Starting to Save…. Tomorrow

Heya! Sorry for being gone for so long – work has been absolutely crazy lately. (But in case any of my employers are reading this, I love my company. Hugs and kisses, xoxo). Just spent the last two days on leave (or “time-off” as they say in the US of A), sitting at home… and crunching numbers for work. Yeah, you know I’m baller like that.

Anyways, that’s why I’m hoping you’d forgive me for blogging my Ted Thursday post on Saturday. Today’s Ted talk comes from Shlomo Benartzi, entitled Saving for Tomorrow, Tomorrow. I loved it because it pretty much espouses everything that I’ve blogged about on saving so far. (I also love his accent – still trying to figure out where the hell he’s from).

Here, he points out three problems we face in behavioral finance, and then gives you a simple solution that will solve all of them – the same one I’ve been preaching for the past 3 months. Yes, I know, all the ladies say I should totally be on TED. Anyways, in summary:

1. Present bias: We know we should be saving, but we don’t do it today. We’ll make all these resolutions that we’re gonna save more next year, next month, next week, whatever, but it never works. It’s always a lot more fun to spend more today, and put off what we know is good for tomorrow.

Quote at 6:47 of the video: “Self-control is not a problem in the future. It’s only a problem now when the chocolate is next to us.” 

2. Inertia: People are lazy. And don’t even think that you’re different from the rest of us, because you’re not. Even checking a box on a form, is way too much effort for most people, even if it means saving someone’s life. Germany has an opt-in program for organ donation where you would have to check a box if you would like to donate your organs. Contrast it to Austria, which has an opt-out program, where you would check a box if you don’t want to donate your organs. The result? 12% of Germans take up the program, while a whopping 99% of Austrians agree to donate their organs.

3. Loss aversion: We hate losing stuff. When it comes to savings, people amazingly frame this as a loss because they have to cut their spending today.

So where does that leave us? The trick to overcoming all of these problems is to (surprise, surprise) adopt an automated system that saves on a regular basis, and whenever you have any income increases. Since saving more tomorrow is easier than saving today (present bias), we first make the commitment to save a certain percentage of our income… tomorrow. Or next month. Whatever. We then commit to it by setting it up with our bank.

Once it’s set up, that overcomes our problem of inertia, because it takes a helluva lot of effort to cancel that commitment. So we’ll automatically be saving without any effort at all. And finally, by committing to save a fixed percentage of our pay rises, you’ll be taking care of loss-aversion by allowing yourself the luxury to spend part of your pay rise, while saving the other part of it.

In fact, if you’re way ahead of the game, Imma challenge you to save a higher percentage every time your income rises. Say you start off with an income of $3,000 and you save 10% ($300), leaving you $2,700 to spend. When your income rises to $3,500, up the ante to 15% ($525). You’ll still have $2,975 left over to spend, which is more than what you were spending on your original income anyway.

Random: There’s also a shoutout to Singapore at 16:47 of the video – apparently we hold the record for lottery ticket purchases. According to Benartzi, the average household in the world spends $1,000 a year on lottery tickets, while the average household in Singapore spends $4,000 a year on lottery tickets. WTF?! Seriously, what is going on here? Buying the occasional ticket is fine (and it’s helluva fun to trash talk in the office about handing in our resignation once we win our $10 million dollars), but throwing away $4,000 a year is just stupid. Fellow countrymen, try saving it instead 🙂

Go Tiny

Soooo it’s mid-Feb. Have you discovered that you’re not keeping to most, or all of your resolutions? I know I have. My resolutions to leave work by 6.30pm and sleep 7 hours a day have fallen flat on their faces. (It’s sad, but despite all my posts on productivity I inevitably get a couple of days/weeks where the work just surges unbearably.) Yet, there are others, like exercising, personal finance and sending compliments, that I’ve managed to keep surprisingly well so far because of systems I’ve stuck to. I’ll tell you more about one in a bit.

