A few really quick ideas about personal finance

by Louis_Dixon6 min read3rd Sep 20202 comments

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Personal finance
Personal Blog

This is published in an entirely unofficial capacity.

Are you fortunate enough to be saving money during COVID? Here are some really quick and unofficial thoughts, which are not at all original, and found in many other places, sparked by a conversation with Andrew Leeke.

Also please add your own tips and thoughts below!

  • Runway. I think it's good to have some buffer/runway to cover expenses you'd have to pay out, in case you lose your job or something unexpected happens. As an individual, I think it's probably good to have at least 3-6 months of your monthly expenses in the bank. But if losing your job would be worse (e.g. you can’t stay with your family, you have kids etc.) then this should probably be longer.
  • Direct debits. I think these are good way to save, just set it up to come straight after your salary gets paid (but also make sure you don’t run so lean that you don’t have £300 to buy a new fridge or whatever - I have made this mistake).
  • What to invest in? This is a whole industry and I have no expertise here. Some sites are here and here. I can also say that the simplest thing to do is invest money in Vanguard, and they also have a tax-free ISA up to £20K per year. But the UK personal finance subreddit has a good flowchart.
  • Invest in your health. Also given there are quite low returns in the markets at the moment, I think for lots of people they can make better investments in their health and lifestyle which would make their lives better and actually save them money overall. E.g. my mum spends loads on various back doctors and dentistry from a childhood of slouching and eating lemon sherbet. Paying for the dentist, an electric toothbrush, a better chair, nutritious food, sports, and investing in things which are also good for your mental health and well being are good. What about coach to be a better runner, swimmer, or yoga lessons for a month or so? I reckon 3-5 sessions will teach you a lot of good technique. Also climbing. Climbing is great.
  • Invest in your career. Also on the investing in yourself side of things, I think a lot of training etc is very much worth it. I had to pay quite a lot to train as an accountant, but I think it was worth it in terms of salary differential within a year, and over decades the difference is bigger.
  • Pay for time off for self-development. When I worked as a management consultant, people always complained about their holidays being too short. But it was quite easy to request a week or a month of unpaid leave. Or even reduce your hours to 4 days per week, or 9 days per fortnight. I got this approved by my boss, and it wasn’t a big deal. And it might feed into the points above. I expect most people reading this will do information-type jobs/ be 'knowledge workers', so why are we still working a 19th century timetable? This is another form of spending/investment - reducing your income.
  • Time and £ per hour trade-off - use with caution. I think the value of your time is probably higher than people think, and led to me realising it made sense to get a cab home from a party at 3am rather than ruin my sleep for another day (more so). And so three hours shopping for a bargain on eBay to save $5 when you could use that time doing something else is probably not worth it. But use with caution, as I think the time/$ trade-off might imply you should maximise your working hours, which I think isn’t a good assumption. See point earlier about knowledge workers.
  • Coffee. It's popular for money guides to tell us to stop buying coffee to save money, but I think it's typically such a small expense, and if it makes your life better more than the cost, then it's definitely worth it. I think £5/$5 for coffee or dinner with a friend is great. Shout out to the funky independent coffee shops of the world, where I have spent many hours studying, training as an accountant, and enjoying delicious coffee. But if you pick up on the way to the office, or you have perfectly good coffee at home or at the office, then well maybe not. My rule is I buy coffee out if I am going to study out or meet friends.
  • Consumption smoothing. And if you think your income will be higher in later life, then under the good old permanent income hypothesis, you should be smoothing your income so you don't live like a peasant when young and a king when older. If you think your disposable income will increase in later life (although it might not) then theoretically as a rational agent you should be spending your average yearly income (across your life) each year. Don’t go overboard with this, but I remember trying to save money when I was a student even though I had a job when I left university, and it was the time in my life I probably had the lowest income.
  • Budget. This could be a good way to formalise the plans above, e.g. you could try allocating yourself £100/$100 per month for self-development or health stuff. Some people use YNAB, but I've never seen the point. I use Starling bank (Monzo etc also good) to see what I spend each month.
  • Return things. It's actually super easy to return stuff nowadays.
  • Beware shiny things. In life there seems to often be a shiny deluxe packaged version of something and the regular version which is just as good and half the price. Is the deluxe £500 webinar really any different to a YouTube video? Like Dwight, before I make a decision, I ask myself: would an idiot do this? If so, I do not do that thing. Also one of my friends has an uncle in Turkey who sells olives. He has three types: a regular olive, a health olive, and a deluxe olive, where the prices are wildly different. They are all the same olives.
  • Slow down the hedonic treadmill. I have a Google doc of things I want, where I add a link, the date I first wanted it, and why. I set a length of time to come back to it before deciding to purchase it. The Simpsons bedsheets seemed like a great idea, but a week later I figured it was probably excessive.
  • Give it to someone/ something who needs it more than you. You could sign the GWWC pledge (if you haven’t already), and realise the ridiculous 100x multiplier between the value of £1/$1 to us compared to the world’s poorest. Or you could do some of the above, but write down (and maybe share with your family/friends?) that you’ll give 10% of your income/investment value away in the future. Also listen to Phil T and see this.

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2 comments, sorted by Highlighting new comments since Today at 4:07 PM
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I agree that this is a good time to invest in yourself if you're saving a bit of money. Even just buying "things" that will improve your quality of life, like a quality frying pan or comfortable pillow, might be a reasonable option right now.

Obviously I'm also keen for people to save and donate money!

But use with caution, as I think the time/$ trade-off might imply you should maximise your working hours, which I think isn’t a good assumption. See point earlier about knowledge workers.

I definitely agree with "use with caution". The value of my time question has been bothering me for years now, and I never really found a satisfying heuristic for it. There are just a lot of complications and there imho is no way this can reasonably be considered to be a constant value:

  • it depends not only on the amount of time you're thinking about spending in a certain way (or gaining), but on the difference of value of the thing you're considering you do as compared to the thing you would be doing otherwise
  • even if you manage to pin it down to some value in a situation, that's only the marginal value of time given your circumstances, and it would differ if you had more/less time or money on your hands; thus, if you derive some great heuristic from that (e.g. "take a cab after parties"), depending on how much that impacts your behavior, this changes the value of your time, so the heuristic is sort of self-defeating to a degree

So I basically came up with a range of the value certain things I tend to do are worth per hour, and in that way have a way to compare things. It does feel like I'm overthinking and under-utilizing the principle though... one conclusion it led me to however was that I should work less, since my time was worth more to me than what I was paid per hour (after taxes). This is definitely a case where point 2 from above is highly relevant though. Reducing my time at the job rather drastically changes the value of my time, so I need to take that into account and try to find an equilibrium in working just as much (or little) such that the estimated value of my time (maybe averaged over my typical daily habits) reduces to roughly what I'm being paid to work. Which is tough!

But yeah, I'm getting a bit rambly. Just one more thing: Consumption smoothing is an interesting concept which I have to admit never occurred to me before. Thanks for the post! It also nudged me to once again look into investing which I've been procrastinating for years.