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More Financial Notes

November 27, 2014

NB: I had a wonderful article about compounding returns in life apart from finance prepared – hundreds of words written, and ready to be polished – yet it somehow disappeared into the ethereal world of… computers. You’ll have to settle for some of the dot points from a document of mine “Financial Matters – KEY DOCUMENT”. You might learn something. Italics are annotations just for this article. Also, formatting is a mess.

  • Arbitrage
    • The sake / purchase of the same item in different markets to profit from unequal prices
      • Eg.US / Australian interest rates – international interest rate differential

NB: Arbitrage is a way to maximise your return on loans. Generally, arbitrage is more available to people with ‘big money’, but if you could borrow from Japan to finance Australian loans you’d also minimise costs…

NB: I actually have no consumer debt. This is more for the future when debt will have to be incurred.

 

  • How to spend money
    • Buy experiences instead of things
    • Help others instead of yourself
    • Buy many small pleasures instead of few big ones
    • Buy less insurance
    • Pay now and consume later – for anticipation as *free* happiness
    • Think about what you’re not thinking about (eg. Don’t think about expected happiness after good event properly)
    • Beware of comparison shopping
    • Follow the herd instead of your head

NB: This is an article in and of itself! Wealth is very nice to have… if you know how to spend it! If money doesn’t make you happy then you probably aren’t spending it right, says an expert study. Have a read.

  • Student discounts!
  • Go for scholarships!

NB: I have sub-points for myself on these points, but the idea is to minimise costs and maximise Y. Our core rules.

  • Start an emergency fund
    • $1000 fast
    • When older, build 3-6 months of basic living expenses
    • To get here, make savings automatic
  • Be frugal, wealth is built by spending less than you earn
    • Save at least 20% of my income;
    • Start EARLY on this – returns compound!
  • Build alternative income streams
  • Build passive income!
  • A key idea is to build towards financial freedom
    • This means “not needing to worry about money” .
    • Why? Because then money though it plays a role is not a dominating factor in life.
    • Composed of
      • Y>C, passive income, low poverty threshold
  • Once a month financial check-ups

Last but not least, I’ve saved an analogy I came across recently that very succintly describes the goals of personal finance.

  • Money is like petrol in life on a road trip. You don’t want to run out, yet an overabundance doesn’t make the trip any better.

This, I think is a very powerful metaphor. Ultimately, we should be focusing on the road trip itself – the sights, the destination, the camaraderie – not how much petrol we have. The petrol is useful insofar as it helps us get where we want. So it is with wealth.

But I’d also extend this metaphor another step. An overabundance of oil can actually be bad for an engine. So it can be with money. In our lives we’re inevitably going to fail to do everything, and to become everything. We are faced with opportunity costs at every step, and pathways that break apart from each other. To be drowning in oil is not a good thing, and I think it reflects on a man. If one has so little time, yet has reams of money, then what has he left behind? In chess every time you move a piece there is a ‘space left behind’ to be exploited. So to it is with money. Every decision has a consequence.

This is not to disparage money, which is still needed as a lubricant for the engine of our lives. But… the men who are content and happy are richer than us all. The man who is content, and smiles at the dawn, tends to his flowers and gains such pleasure knows what we do not. For our happiness may be tied to seeing a friend, to getting an ice cream, a raise… yet his happiness is ever present, and cannot be taken away from him.

Thoughts to keep in mind.

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