If you’re like 90% of the people in the world, you’re probably not keeping to your resolutions like you said you would, or you’ve given up on making resolutions altogether because they’re impossible to keep. The thing is, if we really want our lives to improve, we’ve got to create something that sticks, that becomes so ingrained in the fabric of our lives that we do it without any effort or without thinking. Sort of like brushing your teeth. (I blogged previously on how personal finance can be exactly like that) There’s no point in making a resolution like “I’m gonna get a six-pack this year” if you’re not going to stick to it and look like a beached whale again once Christmas comes around. (Speaking from personal experience here.. pat pat)

So recently, I’ve been following BJ Fogg’s work on creating habits and sticking to them. He’s a Stanford professor and created quite a following with his program 3 Tiny Habits. He tells you to “forget about motivation. Forget about 21 days. Forget ‘one habit at a time.’ None of that matters as much as going tiny. When you succeed in tiny ways, you unlock power to do more. For this and other reasons, tiny is the key to new habits.”

Essentially, to create a new habit, follow these three steps:

1. Make it tiny: When Fogg was trying to create a habit of flossing, he started by flossing one tooth a day. That’s it. Make the habit tiny, even if it’s ridiculous, and suddenly it’s not so hard to start doing it.

2. Find a spot: just like how brushing your teeth always comes right after you get up and before you go to sleep. Create a spot in your existing routine for it.

3. Train the cycle: Every day, just do your tiny behavior in the spot you’ve chosen. If you’re not committing to it, go back to Step 1 and simplify it. Keep trying, revising and adapting, and trying again until you do something that sticks.

The awesome thing? When you train your body to do certain behaviors at a certain time in your routine, the little victories that come with accomplishing a goal start feeding your mind and your confidence. It then becomes way easier to expand that tiny habit into something a little more ambitious. But don’t be in too much of a hurry to achieve too much. The key is to do small, incremental steps, even if it takes you as long as a couple of months to train it. You’re better off moving slowly and progressively than jumping the gun and not sticking to it.

At a TEDx conference a couple of months back, I listened to my colleague Daniel Wong give an awesome talk about delivering happiness through emails (the summary can be found here). Inspired, I tried to fire off as many happy emails as possible whenever I could, but after a couple of weeks, it just wasn’t sticking as a habit. So I decided to try Fogg’s methods instead. First, I made a goal to send at least one complimentary / positive email per week (okay, I know what you’re thinking – now I sound like a douchey depressing office drone – but first, you’ve gotta make it tiny right?). Next, I found a spot by setting a weekly reminder on my phone to send a compliment at the start of the day every Wednesday, before I got lost in my daily barrage of emails. Finally, I trained the cycle by sticking to it religiously. Wednesday wasn’t just another workday, it became “Compliment Wednesday”. (Yes, you can tell I’m a total genius at coming up with creative names) It was weird at first – you’d be surprised at how hard it is to find someone new to compliment each week – but it started getting easier as time passed. As a result, my Wednesdays and my work week started getting more positive, my mood improved, and it became a lot easier to work with colleagues who were previously impossible to approach.

So give Fogg’s method a shot and go tiny. You’ll be way ahead of the game in creating habits that stick 🙂

Should I Buy 16 Exxon Mobils, or a Lump of Gold?

Everyone’s caught up in the gold bug these days. They see the meteoric rise in gold (check out the chart below) and their palms get all sweaty, they start breathing heavily, and they yell “GOTTA HAVE THAT AWESOME SHINY STUFF, AHHHHHHHH!!” Gold has risen a whopping 500% since 2000, especially during the last couple of years when everyone got really scared that the world was coming to an end. (I never got the logic of that: the world is coming to an end, and you think a piece of pretty shiny metal is going to save you?)

Even my dad, who got me interested in finance in the first place, turned to me really seriously one night and said “Gold should be an essential part in everyone’s portfolio”. He cited numerous convincing reasons: it’s an inflation hedge, the US dollar is falling, it’s the world’s ultimate reserve currency, etc etc. I didn’t really know how to respond to that at the time – it’s really easy to get swayed by complicated, convincing arguments on why you should buy gold, or junk bonds, or tulips, or Moroccan camels.

