factornerd

Saving money and my journey to financial responsibility

I was a late bloomer in terms of saving money. I was almost 30 when I started to not spend all my paycheck before the end of the month. It didn’t matter that my income grew exponentially since I started working, I would always spend it all before the next paycheck. I used to make jokes with my employer that I don’t want a pay raise, but I’d like to get my paycheck more often, at least twice a month. It sounded funny to me back then.

Published:  Tuesday, 22 December 2020
Author:  Daniel

Being poor and with no financial education

I grew up in a small and poor mining town. When the mine closed, everybody was as poor as I was, so I never had a good example to follow. Budgeting only meant having enough money for food until the next month and covering for the tabs opened on buying alcohol at the many pubs in town by the now jobless men in the family.

Buying clothes was a big event, and only happened twice a year: for summer and winter clothes. Since I was the first child in the family and grew up each year, my parents had to buy me clothes. Mom and dad were wearing the same shoes and clothes for many years until they eventually were convinced they actually needed new ones.

Vacations only meant going to my grandparents in the countryside, from where we’d bring flour, beans, eggs, and cut a bit the groceries costs.

For most of my childhood, my parents struggled with money. Their biggest expense was always food, and not even that was enough. I spent many winters eating the same 5 types of meals made from the mushrooms we gathered and conserved during summer, or eating countless meals made mostly of potatoes we cultivated in our small patch of mountain-side garden. Except for Christmas, I’ve never seen chocolate or oranges. Winter days when we afforded to buy a few apples, the cheapest fruits around, were really rare.

I didn’t know how poor we were, as everybody around was the same, so I had a happy childhood. Money couldn’t bring me happiness, since I didn’t have it. Happiness came from playing with my friends all day, reading all the books from the one small room school library, or roaming the mountains around the town with my dad from dusk till dawn in search of mushrooms in the summer or firewood in the winter.

High school and uni were the same, except now I knew how poor I was, as I could see other people enjoying going out, or going to the seaside in the summer, or just buying stuff I could never afford. It bothered me a bit, but I was used to being poor, so it didn’t matter that much. I would work during the summers and save up enough money to buy next year’s clothes and school stuff, and then give whatever was left to my mom. Happiness still came from falling in love, reading books, and learning everything I could about a subject that fell into my hands or just spend day and night in front of a computer because everything on the internet was free and unlimited.

Being rich and with no financial education

The newfound love for computers landed me a job after uni, a job that suddenly started to pour on me more money than I’ve seen before.

It took me 5 years to realize that I don’t need to spend it all, that I could actually save and invest it, and prepare for future black days. 5 years of spending on expensive clothes, eating out every day, going out in a club at least twice a week, buying every piece of expensive equipment I thought I’d need, going to all the vacations my friends were going to.

I really did enjoy those years, but the amount of joy I felt was not linked at all to the amount of money spent. I had the same fun spending less or spending it all. Happiness was still not tied to money, but at the same time, I didn’t know what to do with the money I had.

Creating a saving goal of my own

Some people I knew did save money and did invest their funds. But saving money for buying a car or an apartment never appealed to me. Rent provided me with the freedom to move and walking and public transportation were faster ways of transportation in my city. Some people invested in the stock market, but all Romanian companies are shady and access to US stocks came with very high commissions. And besides, I knew nothing about the stock market.

To be able to save money, I needed a goal of my own. At first, my goal was to have enough money to spend on larger purchases when I wanted, without having to wait a few months to have enough funds. A lousy goal, but it got me moving.

I created a separate bank account not linked to any of my cards, where each month I’d move the money I didn’t spend from my previous paycheck. For a full year, I entered a loop where I would save up twice my paycheck and then spend it all on a better laptop, a more expensive phone, an expensive vacation, expensive gifts for my family.

Building an emergency fund without knowing what I did

At some point, I didn’t have any new big expenses to make, but I kept saving up the remainder of my paychecks. The funds kept adding up to a point where it was just a shame keeping them into an account and getting eroded by inflation. The obvious step for me was to create term deposits at my bank. At first for 3 months, then 6, then up to 1 year. At least now my funds were not losing value to inflation. I didn’t know anything about the concept of emergency funds, but that’s what I had there. Money readily available in case I needed it.

In 2 years, I had around 6 months’ worth of paycheck saved in my account. Those savings generated a measly income, around 150 EUR a year for the 10,000 EUR I had saved up.

Spending less as a second nature

I didn’t know any better, and saving up became innate at this point, so I kept saving. Another year passed and I doubled my savings. I could now spend 1 or 2 years without a job and not feel any difference. Not that I ever thought that losing my job was ever possible, but at least I had this option.

With age, it gets harder to survive hangovers. 15 years ago, I didn’t even have them. 10 years ago, I started to need a day to fully recover, and in the past few years, there were many times I needed 2 days until I was back to my normal. As a consequence, I started going out less and drinking less. My savings rate doubled just from doing that.

Then I started to spend less on clothes. It was mainly just thinking more if I would really wear them and, most importantly, think about it before I bought them. And it helped a lot.

Then I realized I don’t need a new phone every year, that my laptop is still good even if it’s not the latest model, that I don’t need the latest smartwatch or another gadget I won’t use. And I started buying less and less of these.

I’ve built my own rule of delaying any impulse buying. If I still needed that specific thing in a week, I would buy it. Most of the time I didn’t need it or just didn’t want it anymore.

I started cooking more at home, mostly because I love it and I find it relaxing. But it also proved cheaper and healthier than eating out all the time.

Tracking my expenses

Without noticing, I became a bit of a minimalist. I spent less and less on things I didn’t use, and never felt any loss.

