"I hope you stop always thinking 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 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 problem. 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 usual 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 also late fees for unpaid 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 considerable amount.

The Latte Factor mainly refers to these habitual expenditures 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 on coffee each month (30 days * 28 yuan), then over 10 years, the total investment 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 returns 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 buying coffee.

Now, let's look at 30 years. The total investment would be 302,400 yuan, and the expected total amount at maturity would be 1,914,633.27 yuan. 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 anymore, and many things you can't do. If that's the case, then what’s the meaning of life? We should spend our money more wisely. For example, if you love to travel, you should find the money spent on these Latte Factors and control those expenses appropriately, so they don't become obstacles to enjoying life.

So how do we identify these Latte Factors? That’s through budgeting.

Budgeting

After reading the above, you might feel like you're on the path to financial freedom. So hurry up and start budgeting, but then we might lose momentum and stop. Gradually, we might stop budgeting altogether because it seems troublesome and not very useful.

Budgeting shouldn't be done daily; it should be done monthly and sustained 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 lying on the couch watching TV. So initially, you should maintain a good mindset: spend as you normally would and keep your existing habits.

First, develop the habit of budgeting. At the beginning, you can even record small purchases like a bun for breakfast. This stage is mainly about cultivating your budgeting habit. You might have many questions about how to record it; don’t worry about right or wrong at first; the important thing is to write it down. 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, so this is where budgeting becomes very 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, or occasionally have friends over for hot pot instead of waiting in line outside. We can also cut back 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 ourselves. If you no longer want the coffee machine later, you can sell it on second-hand platforms to recoup some money.

We must remember to review our spending proportions each month and optimize our consumption habits accordingly. Only then can we enhance 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, all facing different issues. But the only reason businesses fail is that they run out of money. People are the same; we can also 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 true ability to master wealth is to use your cash flow to pay off interest, and the more you pay, the healthier your finances are, 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.

The second type may seem noble, but it's also a form of self-sabotage; at least the first type enjoyed life. With sufficient cash flow, whoever has a faster turnover is wealthier. With the same turnover rate, whoever has sufficient cash flow is wealthier. So you can understand why Wanda is selling off various assets; the same principle applies to why some wealthy individuals 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, suppose your property has appreciated tenfold; if you want to sell it, can you actually realize that tenfold appreciation? With stocks, you can sell at any time. Of course, I'm not suggesting everyone should speculate in stocks; after all, 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 everyone has bought quite a few interest-free installment products. Although 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 repayment 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, suppose after deducting essential expenses like housing, transportation, and food, you have 3,000 yuan left as disposable income. This means your cash flow has been cut by one-third. If a friend gets married or you have social obligations that month, you might incur debt.

Suppose you incur 1,000 yuan in debt that month; your disposable income for the next month would only be 1,000 yuan. If you then have unexpected expenses, like stocking up during Double Eleven sales, and incur another 1,000 yuan in debt, your disposable income for the next month would be zero, leading you to start using installments and accruing interest.

You 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 to have no effect. It hasn't improved my standard of living; in some ways, it may have even declined, and I haven't identified any Latte Factors.

In fact, compared to your previous situation, now you at least know where your money is being spent, right? Next, what 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 your pet expenses this month, you can transfer that amount to the budget for other expenses. Next month, if your pet expenses exceed the budget, then you need to reduce the budget for other categories 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 available each month, allowing you to use the excess portion of your assets for other things, such as investments.

Investment

That said, I still can’t claim to be particularly good at asset management, but I do have some insights to share.

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 (the goose that 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 allocate 10% for daily expenses, I estimate you might end up on the streets. 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 since there’s a lot of content, I’ll write a separate piece on what I’ve learned later. I won’t provide specific recommended ratios here, but you can divide your investments into the following categories.

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

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

You will find that the mistakes you’ve 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 invest all our money and wait to get rich, dreaming of yachts and models, rather than diving into the market…

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 buy at the bottom 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 risk 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 execute 100 trades manually in a day, running a program might allow you to execute 1,000 trades in a day, thus increasing your income.

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

There’s a lot of information to assess 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 a rationale.

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 for 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 the prospectuses of major companies, but don’t put all your money 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 user-friendly.

Why do I say this? Many accounting applications focus solely 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, which made my experience quite frustrating.

For example, if I used Huabei to buy something worth 1,000 yuan and need to repay it by the 10th of the 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; should I record multiple expenses when I repay? I was puzzled for a while about how to balance my accounts. Then I tried another app, Suishouji, and found it extremely difficult to use, and I even encountered ads after paying for it?!

Later, I searched around and realized that accounting applications need to 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 those I recently tried in the U.S. stock market. As a result, many domestic accounting applications became unusable, and I later imported my data into Money Pro.

I initially used it for a few days and found it extremely uncomfortable; the accounting experience was really poor. Although it solved the issues I mentioned, the reports were poorly designed 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; after trying different keyboards, you ultimately choose the HHKB. It also supports recording credit card installments, different account types, and grouping. After using it for a while, it basically meets my needs and even 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 a 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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