And then I came across this awesome article in Fortune Magazine written by Warren Buffett, the world’s greatest investor. It’s an adaptation from his upcoming shareholder letter – if you’ve taken a basic Finance 101 class, you can totally appreciate the obvious, simple truths in it. I loved this one particular analogy:

“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

Would you? I wouldn’t.

Today, you can put your money into hundreds of investments – A colleague complained to me once that there are just “waaaaay too many choices out there” – How do you choose? Personally, I find it a lot easier to make sense of the whole mess by taking Warren’s advice and looking at all the investment assets in the world as just three types:

1. Currency-denominated assets: Think bonds, money markets, CDs, or your simple POSB savings account. These are supposedly the “safest” kinds of assets to invest in, but you’re really losing money every day because of inflation.

2. “Bigger sucker” assets: Assets that never produce anything, but are purchased with the hope that another buyer will pay more for them in the future. I call these “bigger sucker” assets. Gold falls in this category, along with oil, internet stocks in the early 2000s, silver, cattle, lean hogs (no, seriously, you can invest in them), art, wine, country club memberships, and tulips during the 17th century. You buy them, and after the price rises, you can sell them to a bigger sucker who will pay more than you did. And yes, houses fall into this category too, if you don’t rent them out.

3. Productive assets: these are assets that produce more and more cash flow as time goes by. Think businesses (which produce earnings), stocks (a proxy for owning businesses since they pay you dividends), real estate (which earns you rents), factories, farmland, etc. Sure, the economy is pretty shitty right now, but is the Coca-Cola company going to stop selling Coke, or is P&G going to stop selling shampoos? Doubt it.

No prizes for guessing the best type of investment to put your money in. Hint: it’s not number 2, or whatever assets that’s hyped up at the moment. It could be tulips in the 17th century, or gold today, or Hello Kitty paintings in the Baroque style in the year 2050 (gawd, I hope not). Investments make a lot more sense when you just focus on the basics: when you invest in something, does it actually produce anything? Will it earn an income for you? If it does, you’re probably on the right track.

To my knowledge, there’s only one type of asset that has stood the test of time with 200 years of history, will allow you to invest in real, tangible productive assets, and is still doing amazingly well today. Ladies and gentlemen, stocks are the clear winner in this race. Name any other asset, and I’m willing to bet that they don’t have as long, or as awesome, of a track record as stocks have had.

Could gold outdo stocks in the next couple of years? Sure. But I’m pretty sure that a lump of gold the size of a baseball infield is not going to be more valuable than 400 million acres of farmland and sixteen Exxon Mobils in the long run, no matter how pretty it is.

Why Personal Finance Is Like Brushing Your Teeth

This is the situation most people live by: They get their paycheck every month, and feel RIDICULOUSLY RICH for that day. They’ll hit the bars and order like 10 rounds, yelling “IT’S PAYDAY, BITCHES!!!” Then they wake up the next day, nurse their hangovers, and get on with life. They pay off their credit card bill when it comes in the mail, and go “What the hell – I spent THAT MUCH last month? Oh well. Shrug.” And then a friend’s birthday comes along, so they spend some money on dinner. And later on in the month, their phone bill comes, so they pay that off… and before they know it, it’s the end of the month. They catch sight of their balance while making an ATM withdrawal, and go “Crap, I spent THAT MUCH last month?! Oh well. Shrug.”

Most people have no freakin’ idea where their money goes every month. They live in an endless cycle of receiving a paycheck, spending, getting horrified at how much they spent, and shrugging in resignation. And the cycle repeats again the following month. It’s a modified version of the phrase “living paycheck to paycheck” – when you have absolutely no control over what happens to your money, never mind about trying to save and invest. Even if they do decide to save, it just involves checking their balance at the end of the month and going “oh awesome! I still have like $500 left over from my paycheck. I’ll save that.” (Not realizing that the following month, they go for a vacation and spend that $500 they just saved) Sound familiar?

