Accounting for Noobs, Part 2

Accounting for Noobs, Part 2

In Part 1 of this series, we discussed basic accounting concepts like the Accounting Equation. From there we identified the different Account categories and how transactions are placed under Debits or Credits.

You may be thinking, “Ok good, I get why this is being used by companies and banks, but this does not apply to me!“. Perhaps you may be right, but have you asked yourself these questions before? Continue Reading

Accounting for Noobs, Part 1

Accounting for Noobs, Part 1

If you are not involved in finances in your work, accounting seems to be a very daunting concept. This is understandable as there is an Accountancy course in college which means that you need to spend years studying the whole thing. It should not dissuade us in learning about basic concepts however, as it will help us greatly in managing our own finances. This article will serve as an introduction to accounting for noobs or those new to the concept.

The main purpose of accounting is to enable recording of economic data (which is mostly money or asset values). From these data recordings we can then summarize them and provide useful reports for analysis. These reports are used to see how a business or organization is doing. The results of the data can then be analyzed to determine the next course of action. Continue Reading

Where did my money go?

Where did my money go?

You just received your regular paycheck. Finally, after all those weeks of hard work and not having enough sleep, you finally reaped the fruits of your labor. After a few days, you checked your bank account and most of your fresh money just disappeared. You ask yourself, “Where did my salary go?“.

This is a common occurrence nowadays. People sometimes feel like they don’t see any rewards from their work as most of their paycheck just seems to vanish every month. While we need to pay our dues and bills and our costs of living, do you honestly know where your salary is going? Continue Reading

The Way to Wealth

The Way to Wealth

Benjamin Franklin is not only an American patriot, but his writings are also influential in the personal finance space. His annual journal called the Poor Richard’s Almanack contains gems on how to manage money and how to build your wealth. He summarized it in his essay in 1758 called The Way to Wealth. Here, I will highlight some of the items in his essay that resonated with me and helped me in my financial journey.

“Friends,” said he, “the taxes are indeed very heavy, and, if those laid on by the government were the only ones we had to pay, we might more easily discharge them; but we have many others, and much more grievous to some of us. Continue Reading

Investing is like Planting a Tree

Investing is like Planting a Tree

Investing can be daunting especially for people beginning to learn how to manage their money. One way to make it easier to understand the concepts and avoid doing things that can hurt financially is to think that investing is like planting a tree.

You don’t eat it while it is a sapling

All plants and trees start out as a seed and then a sapling. Even the largest trees in existence today started out as small saplings many years ago. This is also true with wealth: all of the wealth today started out as a small investment decades or centuries ago.

Some plants can already be eaten while it is still a sapling. However, consuming the plant at this state does not give that much benefit due to its small size, and doing this destroys the plant entirely. The best course of action is to wait for it to grow so you reap the benefits of having a large, mature tree bearing fruit and other produce. If the plant or tree is large enough, you can harvest its fruit or leaves without destroying the plant, and you can repeatedly gain the benefit for a very long time.

The same concept applies to money. You do not kill your source of income prematurely; instead you wait for it to grow. When you start investing and you begin to see some gains, it may be tempting to reward yourself by cashing out and buying the things that you want. However this is the same as eating the plant while it is a sapling. Compounding effects take time, and this means that you reap the greatest benefit by not consuming your investments while they are still “growing up”.

One specific example of this is the education fund for our daughter. For this, I used an automatic investing program from my bank that regularly puts a modest amount of money into an equity fund every month. As I don’t consciously move the money to the fund, it barely even registers in my mind each month.

When I checked it after more than a year, I found that it is now worth one year of primary education for my daughter. While it may be tempting to reap the benefits now and pay the tuition for the year, it is much better to let it grow further. The end result of it is that instead of this investment providing only one year of primary education, it is possible for it to be able to support her entire college education!

It requires regular maintenance

Taking care of plants require regular maintenance: you prune dead leaves, you water it daily and give it fertilizer. Pruning and adding fertilizer is not really required for it to grow, but the plant’s growth is not optimal if these additional actions are not performed.

Similarly, you will need to continue to add to your investment portfolio as time goes on. It is possible to invest your money and then leave it for years, waiting for it to grow. However, the compounding effect shows its magic once you continue adding to your previous investments, resulting in a snowball effect that may someday surprise you!

You need to learn as much as you can

Plants require different types of environments in order to thrive. Some want constantly moist soil, some prefer watering only once a day, while others even die if there is more water than what they need.

Education and experience are both important when gardening and investing. Just as you need to know as much as possible how to most effectively grow your plants, you also need to understand how your money is invested. Familiarize yourself with the basics of investing such as saving money, tracking expenses, and putting them in investment vehicles. Know the different ways of investing: putting money in equities, bonds, real estate, lending, or personal businesses.

With a deeper understanding, you can also protect yourself from people and organizations who try to profit from your ignorance.

You can only control as much

After planting and taking care of the needs of the plant, you then leave the rest to mother nature. You cannot force the plant to grow, to take up water, or to process sunlight as its energy source. As with most things there is only so much that you can control in the world.

It is scary and sometimes unsettling to leave your hard-earned money invested somewhere. Perhaps the market will drop and you will “lose” money, or that businesses can go bankrupt and take your investments to the grave. While these events do happen, we cannot control them. No matter how hard we try, market forces will take effect and will have an effect on your investments.

Instead of spending our time worrying about these events, focus instead on the things that you can control.

  • Is an insurance policy available and applicable for your investments?
  • Can you distribute them so that you will not lose everything on a single bad event?
  • Have you done due diligence to make sure that your investment is in good hands before you commit?

Doing these things do not ensure a risk-free investment, but it greatly helps to reduce the risk. It also makes sure you can sleep soundly at night, knowing that you prepared first before diving in.

There is a risk when moving it to a new place

Moving a plant from one place to another requires careful planning. You cannot just uproot the plant and put it in another place without affecting the plant in some way. There are very tiny roots at the edges of the roots that you can see that are mostly destroyed when you uproot it, reducing the plant’s capabilities to nourish itself in the new soil. If not done properly, the process of moving a plant can eventually result in its death.

There will be times when a tempting investment opportunity arises. The promise of higher interest or higher profitability may cause us to think of moving our assets to that new investment. However, we must consider the risks of moving: are we moving from a low-risk investment to a riskier one? Have we done sufficient due diligence so that we don’t lose all of our investments on a scam?

Prepare for Black Swans

A black swan is a rare event or occurrence that is hard to predict but often has a very significant impact in the world. This term is popularized by Nassim Nicholas Taleb in his book The Black Swan. This concept is important as most of us are not even aware of its existence, and so we often get caught blindsided when a black swan event happens.

Wildfires and locust swarms are rare events, but when it happens it can affect or destroy huge swaths of vegetation and plant life. Once the event is happening already there is not much we can do but to just brace until the event is over.

Similarly, great recessions, sudden market crashes, government collapse, and war are some of the events that could have a drastic effect on our finances and investments. We almost always have no control on these events, but we can anticipate and prepare for it.

Setting a well-planned and diversified investment portfolio and purchasing insurance (as applicable) can serve as cushions to reduce the impact of these black swan events. Having a separate store of wealth in another medium such as commodities can be also helpful if you are unable to liquidate your existing investments.

Enjoy the harvest

Perhaps the most satisfying part of investing is seeing your money and assets grow. This is similar to finally seeing the fruits of your harvest (such as a tree bearing much fruit) after a long time of working and waiting.

The reward for diligently caring for your investments is financial security. Happy planting!


Photo by Matthew Smith on Unsplash