frugal

What I have learnt in 2020

I think I have learnt a lot in 2020 about personal finance. I have never done as much reading in one year before and I hope to continue in the coming years.

Over time, my opinion about investing and money has changed. This all happened within 2020, the pandemic year. Who knows what else will change in the following years. It will be fun for me to look back years from now and know that a young me thought about money this way.

Thinking about it mathematically

Firstly, I like math so I think about money in terms of mathematical operations. Your income is your addition sign (+), your expenses is your minus sign (-), and investing is the multiplication sign (x). Of course there are many other factors to consider, such as debt, but I think simplifying it to these 3 stages will make it easy for anyone to digest. Most people, if not all, earn the bulk of their wealth. The richest people in the world mostly started businesses and through those enterprises and capitalism, they have managed to bring additional value to humanity, and humanity appreciates the value they bring, thus exchanging money for them. Think Jeff Bezos (Amazon) or Steve Jobs (Apple) or Elon Musk (Tesla).

How to get rich fast?

My point is, if you want to get rich fast, investing, trading or gambling probably will not get you there. Starting a business which can solve the world’s problems will get you there. Of course, it is easier said than done. But there are many inspirations around you. I am sure you will have peers trying to start their own small businesses. If not, there are many online figures. Look up the backstories of successful businessmen, they usually have a backstory of entrepreneurship as well. For example, Daniel Ek, the founder of Spotify, started a business making websites for clients from his home. Eventually, he bribed his classmates to work for him using video games and managed to rake in 50,000 a month. Very impressive. After that and before Spotify, he was also part of many other business ventures.

Subtracting your finances

Secondly, there is only so much you can cut down on your expenses. Every month, there is a definite need to spend a certain amount on necessities for survival. So, don’t think you are going to get rich just through saving lots of money. It is definitely easier for a high income earner to save more than a low income earner. Moreover, the capitalist nature of our society and the onslaught of monthly sales from e-commerce platforms like Shopee and Lazada have probably massacred the plans of many to accumulate wealth. Remember, even when you are spending money on a sale, you are not saving, you are still spending money. (Unless you actually need the item and are going to buy the item in full price anyways)

Multiply your money

Lastly, to the more interesting part, investing. I have learnt a lot about investing this past year. Initially, I was really drawn to the idea of Bogleheads investing. This would mean just finding a low-cost, diversified, broad-based, global ETF and putting your money inside. Do it regularly and you will see your money grow over time in the long run. I was and I am still very convinced by Jack Bogle himself. However, as I learnt more about investing, I began to realise that following the market returns while not bad, is average at best. It is good when you do not really have any conviction plays and are unsure where to put your money. However, there always places to put your money to earn greater returns.

As I read more, I began to pick up an interest in analysing companies, looking at mainly the story behind the company and trying to form an argument to convince myself why it was worthy to put my money inside. This was when I realised that purely using a bogleheads investing strategy was not for me. I decided to switch to a core-satellite portfolio, where the bulk of my portfolio still remained in a diversified ETF but I give myself some wiggle room to make conviction plays. I am still at a beginner stage and I am still learning but I feel it suits me a bit better because I am interested in this field. Of course, if you are not interested at all, just put it in VWRA or a robo-advisor and find something else you are more interested in. Look out for my investing strategy for the 2021 post!

Pet peeve

Also, I also have a small pet peeve when people ask beginners about their risk tolerance. How is a beginner supposed to know their risk tolerance? Yes, you can draw comparisons to day-to-day lives but most people have never touched a stock market in their entire life. Given that our Asian culture deter us from investing and prefers the idea of a much safer savings account, I feel that it is pointless to ask beginners about their risk tolerance. I know this is necessary for robo-advisors but for DIY investors, why ask your friends who are starting out what is their risk tolerance? Tell them to put $500 in an ETF and see what they feel after a few months of market volatility. This will let them understand better.

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