Most people know they should be saving and investing, but very few people go out there and actually do it. Why is that? I think the number one reason is because it involves a huge amount of effort and willpower. It’s a helluva lot of effort to actively try to spend less, to consciously take money and save it, and to plan for investments. Personally, I hate effort. To me, personal finance is like brushing your teeth. It’s necessary, but I don’t really want to spend a lot of effort trying to remember to do it, or how to optimize my toothbrushes and toothpaste. It’s gotta be automatic, it’s gotta be routine, and even better, I’d like a robot to do it for me so that I don’t have to deal with it.

While technology hasn’t caught up in the area of oral hygiene, it’s entirely possible to have a robot take care of your personal finance. How? By creating a financial system that automatically does everything for you with no effort on your part. While I’ve previously blogged about how to automate your finances, I thought I’d give an overview on how everything works together to help you see what I’m trying to say. Check out this spiffy little diagram I created while chilling at McDonald’s this morning (Yeah, some people eat nuggets, some people check out girls, and I create awesome nerdy diagrams).

 

It looks really complicated, but it really isn’t. I’ll talk you through it. Let’s start with the orange box in the middle. My POSB account (for most people, this would be your checking or current account) acts as a central postman. It receives money from my salary and any other income, and then automatically shovels it into 3 categories: savings, investments, and expenses. Money doesn’t stay in my POSB account for very long – it gets quickly allocated into where I want it to go, so that I don’t even have to think about how much I should save, how much I should invest, how much I need to pay my bills, etc. Almost everything you see here is automatic – the only part that isn’t is my daily expenses, because I can’t regularly transfer money to my favorite chicken rice hawker stall. (Would be awesome if I could though)

Otherwise, my POSB “central postman” does all this for me:

  1. Savings: It adds money to my long-term savings account for retirement and my short-term savings account for guilty pleasures. My CPF (sort of like a 401(k) for Americans) gets automatic contributions direct from my salary, as well as my employer’s additional 15% contribution. (Which is sort of like free money – so awesome!)
  2. Investments: It wires funds into my brokerage account (you can use a variety of brokerages, but I use Standard Chartered for its low fees – more on this later) to invest in ETFs.
  3. Expenses: My bills are automatically paid off when they’re due, so I never incur late payment charges.

That’s it! That’s my entire financial infrastructure, and it saves me countless hours of paying bills, allocating money to save, deciding how much to invest, etc. If you haven’t set up something like this, I recommend that you get started today, even if it’s just setting up one automatic bill payment. You’ll be amazed and how much time and effort this saves you. Setting the whole thing up will literally take you no longer than one afternoon, and you will never have to worry about any of this stuff anymore. And then you can start focusing on the awesome things in life. Try it 🙂

(Hat tip to Ramit Sethi for coming up with this idea – I know, lots of what I do here is totally inspired by him)

Be Choosy About Choosing

Today’s TED Thursday talk (woah, talk about mega alliteration – yay literary devices!) is about choosing. Or more precisely, how to be choosy about choosing. Sheena Iyengar raised an interesting point about how having more choices may not actually help you, but cause you to give up altogether.

Last week, I was trying to figure out what I should blog about next, so I asked several friends what they thought was the biggest challenge that prevented them from investing. I expected the answer to be something like “because I’m afraid of losing money”, or “because I don’t know enough about it”. But I was wrong. Surprisingly, the number one reason why people don’t invest their money is because there are way too many choices out there.

The more I thought about it, the more it made sense. There are dozens of things you could invest in: stocks, mutual funds, REITs, fixed income, ETFs, futures, options, foreign exchange, commodities, unit trusts, money market funds, art, wine, etc. And within each category, there are even more choices. Take a boring product like fixed income: there are government bonds, corporate bonds, CDs, zero coupon bonds, high yield bonds, junk bonds, bond indexes, bond funds.. Wanna buy stocks? There are literally thousands to choose from in any stock market around the world. It’s enough to scare the shit out of any novice investor trying to get started in investing.

