"I hope you don't always think about getting rich quickly; slowly becoming wealthy is what we can achieve."

This article is Lu Canwei's 44th original piece.

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On the first day of the New Year, let's talk about money. I believe everyone has experienced this feeling: you feel like you haven't bought much, but you don't know where all your money has gone.

A friend once told me about keeping a budget, but I thought that keeping a budget wouldn't change my poverty situation. The key issue was that I earned too little. Later, as I worked longer and my income steadily increased, I found that there was no essential difference; I was still spending more than I earned.

Latte Factor

Later, I realized that my spending wasn't much different from others. I would drink coffee daily, occasionally buy things during big sales, travel regularly, and sometimes buy face masks and cosmetics for my sister. Meeting friends for meals seemed quite reasonable.

David Bach, a writer and financial advisor, introduced the term "Latte Factor," referring to unnecessary expenses in our lives. This comes from a story about a couple who had to drink a latte every morning. This seemingly small expense accumulated to 700,000 yuan over 30 years.

For example, my favorite Americano costs 28 yuan for a large cup. That amounts to 10,220 yuan a year, 102,200 yuan over 10 years, and 306,600 yuan over 30 years, which is 306,600 yuan. Of course, this is just an example; I doubt anyone drinks Starbucks every day for 30 years. Besides coffee, there are late fees for forgetting to pay bills, like utilities, which might add up to just a few yuan, interbank transfer fees, unused gym memberships, and private coaching sessions bought during Double Eleven sales. All these can accumulate to a significant amount.

The Latte Factor mainly refers to these habitual expenses in our lives that are not essential. I believe many people might think that when calculated, it doesn't amount to much.

Let's stick with the coffee example. If we spend 840 yuan a month on coffee (30 days * 28 yuan), then your total investment over 10 years would be 100,800 yuan. If we assume a 10% annual return, the return after 10 years would be 173,503.70 yuan, which is over 70,000 yuan more. You might say that a 10% annual return is too high; even Yu'ebao only offers around 2%.

Take the CSI 300 index fund as an example. From December 31, 2004, to August 27, 2018, the annualized return was 10.96% (the return in the last two years should be even higher). Of course, 70,000 yuan over 10 years isn't going to make you rich; it’s not worth it compared to drinking coffee.

Now, let's look at 30 years. The total investment would be 302,400 yuan, with an expected total amount of 1,914,633.27 yuan at maturity. You read that right; 300,000 yuan over 30 years turns into a motorcycle.

Of course, I'm not saying we should give up some spending to invest all our money. After 30 years, you might not be able to enjoy extreme sports or do many things. If that's the case, what’s the point of life? We should spend our money more wisely. For example, if you love traveling, you should find the money spent on these Latte Factors and control those expenses appropriately, so they don't hinder your enjoyment of life.

So how do we identify these Latte Factors? That’s where keeping a budget comes in.

Budgeting

After reading the above, you might feel like you're on the path to financial freedom. So, hurry up and start budgeting! But soon, you might lose momentum and stop. The first reason is that it’s cumbersome, and the second is that it seems useless.

Budgeting shouldn't be done daily; it should be recorded monthly and maintained for at least three months. Only after three months can you understand which areas your spending is higher. This way, you can identify which expenses are unnecessary and which are essential, allowing you to adjust your financial plan in a timely manner.

I don't recommend forcing yourself to save money right from the start; that might lead to a binge-and-purge cycle like dieting, where you eat healthily for three days and then can't resist junk food, ending up on the couch watching TV. So initially, you should maintain your spending habits and just focus on getting into the habit of budgeting.

Start by recording everything, even if it’s just buying a bun for breakfast. This stage is mainly about developing your budgeting habit. You might have many questions about how to record it; don’t worry about right or wrong at this point. The important thing is to keep a record. After a month, you’ll be able to see your income and expenses from the previous month.

At this point, you can see your approximate spending proportions, such as how much you spend on dining, shopping, coffee, insurance, socializing, transportation, etc., and how your monthly income is distributed. We generally know where our money goes, but detailing it can be quite challenging, which is why budgeting is so important.

Next, we can optimize our spending proportions. For example, we can reduce the number of times we eat out and prepare healthy dinners at home. Occasionally, we can invite friends over for hot pot instead of waiting in line at a restaurant. We can also cut down on buying coffee outside and try popular brands like San Dun Ban or Su Tian's drip coffee. Alternatively, after some time, we could invest in a capsule coffee machine or a coffee maker to make lattes at home. If you no longer need the coffee machine later, you can sell it on second-hand platforms to recoup some costs.

We must remember to review our spending proportions each month and optimize our consumption habits. Only then can we improve our quality of life.

