job as a dead-end endeavor, but as an active patron of their creativity. When you’re in this first stage, you must rigorously work on your creative endeavors after your day job responsibilities. This is an absolute must “. I love this website.

Stats

Zenly, a subsidiary of Snapschat that is very popular in Russia, has 35 million monthly active users

Internet companies in China raised $3.51 billion in Q1 2022, down from $15 billion in Q1 2021

The average price for ground beef in America grocery stores has jumped 18% from a year ago

Dr Strange 2 minted $36 million in preview performance, the 8th largest of all time. For comparison, Avenger’s Infinity War notched $39 million and Spiderman: No Way Home did $50 million

US reaches 1 million Covid deaths

Airbnb said more than 800,000 people flocked to its careers page after it announced that employees could live and work anywhere

Book Review: Just Keep Buying

If you are a normal Joe like me and want to learn about investing as well as personal finance, do yourself a favor and get “Just Keep Buying“. The lessons contained in the book are popular and well-covered by many other authors. So don’t expect any earth-shattering discoveries there. But great lessons remain great and it’s always delightful to regularly re-acquaint with them.

Just Keep Buying covers essential issues from rent vs buying a house, focusing on income instead of expense control to dollar-cost-averaging vs buying the dip, traditional IRA vs Roth IRA, individual stocks vs ETFs, REITS vs stocks vs bonds etc…The book doesn’t give a deep dive into each of these issues. Instead, it analyzes the pros and cons or when an investment option makes and when it doesn’t. The arguments are supported by recent data and written in a way that each a dummie like me could understand. If you are new to investing or personal finance, great. Take it as a great inspiring starting point. If you are relatively experienced in some investment areas, there may still be some valuable learnings to gain from the book.

What I also like about “Just Keep Buying” is that Nick offered some great personal perspectives with refreshing honesty. He talked about missing his saving goal by the time he was 30. He mentioned that he didn’t feel rich years ago because unlike his classmates, he never visited Europe. These admissions, if you will, make the book more relatable and credible. It’s a rare quality in books, I find.

All in all, I highly recommend this book, along with The Psychology of Money, to anyone who is interested in money, investing and personal finance. Below are a few highlights from the book

“The first tip is what I call The 2x Rule. The 2x Rule works like this: Anytime I want to splurge on something, I have to take the same amount of money and invest it as well.

So, if I wanted to buy a $400 pair of dress shoes, I would also have to buy $400 worth of stocks (or other income-producing assets).” This makes me re-evaluate how much I really want something because if I am not willing to save 2x for it, then I don’t buy it.

“When it comes to housing as an investment, unfortunately, the data isn’t that promising. Robert Shiller, the Nobel Prize-winning economist, calculated the inflation-adjusted return on U.S. housing was “only 0.6% a year” from 1915–2015. More importantly, most of that return came after the year 2000. Anytime you look at U.S. housing as an investment, you have to compare it to what an investment in another asset would have done over the same time period. This is known as the opportunity cost of the investment.”

“For example, my grandparents bought their $28,000 home and paid a $280 monthly mortgage from 1972 to 2001. Around 2001, their home was valued at around $230,000. If they had put $280 a month into the S&P 500 from 1972 to 2001, they would have had over $950,000 by 2001, after reinvested dividends. And this doesn’t even include their down payment! Had they invested their down payment as well, they would have had over $1 million by 2001.”

“Given that the transaction costs of buying a home are 2%–11% of the home’s value, you will want to ensure that you stay in the home long enough to make up for these costs. For practical purposes let’s choose the middle of this range and assume that the transaction cost of buying a home is 6%. Using Shiller’s estimate for real U.S. housing returns of 0.6% per year, this means it would take ten years for the typical U.S. home to appreciate enough to offset this 6% transaction cost.”

“Just 4% of stocks from 1926–2016 created all the excess return for stocks above U.S. Treasury bills. In fact, “just five firms (ExxonMobil, Apple, Microsoft, General Electric, and IBM) account for 10% of the total wealth creation.”

“As Geoffrey West calculated, “Of the 28,853 companies that traded on U.S. markets since 1950, 22,469 (78 percent) died by 2009.” In fact, “half of all companies in any given cohort of U.S. publicly traded companies disappear within 10 years.”

“The main purpose of this chapter is to reiterate that saving up cash to buy the dip is futile. You would be far better off if you Just Keep Buying.”

“For example, if you had picked a random month since 1926 to start buying a broad basket of U.S. stocks and kept buying them for the rest of the following decade, there is a 98% chance that you would have beaten sitting in cash and an 83% chance that you would have beaten 5-Year Treasury notes as well. More importantly, you would have typically earned about 10.5% on your money while doing so.”

“And if your net worth exceeds $93,170, which is similar to the median net worth in the U.S., that puts you in the top 10% globally. I don’t know about you, but I would consider someone in the top 10% to be rich”

“There is no right answer, because being rich is a relative concept. Always has been and always will be. And that relativity will be present throughout your life.”

“I would be willing to bet that not one of you, if you were offered every dollar of Warren Buffett’s fortune, would trade places with him right now… And I would also bet, by the way, that Buffett would be willing to be 20 years old again if he was broke.” Consider Attia’s trade for a moment. Imagine having Buffett’s wealth, fame, and status as the greatest investor on earth. You can go anywhere you please, meet anyone you want, and buy anything that can be sold. However, you’re now 87 years old (Buffett’s age at the time). Would you make the trade?”