First, let’s agree that investing is generally a good thing. Keeping your money in your stupid POSB savings account earning zero-point-lame % per year is not going to make you rich. What about bonds? For the past 200 years, bonds would’ve squeezed you about a 1% return rate after inflation. Stocks, on the other hand, have yielded an average of up to 7% each year after inflation over the last 200 years, according to Wharton professor Jeremy Siegel (Totally irrelevant but I used to crash his classes while studying at Penn and he’s a helluva awesome. And smart). So yes, investing in riskier assets, especially while you’re young and you have many years of income ahead of you to ride out the risk, is generally a good thing for us young, sexy, just-started-working adults.

We know that investing is good, but we’re just so damn overwhelmed by all the choices out there. Well you know what? I’m a big fan of the 85% solutiongetting started is way more important than becoming an expert. From I Will Teach You To Be Rich:

“Too many of us get overwhelmed thinking we need to manage our money perfectly, which leads us to do nothing at all. That’s why the easiest way to manage your money is to take it one step at a time – and not worry about being perfect. I’d rather act and get it 85 percent right than do nothing. Think about it: 85 percent of the way is far better than 0 percent. Once your money system is good enough – or 85% of the way there – you can get on with your life and go do the things you really want to do.”

Over the next couple of weeks/months, I’ll be blogging about some simple, straightforward assets you can start investing in. Really basic, nothing fancy – you won’t have to learn about stupid terms like “ROI” or “derivatives” or “CAGR” – but they’ve been proven to beat at least 80% of the popular, expensive, actively managed unit trusts out there. Hint: They don’t involve watching the market every day. Stay tuned.

How to Automate Your Finances

I don’t know about you, but I hate dealing with the stupid administrative things in life. You know what I’m talking about: Like topping up your EZ-Link card (for non-Singaporeans – it’s this card Singaporeans use to ride the subway / bus), paying off your bills, insurance premiums, etc etc etc. Seriously, nobody gets up in the morning and goes “Oh yay! I’m totally gonna pay my phone bill today! Woot woot!”

Why personal administration sucks ass

Each individual task doesn’t really take up that much time and effort, but add them together and it’s a helluva pain in the ass. Think about it – say you receive your credit card bill on Monday, and you want to pay it off at the AXS kiosk on Tuesday, but the line is way too long so you put it off till Wednesday, and then you realize that you have to top up your EZ-Link card, which you do, making you late for work anyway. And on Wednesday night you receive your phone bill, so now you have to remember to pay that off, but after paying off your credit card bill you get really busy so you forget about the phone bill, so the phone company sends you a reminder letter to pay last month’s bill…

Add insurance premiums, magazine subscriptions, gym memberships, charity donations, investment contributions, savings contributions…. and you get a freakin’ pain in the ass. What’s even worse – forgetting to pay off last month’s balance on your credit card will cause your credit card company to charge you interest. They could also lower your credit score and either make it harder for you to get a loan or increase the interest on your mortgage, potentially costing you thousands of dollars over your lifetime. Not fun.

Relying on “willpower” to remember to do all these annoying administrative tasks just doesn’t work. Your life is only going to get busier. Besides, having all these items on your to-do list just breaks your flow – you may be working on an important career-changing presentation, or starting up a side business, or raising a family – you don’t wanna have to deal with crap that just distracts you from the really important things in life.

Automating your admin

The key to this is to create a system – a system that automatically takes care of actually doing all this stuff for you, yet allows for you to go in and check that you aren’t making any regular contributions to the Nigerian royal family. And you can set it up in a couple of hours. If you’re Singaporean, here’s how to automate your:

Bills: Set up a GIRO arrangement for your credit card and phone bills. Once it’s set up, the system goes into your bank account once a month and then pays off your bills in full, which means that you never have to worry about late payments. All you have to do is make sure that you’ve got enough money in your bank account (I personally keep about a month’s salary in my account, which provides enough buffer for any potentially huge credit card bills).