Cash Flow

In my years of experience, I've seen various types of businesses—some struggling to survive, some suffering from internal conflicts, each with its own set of problems. But the only reason businesses fail is that they run out of money. The same goes for individuals; we can fall into poverty due to a lack of money.

So how do we become wealthy? I once saw a great answer on Zhihu.

The truth can be summed up in one sentence:

The real ability to master wealth is to use your cash flow to pay off interest, and the more you pay off while keeping your finances healthy, the wealthier you become.

In essence, it boils down to six words: cash flow and turnover rate.

Here are two examples:

The first type of poor person wastes all their cash flow on eating, drinking, gambling, and other vices, reducing their effective cash flow to zero.

The second type of poor person opposes consumerism, saving all their money, which also results in a turnover rate of zero, ultimately losing to inflation.

While the second type may seem noble, it is also a form of self-sabotage; at least the first type enjoyed life. With sufficient cash flow, whoever has a faster turnover will be wealthier. Conversely, with the same turnover rate, whoever has sufficient cash flow will be wealthier. So you can understand why Wanda is selling off assets and why some wealthy individuals have become indebted.

I remember reading in Li Xiaolai's book about how to identify quality assets. He cited stocks like Moutai and real estate. Real estate is indeed a quality asset, but its liquidity is poor. In contrast, stocks have almost 100% liquidity.

For assets, liquidity is a decisive factor. If you need money one day, and your property has appreciated tenfold, can you actually realize that tenfold increase when you want to sell? With stocks, you can sell at any time. Of course, I'm not suggesting everyone start trading stocks; the stock market carries risks, and one should be cautious when entering.

The main point here is to understand that turnover rate is crucial for assets, which is why some people are particularly concerned about T+ days for settlement and are willing to pay fees for T+0 or D+0.

Now, back to cash flow. I believe many of you have purchased interest-free installment products. While interest-free installments don’t incur interest, they do take up your cash flow in advance. For example, if you buy a Mac computer with a monthly payment of 1,000 yuan, that totals 12,000 yuan over a year. It sounds great—no fees, and you get to use the computer for a year in advance.

However, if we are unclear about our financial situation, and after deducting essential expenses like housing, transportation, and food, we have 3,000 yuan left as disposable income, that means your cash flow has been cut by a third. If a friend gets married or you have social obligations that month, you might incur debt.

If you incur 1,000 yuan in debt that month, your disposable income for the next month drops to 1,000 yuan. If unexpected expenses arise, like buying during the Double Eleven sales, and you incur another 1,000 yuan in debt, your disposable income for the next month becomes zero, leading you to start using installments and accruing interest.

You might find that no matter how much you try to save, you can't, ultimately creating a vicious cycle.

Budget

After we start budgeting, we often encounter a frustrating problem. I've been recording for so many days, but it seems useless. My living standards haven't improved; in fact, they may have declined, and I haven't identified any Latte Factors.

In fact, compared to your previous situation, you at least know where your money is being spent now. So the next thing we need to do is set a budget. You can set a suitable ratio based on your previous data, such as how much for housing, how much for food, how much for transportation, how much for social expenses, and so on.

Then you will discover a rather despairing fact: some expenses exceed the budget, while others are hardly used. For example, I set my monthly pet expenses at 200 yuan, which includes cat food, cat litter, etc. However, I don’t buy them every month, and in some months, I might buy a lot at once, like a large bag of cat food for 500 yuan, which could exceed the budget, but one bag can last for several months.

Therefore, your budget should have a concept of a total account budget. For instance, if you didn’t use the pet expenses this month, you can transfer that portion of the budget to other expenses. Next month, if you exceed the pet budget, then you need to reduce the other budgets accordingly. Of course, your budget can be adjusted according to your assets, but I recommend not to adjust it frequently.

For example, if your budget over six months doesn’t vary too much, you can basically estimate how much disposable cash flow you have.

This way, you can calculate how much cash flow you might have each month, and you can use the excess part of your assets for other things, such as investments.

Investment

That said, I still can’t say I’m particularly good at asset management, but I do have some things to share with everyone.

Most of this knowledge comes from "Dog Money." You can divide your accounts into several parts: the first part is for daily expenses, the second part is for dream savings (like going on a trip or buying something), and the third part is for the golden goose account (which lays golden eggs, meaning investments).

For example, 50% for the golden goose account, 40% for dream savings, and 10% for daily expenses. Of course, everyone’s situation is different; if you only have 10% for daily expenses, I estimate you might end up on the street. At this point, you can reallocate this ratio based on your previous monthly expense records.

I originally planned to write this article after finishing the "Personal Investment Course," but there’s too much content, so I’ll write a separate article later on what I’ve learned. I won’t provide specific ratio recommendations here, but you can divide your investments into the following segments.