I tracked my expenses for a full year, and then later on a few months at a time, just to see if my spending habits changed. It was hard at first, and I used an app to do this where I had to manually enter all my expenses (Monefy), but in a few weeks, it became second nature.

On average, I would spend around 1000 EUR each month:

Optimizing expenses

I read in the past a few tips on cutting expenses that were a bit too extreme for me. Things like never going out, take “staycations” instead of vacations, lowering the water temperature when showering seem like things that suck all the fun in life.

I do save up, but I don’t like to do it as a tradeoff to my normal life. I buy beer that has twice the price of the cheaper one because I like it and I want to support the local economy. When I go out with my little sister, I always pay for whatever we have, as she’s my little sister and I want to take care of her. I have a Netflix subscription that I share with my family, but I’m the only one paying for it, and I’m happy to do it for them.

These are all small things that would save me maybe 100 EUR per month, and in turn, make me more miserable.

To compensate for it, I’m using other tricks that save me money.

I always use a card like Revolut when traveling, so I cut currency exchange fees. I never book vacations through a travel agency, but instead plan my own itinerary and book Airbnb rentals which are cheaper and more comfortable than most hotels in my price range. I mostly use public transportation and walking in the city, instead of taking a cab. I buy clothes that are more expensive, but last longer. I’m trying to waste as little food as possible, and it’s a lot easier doing so when you cook. And this helps me save without feeling I’m giving up on anything.

Creating a retirement savings plan

25% of my gross pay goes to a retirement plan, or what our government calls the ‘’social security contribution”. It’s mandatory, and I never even see the money. The bulk of it (21.25% of my pay) covers the current pensions, with the promise that in 35 years other working people would cover mine. 3.75% of my pay goes to a secondary ‘’pillar”, a privately managed fund that’s supposed to ease the state’s burden when I retire. I also have the option to invest another 15% of my gross pay into a 3rd “pillar”, again managed by a private fund.

These private funds are mostly investing in government and municipal bonds and pay themselves high commissions.

Retirement years are far in the future, so I don’t think intensely about them. But in recent years discussions about the privately managed fund made me think about it. While all private funds boasted 6% or 7% returns each year, they also took more than 5% in commissions from the funds they managed. I was tempted for a while to open a 3rd pillar pension fund, but after seeing their commission structure, I decided I’d be a fool to let them spend my money while the only thing they do is invest in bonds I could purchase by myself.

Based on my current contributions, I should expect to receive from the government a monthly pension between 200 EUR and 1000 EUR, and another 200 – 400 EUR from the private fund, depending on when I plan to retire. While the better scenario would work just fine for me, the worse one, with 400 EUR a month, is far from what I’d need.

Living in Romania, more than in other countries comes with the gift of uncertainty. And the best way to prepare for uncertainty is to have alternative plans. One of my alternative plans to the state-provided pension was to invest all the saved funds and prepare for retirement as if the state money never existed.

The rocky road of investments

As my savings reached 25k EUR, it became harder for me just to let the funds sitting there in my account and gain almost no interest. I decided I should start investing in the stock market.

A few years back, the market was forgiving with beginners like myself, and it continued growing and got me out of many mistakes. It also gave me enough time to read more on the subject, adjust my positions, move to a better broker. It gave me time to understand what technical analysis is (basically astrology) and what fundamental analysis is. It gave me time to learn how to read financial statements, and also fall a bit too much in love with value investing. A good saying for this is the market can stay wrong more than you can stay solvent.

And 3 years ago, stocks became a bit boring. I stopped looking daily at my account, and only bought or sold something every once in a while. Daily or weekly price variations didn’t matter anymore. Then not even monthly spikes didn’t matter that much.

I couldn’t stay away from cryptocurrencies. I trolled my friends so much on why they have zero value, and they’re not investments but speculations until I decided I had to give them a try. And again, the initial gains were high, and I sold, and then bought more, and sold again, and so on, until 2018 came and a dark cone covered the crypto space. I just considered those invested funds as lost money and a reminder and left them where they were.

I needed a new kick and started to look for alternative investments. What else was there I could try?

Equity crowdfunding came easy, as it was still about buying equity, except in startups that are a lot more likely to fail. But I would figure that not all of them would fail, and the ones that don’t fail will grow enough to cover for the other ones. That’s still to be seen, and I’ll see that in a few years.

Bonds were also interesting, especially corporate bonds. And I never liked bond ETFs, because I had no control over what they contained and when they were sold. And I liked to have control. When I found WiseAlpha, I knew it was exactly what I was looking for.

Crowdlending was a different ball game. Entirely new to me. Exciting. And I had to know how it works.

Reading only gets me to a point, and after that, I needed to learn with my own money. As if I haven’t learned anything from my previous mistakes. By the time I understood diversification doesn’t necessarily mean more safety, but more points of failure, it was a bit too late. Using a mix of ignorance and greed, I managed sometimes to quiet my suspicions just because everybody else was saying good things about some p2p lenders.

But, contrary to the belief that we should learn from other’s mistakes, most of us learn from our own mistakes. Not because we’re stupid, but because that’s the natural mechanism to internalize learning. That’s why no kids listen to parents when they’re told not to do something. The parent’s fears are not their own, and they need to have their own experiences even though they’ll draw the same conclusions.

I’m happy for these lessons, and thankful it was not a too expensive lesson to learn. It will make me more cautious in the future.

Am I done with learning? Of course not. I’m still reading lots of economy and finance books, still looking for new opportunities. Just less prone to the same mistakes of the past.

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