Personal Finance

This was a long time coming post of sorts, as money management in the last 5 years has become a relevant trap of my spare time.
I say trap because I have designed and redesigned the “systems” with which I manage my money, I have watched thousands of pills and tips and tricks on personal finance, and have been, all round absorbed by the topic (as I usually get absorbed, which sits one inch short of obsessed).

Not that I really studied the topic, I don’t have time for that, but I have implemented and played around with lot of tools to help bring awareness at the forefront of my conscience when the talk is about money.

Before talking about how I do what I do, I think is important to provide a little bit of context and therefore explain how I got there:

My money Journey

1. Beginnings

Be me, 2018 ca., I hadn’t literally got a clue.
I worked, had a somewhat decent salary for my first real job but completely lacked vision about my finances (despite being a recent business graduate).

There was no plan for the money, no accounting of the money, no real awareness of the money; except for a rough tendency to spend less than I earned.

My parents helped me and my brother by paying rent, and all other living expenses, fun money (and especially drinking money) are mine to manage. With the benefit of hindsight I recognize that my lifestyle at the time could not have been sustainable and thus was making it harder to confront with my real spending habits.
But then, Being naturally stingy with money, I had a healthy savings rate (that was not intentional) and so little by little my Bank’s account balance was steadily going up.

2. Awareness

Suddenly, more by imitation than by a genuine own compulsion, (and mostly by browsing reddit) I became aware that with this approach, inflation was slowly eating at my savings and that my relationship with money was not optimized.
(Optimization of most things is something that sits often at the forefront of my conscious thought).

The world is full of opportunities to make use of compound interest rate and benefit from it, so something had to be done about my financial future and a plain saving strategy was not going to cut it.
So, in august 2018, (also thanks to reddit) I started a very small accumulation plan (PAC) with my Bank.

The very simple and straightforward plan was:

• automatically every month the Bank purchases for me a stock that I have chosen beforehand;
• said stock grows in time;
• it combats the inflation eroding at my savings.

In the beginning, I was a little bit unsure, having started all this by reading strangers’ opinions on the internet, and seeing my disposable income curtailed every month, but habits are a potent force and in the end I got used to having this automatic withdrawal of my finances.

Obviously the choice of the amount and the stock are the two relevant variables here:

• how much are you comfortable giving away each month?
• what stock do you pick (on which horse do you bet?)

The time frame for this kind of investments is very long, in order to maximize the effect of compound growth, so in my heart I decided I would not touch that money for at least 20 years.

I learned very early that stock cherry-picking (or active investing) is not a sound strategy, as nobody can predict the future and even trying to get a sense of the market trends or of a company’s stock price takes a massive investment of time and attention (without guaranteeing results).
So there would be no stock-picking.

In alternative there is a wide array of passive investing strategies. One such strategy is investing in index funds, which are a financial product that mimics the trend of a particular market index, such as the S&P500, or NASDAQ.
The underlying rationale is that by clustering similar companies (by size, by geographic locating or by industry for example) you can broaden the micro and macro economic factors that affect that particular “segment” of interest. But here’s the kicker, by moving the scope farther and farther away from the single company, you can systematically hedge the risk by taking up the market as a whole.
So there’s funds that provide a product that does just that: it matches the World Index and therefore if the markets go up (and they do, most of the time) so does this “stock”. That’s the philosophy that underwrites most personal finance movements (such as Boogleheads) that advocate for long term investment strategies of the “buy and forget” kind.

I too decided that this was the way to go, and settled on an index that replicated the S&P500.

3. Refinement

Then Covid-19 hit, and my tiny substances started sinking with the global market. Afraid (with what in hindsight has been a stellar investment from my part) and trying to stabilize the losses that I was accruing, I basically lump summed all my savings in the stock I was buying monthly. This had a double effect:

• it lowered my BOOK VALUE (so I wasn’t losing on the position anymore);
• locked all my savings in a bear market.

At the time, I realize I just panicked, which is the one thing you’re really not supposed to do when passive investing, but it turn out to be quite a catch. The world was not really ending and I basically (and involuntarily) exploited the Covid Market Crash.
Yay me!!

Then, after the crisis passed, I discovered that the stock I was investing in was not really fiscal efficient because it paid a dividend every three months. (A better stock is one that reinvests its dividends). Too lazy to re-balance, and because the performance of said stock is stellar, I still get dividends four time a year, and pay taxes on them.

But I needed a new product, and to hedge the risk that some time in the future America could not be anymore the leading economy of the world I decide to invest into a global index without a geographic/capitalization focus. Therefor I switched to a product with an accumulation strategy (dividend eventually paid by the underlying companies get reinvested) based on a world index that took into account the performance of the global market, de facto betting on the world’s economy as a whole.

4. Moving forward

Right now, having changed life and habits, unfortunately I don’t have much disposable income for investing.
(This too is an “investment constraint” that has to be accounted for while planning your finances.)
What I do most is tracking performance, Net Worth variation and spending for me, my girlfriend and my immediate family.

What does it all mean, then?

Despite studying business and economics at university, until recently I had very little clues about managing money. There is a stark contrast between what you think you know and what you actually end up having real, practical experience about.

It’s not something they teach you in school and yet is one of the most important skills to acquire. Many family problems are coincidentally economic problems, and I believe everyone would benefit from making a little bit of financial planning.

Alas, financial literacy, especially in Italy, is not something that is really taught.
Everything that relates to money, administration, taxes and finance is more or less relegated in a dark corner of everyone’s mind only to see the light of day when tax season hits.
I now recognize that this approach is foolish because:

1. There are opportunities to catch, if one is savvy enough to spot them;
2. Too little education more often than not causes problem down the road if you don’t have a clear idea about what to do with money (i.e. inflation, bad investments, the works).

Ironically enough, I haven’t yet drafted a so called investment statement.