I wrote this article to further motivate myself to do the exercise that design after hearing many financial advises from the riches. The theory is in https://0darkking0.blogspot.com/2019/10/my-steps-from-poor-to-middle-class-to.html. In summary the exercises are accounting –> budgeting –> pay yourself first –> diversification and investment –> business. Ideally, each exercises runs for a month but you may fast forward, visualize in your imagination, or skip.
1. Exercise 1: noting your incomes and expenses
A very basic and natural exercise but also mostly underestimated. “What? I didn’t realize that I spent that much?” Does that sound familiar to you? What’s in your mind or in your memory may not be accurate which is why the basic accounting of noting your incomes and expenses.
- Download a financial app such as Andromoney or use simple software such as Spreadsheet or carry a notebook and note every time you make an expense for a month.
- Already more than a year, I note my income and expenses as detail as each time I bough my lunch for example on the Figure below.
- Note your incomes, salary if you are an employee, pocket money if you are still a kid, teen, students, and etc.
2. Exercise 2: create a budget
If you are interested on why budgeting, take a look at https://www.youtube.com/playlist?list=PLwyhDyJ3VORb-RuLRAP87MmqTPa7KhV2L.
Use the notes on Exercise 1 to estimate your monthly budget. For example mine:
- Income: $1300.
Fixed expense $300:
- Rent: $170.
- Phone service: $30.
- Electricity: $50.
Food $22 x 30 = $660:
- Breakfast: $5/day.
- Lunch: $6/day.
- Dinner: $6/day.
- Backup $140.
- Leftover = $1300 - $300 - $660 - $140 = $200.
I actually made my most expensive budget. For example, I don’t usually do breakfast and snack, and sometimes lunch and dinner are only $4.5 and cut even further if I choose to cook, and never I used all of my backup. Oh, I’m not interested in shopping for more clothes, items, etc.
If your expenses are larger than your incomes, then you have a problem. Either cut more expenses or work harder or sell anything that you no longer need or anything else that can raise your income. Proceed to the next exercise.
3. Exercise 3: pay yourself first
The secret of the most wealthy man in Babylon is “pay yourself first”. In my opinion, it’s the advanced version of budgeting.
- Now that you know your budget from Exercise 2, in this exercise, use your calculated budget to calculate the money to pay yourself first.
- In my case leftover = $1300 - $300 - $660 - $140 = $200 = pay yourself first.
- No matter what, don’t ever use this money for your expenses.
- For example, if accidental stuffs happens, find a way to generate more income, work harder / overtime, or borrow money.
4. Exercise 4: diversification
Buying gold, bitcoin, commodities, etc are not the most important parts. The most important thing is educating yourself. Holding 100% fiat cash such as dollar, euro, pound, yen, yuan, etc is dangerous because there are many predictions of financial crisis, take a look at what happened at Venezuela, Turkey, Argentina, Iran, Zimbabwe, etc. Read my other blog post https://0darkking0.blogspot.com/2019/09/my-inspiration-for-global-financial.html.
- Educate yourself.
- Plan a portfolio of your asset diversification. For example on the left.
Diversify your assets.
- After obtaining your incomes, immediately pay yourself first, and spend it on different types of assets.
- At the end of your budgeting (end of the month) if you have leftovers, store some of that cash as backup (you decide whether it is 10% or 25%), then spend the remaining on different types of assets.
Maybe some of you like me a long time ago are very enthusiast that you are not patient enough to study first and you are motivated by learning from doing / experience. If that’s the case, you can just start buying small for example, buy $10 each of gold and bitcoin and hold rather than you buy lots and you become frighten when the price drops.
5. Exercise 5: investment
- “If you cannot make money while you sleep, you will work forever”, Warren Buffet. Investing your money means, putting your money to work to make more money.
- The same as exercise 4, use your pay yourself first and leftovers (if any) for investment. However, before that, educate yourself first and allocate investment into your portfolio if you haven’t.
In my opinion, your own business is the best investment. However, planning your business or finding a good investment, takes time. Therefore, it is fine to put your money temporary (in my opinion avoid lock terms over 3 months) into common investment products:
- Government bond: in my country Indonesia, the minimum investment amount is $100, the interest around 6% yearly, and lock term 1 - 2 years. The government says it is the safest investment because it is protected by the law. If you want to contribute to your country, this is the right investment for you. In my opinion, this is only to protect your fiat, it will not make you rich, try once for experience but think twice for next time unless you are already rich.
- Certificate of Deposit (CFD): the purpose of CFDs are to lock your money in the bank. if the interest rate are positive, meaning you are lending your money, if negative, you are paying fee to the bank to keep your money safe. Avoid Europe and Japan because they have negative interest, and US because very low. In Indonesia is around 5% with lock term ranging from 1 month, 3 month, 6 month, 1 year, and 2 year with minimum amount $1000 which is still worth considering. For example, if you still don’t know what to invest, you can buy a CFD of 1 - 3 month and withdraw once you know.
- Mutual Fund: definitely a product if you don’t know what to invest in because they have investment managers that will decide for you. The good thing is there are lots of products with varying features. There are products with lock terms ranging from 1 day to 1 year, minimum investment starting from $10, risk profile from safe to dangerous. In my case, put my money into a mutual fund continuously and then withdraw them any time when I have a business that I want to do.
- Stock: buying pieces of a corporation. You will gain profit if the piece of corporation you buy increases in value and vice versa. In minimum, know the piece of corporation that you buy and you think that it will survive in the future. In detail, investigate the corporation’s cash flow and reputation.
- Commodities: cotton, lumber, sugar, salt, oil, you name it.
- Land and real-estates: the most popular and profitable but very expensive and risky if you don’t have any knowledge.
6. Exercise 6: mind your own business
Your business is potentially your best investment. “The rich focuses on the asset column”, Robert Kiyosaki. Assets are things the generates revenue such as rental properties, stores, and factories. The best asset is passive income where it generates revenue automatically without you doing anything.
This is the step that I’m in, I’m currently trying to find a business that I can do. Once I succeed, I will update this section in the future.
7. Optional exercise 7: leverage
- Sign up to a leverage platform and deposit money.
- Predict whether commodities, cryptocurrencies, and foreign currencies goes up or down and put your position.
- Master take profit and stop loss.
- Leveraging without basis is the same as gambling, therefore study lots before doing this.
- If you succeed, you will multiply your money like how gambling does.
What are the necessities?
- Food, water, and house service. To gain them, you have to work. Nowadays, work are a getting a job or doing a business to get money and buy necessities, but that’s not necessary it. Work to live is how to get those necessities where the very basic is in nature where find trees to get fruits, go to the mountain for clean water, fish, and hunt.
How to get out of poverty?
- Decrease your expenses or increase your incomes.
How to get middle class?
- Increase your income: work harder, get more jobs, or find other sources of income.
How to sustain financially?
- Start accounting and calculate your budget.
- Beware of liabilities.
How to start investing?
- Pay yourself first.
- Find an investment product.
- Use your leftovers.
How to get rich?
- Focus on assets primarily, passive incomes.
- Start your own business and regularly invest in it.
How to face upcoming monetary crisis?
- Never hold 100% fiat and diversify such as gold, bitcoin, commodities, and real-estate.
- Educate yourself.