Vincent Chan: Upgrade Your Money and Life
The 1 Mistake We All Make
Welcome to reThinkable – my weekly newsletter where I share actionable insights to build a wealthier and healthier life.
Good morning! There are 24 days left in 2023 – what’s one thing you want to do before 2024? For me, I want to learn how to make really good iced matcha (with oat milk cause I’m lactose intolerant).
Here’s what we’re covering today:
🚫 The Mistake We All Make
🏦 How To Fix The Mistake
🚀 3 Budgeting Frameworks To Boost It
Estimated read time: 4 minutes and 5 seconds
🚫 The Mistake We All Make
If you’ve ever been been on the internet, you’ve likely come across information like this:
“Don’t save money, invest”
Then they usually follow up with something like this:
“Inflation eats away the value of your savings so you’re better off investing.”
Although they’re not wrong, they’re missing a key piece of information that’s especially important for people starting their financial independence journey:
You have no control over your investment returns — the harder you try and beat the market, the more likely you are to underperform. Even the most rational buy-and-hold investors sometimes get into trouble when they try to time the market.
I’m not saying investing doesn’t matter because it definitely does. But if you want to build more wealth, focus on what you can control:
1. The amount you invest
2. How long you stay invested
That’s where savings come in. Your savings rate — the percentage of your take-home pay that you save — is the best predictor of your future wealth. If, at the end of every paycheck, you have leftover cash to invest, then you’re doing great.
In Psychology of Money, Morgan Housel said it best: “Building wealth has little to do with your income or investment returns and more to do with your savings rate.”
But there is one problem…
🏦 How To Fix The Mistake
Saving money is more difficult then ever. For the past 10 years, the average American personal savings rate was around 8.9% but as of August, that number fell to 3.9%.
Many external factors influence this beyond our control,but, let’s concentrate on the factors within our control.
Despite what most people think, saving is often driven by habits and emotions rather than just logic. That’s why no matter how much information you consume, your financial habits will persist if you don’t deal with them at an emotional level.
With this in mind, here’s how you can increase your savings rate (or start saving, if you don’t save).
1. Set clear saving goals:
Saving becomes more difficult when you don’t have a clear purpose for it. If you want to save more, decide what you’re saving for: is it to buy a house, to start a business or to retire? Having a goal helps you track your progress.
Next, decide the specific amount you need to save and how frequent you can save: daily, weekly, or monthly. Make it a bit challenging, but not so much that it negatively impacts your day-to-day life.
PS: I built my own Savings Goal Tracker that has helped me out a lot. Reply to this email with the word “SAVINGS” if you’re interested. If enough of you want it, I’ll share it next week for free.
2. Automate your savings:
Set automatic transfers from your checking account to your savings account after you get paid. This makes saving money seamless, and since our brain likes easy things, it’ll allow you to save more.
3. Limit impulse purchases:
Identify the emotional triggers that lead you to spend impulsively and find healthier ways to cope with them.
Here’s what you can do if boredom triggers excessive online shopping:The next time you feel bored, watch your favorite movie or book.
Just replace the bad habit with something more enjoyable and less destructive.
4. Start budgeting:
Sometimes we think we’re not making enough money to save. While that might be true for some people, chances are, you might not be managing your money as well as you could be.
There’s nothing wrong with guilty-pleasure purchases every once in a while but budgeting can be a game-changer for your savings rate. Here are 3 budgeting frameworks that can help.
🚀 3 Budgeting Frameworks To Boost It
1. Zero-based budgeting
This simply means budgeting your income so that every dollar has a purpose. You want to make sure after budgeting you’re left with zero. Here’s how it works:
After receiving your paycheck:
1. List out all your spending categories: mortgage, credit card bill, gas, groceries, investments, savings, etc.
2. Assign a particular amount to each category.
I’d advise you to assign less money to things you want but don’t need
Make sure when you’re done, you’re left with $0. If you have some money leftover, add it to your savings category.
Zero-based budgeting is perfect for you if you’re prone to impulse buying. It also helps you clarify how much you need to live, but most importantly, it enables you to save the maximum possible amount from your income.
2. Cash only budgeting
In this budgeting method, you scrap the use of credit cards and debit cards and use physical cash for every transaction. The point is to create a tangible connection to spending, so you know when you’re going overboard. Here’s how it works:
1. List out all your spending categories: gas, groceries, rent etc.
2. Withdraw the entire amount you need in cash, and you only spend the cash.
Cash-only budgeting is perfect for you if you’re prone to getting into credit card debt, or If you’re prone to impulse buys on the internet.
3. Envelope method
The point of the Envelope method is to make you conscious of how you’re spending money and to make you have zero tolerance for overspending. Here’s how it works:
1. List out all your spending categories: gas, groceries, rent etc.
2. Assign a particular amount to each category
3. Get physical envelopes for each category and label them
4. Withdraw the entire budgeted amount you need in cash
5. Put the allocated amount in the corresponding envelope category
6. When you want to spend money on something, use only the cash from its corresponding envelope
7. Once you spend everything in an envelope, then you can’t spend anymore in that category. Remember, you’re not allowed to borrow money from another enveloped.
The best saving framework is the one that helps you achieve your saving goals. The trick is to openly test and experiment with each one to see which suits your lifestyle the most.