The allocation should go from more to less. If you’ve noticed, making money is actually a reflection of your ability to control and manage risk. Good risk control is one of the techniques that ensure you achieve long-term benefits.

When you first enter the market, who isn’t a novice?

You will find that the mistakes you made are the same ones that new entrants will make. Even Li Xiaolai, when he first got into investing, was educated the hard way. When we first enter the market, we are eager to go all in and wait to get rich, dreaming of yachts and models, rather than diving into the sea…

Then it seems like you have boundless magical powers to influence the market; when you buy, it drops, and when you sell, it rises. Then you frantically try to bottom-fish or end up cutting losses and leaving the market. Why does this happen? It actually stems from your weak awareness of risk management.

I have a friend who quietly managed risks while those around him experienced dramatic ups and downs, going from tens of millions in wealth to tens of millions in debt. He often tells everyone how much principal to invest, what percentage of profit to expect, when to take profits, or how much to stop loss and when to sell.

Why can quantitative trading make money? Why can arbitrage make money? Because its risk control requirements are very low. If you can ensure that you earn 1 yuan every time, then you only need to focus on improving efficiency. For example, if you can only operate 100 times a day manually, running a program might allow you to operate 1,000 times a day, thus increasing your income.

Another strategy is to implement a barbell strategy (mentioned in "Antifragile"). For example, if you have 1,000 yuan, you might put 100 yuan into Investment A, which earns 100 yuan in a year, yielding a 10% return. If you put it into Investment B, you only have a 10% chance of getting a tenfold return, which would yield 9,000 yuan. If you put money into A, the return is too low. If you put it into B, you might lose everything. So you take 90% and put it into A, earning 90 yuan in a year. The remaining amount goes into B; if it loses, you lose 10 yuan. If it earns, then your total profit is 990 yuan.

A lot of information needs to be assessed in this area, such as national policies, trends in different industries, market conditions, etc. You can follow some finance content creators on Bilibili or read articles from public accounts. There are many filtering criteria, but the most important point is to have reason and evidence.

For example, regarding the appreciation of the RMB, some content creators say it’s because the U.S. is printing money, leading to the depreciation of the dollar and the appreciation of the RMB. Others provide recent three-month trend charts of the euro, dollar, and RMB, analyzing each country’s pandemic situation, foreign exchange conditions, and local economic conditions, combined with the domestic dual circulation policy to explain why the RMB has appreciated.

So I ask everyone, which content creator do you think is more reliable? You can also look at industry investment analyses from 2020 and 2021, as well as various companies’ prospectuses, and definitely don’t go all in on a single bet.

Tools

Combining the points mentioned above, what we need is not just a simple accounting application. When I first started, I only kept accounts, and I bought several applications for accounting management, but I found that many applications were not very useful.

Why do I say this? Many accounting applications only focus on bookkeeping rather than managing your assets. Additionally, many of the developers of these applications are individual developers who are not accountants or finance professionals, so I often found them particularly uncomfortable to use.

For example, if I used Huabei to buy something worth 1,000 yuan and need to repay it by the 10th of next month, how should I record this? I used Shark Accounting for a few months but found it particularly contradictory. I recorded an expense when I bought something, so should I record multiple expenses when I repay? For a while, I was puzzled about how my accounts matched up. Then I downloaded another app, Suishouji, and found it extremely difficult to use. I even paid for it, and there were ads??

Later, I searched around and realized that accounting applications should have a concept of accounts. For example, your credit card account and your payment account should be two separate accounts. If you spent 1,000 yuan on your credit card, you record it as an expense, and when you repay, you record it as a transfer. Then a new problem arose: the cryptocurrencies I had previously invested in had appreciated, but they were all in dollars. Including the recent trial of U.S. stocks, all these currencies were in dollars. As a result, a large number of domestic accounting applications became unusable, and I later imported the data into Money Pro.

At first, I used it for a few days and found it extremely unsuitable; the accounting experience was really poor. Although it solved the problems I mentioned above, the reports were terrible and completely incomprehensible. I also wanted to know how my investment returns were doing, and out of frustration, I continued searching, even considering creating my own application.

Fortunately, I finally found an asset management application that solved all my problems: MoneyWiz. It’s like using various switches in a keyboard; you keep changing keyboards, but in the end, you still choose something like the HHKB. It also supports recording credit card installments, different account types, and grouping, etc. After using it for a while, it basically meets my needs and has some pleasant surprises. It has a dedicated cryptocurrency account that can update earnings in real-time, although some niche coins are not well supported. I haven’t tested the online banking link yet, but since it’s not domestic software, it probably won’t connect, but that’s not a big issue.

Finally, if you have anything you’d like to discuss, feel free to leave a message.

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