Now, I don’t know why, but people get really nervous whenever I recommend setting up GIRO for their accounts. They’re incredibly frightened that some random dude is going to clone your credit card and charge like $5000 bucks on hookers or something.  Let me assure you: this will not happen to you if you check yo’ statement every month! Honestly, it’s not as hard as it sounds. Every month, I get a paper statement about 2 weeks before my bill is due (If you prefer, you can also arrange for an SMS/email notification from most companies, which will also link you to your online statement). I’ll glance through the statement and make sure there’s no entry with the word “HOOKERS” and a charge for $5,000 on it. If everything’s fine, I don’t have to do anything further, and my system automatically pays off my bill for me.

If there is a weird expense that you didn’t incur, then you have 2 weeks to report it to your credit card/phone company. Well-known secret: your credit card company is even more nervous than you are when it comes to these potentially fraudulent charges. Once you call them up and notify them, they’ll reimburse you and launch a full-ass investigation, just to get their money back. There are some credit card companies that are so nervous, that even if you use the credit card overseas, they’ll jump in and cancel the card right away unless you notify them beforehand that you’re going to be using your card abroad. So I’m pretty sure that even if some scammer did try to buy drugs with a clone of my card, it’ll be taken care of as long as I check my monthly statement. Besides, how often has that happened to you anyway?

This system works the same way for any other recurring expenses you might have: insurance premiums, magazine subscriptions, gym memberships, etc. In fact, most companies would LOVE to offer you the option of automatic payments, because that means that they never have to chase you for payments. And while you should review this list regularly to make sure that you’re not paying for things that you don’t need, this system automatically takes care of all the admin for any necessary expenses.

EZ-Link cards: Set up automatic top-ups with EZ-Reload every time your card value goes below zero. This can be done through GIRO or through your credit card, and EZ-Link charges like $0.25 for each top-up. My card gets automatically topped up twice a month, incurring me a grand total of $0.50 for the convenience. And believe me, $0.50 a month is a freakin’ negligible amount to pay for never having to glance at your balance, never having to line up at those infernal top-up machines, and automatically tracking your transport expenses through your credit card bill.

Savings and Investment: I’ve blogged at length about how you can set up automatic savings to both your guilt-free spending account (for holidays, weddings, etc) and your long-term savings account. But you can also automate your investments: First, decide how much of your salary you would like to invest. Next, arrange to automatically transfer that amount to your investment account every month. This can be set up through internet banking within a couple of minutes.

Your investment account works in 2 ways: it can either invest directly in unit trusts (mutual funds if you’re American) or index funds, or it can accumulate a certain amount before you go in a couple of times a year to invest the funds in various ETFs (more details on that in another post!) Either way, the result is clear: you will be regularly investing a portion of your salary, without fail, with no effort on your part whatsoever.

Putting it all together

All this can be a little overwhelming, so I’ll give an example from how I automate my own finances. I get paid on the 21st of every month, when my salary gets credited into my POSB current account. On the 22nd, my system goes in and deposits a portion of my salary into my long-term savings account, another portion into my investment account, and a third portion into my guilt-free spending account (this is one example of the “Pay Yourself First” principle). A week later, my credit card and phone statement arrives and I check it to make sure there are no fraudulent charges. If everything’s fine, my bills get automatically paid off around the 10th of the following month. All this while, I’ll be enjoying Singapore’s mega awesome public transportation system, with my system watching my EZ-Link balance for me and taking care of the top-ups whenever they are needed.

Notice that everything here is beautifully automatic. My involvement is limited to simply checking my statements to make sure nothing’s amiss, which literally takes up 5 minutes a month – probably faster than how long it takes for most people to pay their bills at the good ol’ AXS machine. With all the annoying administrative crap out of the way, you can actually focus on the good and important things in life – like being awesome.

Credit: I got this idea from Ramit Sethi, the author of I Will Teach You To Be Rich. Check out his post for a great overview and more details on automating your finances.