== kensho ==

rules for money

There are no get rich quick schemes. Only sound financial habits compounded over decades

I’m writing this for reference for myself in the future.

This is not intended to be a catchall. Just a basic primer, and rules to think about wealth. A reminder to make sure I’m not making any huge mistakes.

Basics Rules

  1. Keep a budget. You should know how much you are spending and where.

  2. Spend less than you earn, but many don’t follow this because of rule number 1. You want to live below your means.

  3. Insure against disaster. You have to mitigate against Black Swan events. Life Insurance, Critical Illness Insurance, Income Insurance, Home Insurance.

  4. Clear Debt – Not relevant at the moment for me. I intend to keep it this way.

  5. Have financial goals e.g. ‘Buy a flat in London’ or ‘Semi-retire at age 50 with a £3000 per month lifestyle’. The goals vary for individuals, families and at different stages of your life.

  6. Invest Wisely - See below

Investing vs Saving

Savings : Keeping Money in ‘cash products’ in a liquid form. ’Less volatile’ . Savings is for short term financial goals. Likely to be used in the next 3-5 years

Investing : Putting Money into a place that accrues interest. ‘More volatile’ e.g. Stocks, Property, Gold, Vintage Wine, Pokemon Cards. Lots of things. Investing is for long term financial goals. 5-10-20-30+ years.

Why Invest

Money depreciates over time in the bank due to inflation. Inflation is where things you buy get more expensive over time. Therefore money loses its ‘purchasing power’

In 2018, the average inflation rate in UK was 2.5% If you left money in the bank, you technically lost 2.5% of its value.

This is why you should invest. You should also have money in savings accounts for short term goals. Do both.

Time in the market is a better predictor for returns

Start investing early with the intention to hold for the long term. Thanks to compound interest (8th wonder of the world), wealth accrues.

Become Wealthy through Owning Assets

You want to earn with your mind, rather than with your time (@naval)

It’s hard to get wealthy working a job. Because ultimately you are trading time for money. Being paid by the hour is not a recipe for wealth.

To get wealthy you need to own assets.

Assets allow you to earn while you are sleeping. The lever connecting input and output are disconnected. It’s not a 1:1 ratio either

Examples of Assets

  • Owning/Renting out a house
  • Owning/Investing in a business
  • Owning Gold etc
  • Investing in Stocks and Shares

So any money you earn whilst working a job, try to put that into assets rather than status boosting endeavours (e.g. super fancy clothes).

Not that status games are intrinsically bad. They are just zero sum and come with downsides. Wealth is a better game to play.

Diversify Assets

There are loads of asset classes you can invest in. I don’t intend to go into detail in this blog post.

But as a rule, don’t put all your eggs in one basket. Diversify your assets

Don’t go all in. You want to aim to ‘not lose’ money.

Identify your risk tolerance

Depends on your financial goals and age. It’s individual. Make sure you are aware.

Conclusion : Long term thinking

Be a long term thinker. Be aware of behaviour biases (loss aversion, confirmation bias, hindsight bias)

Passive rather than active approach. Aim not to lose money.

Money won’t buy contentment or peace. That’s a different skillset. It will buy a degree of freedom though.

Remember money is a tool. Not an end in itself. You leverage the tool for experiences , for specific knowledge (hiring a plumber, gardener) and ultimately to trade for time, so you can gain a level of financial freedom.