Penny Wise, Pound Wiser
#1
The Economy
Do you understand Money?
No, not the number in your bank account, or the piece of paper in your wallet.
Do you understand why something that costed 100 units of currency 10 years ago, costs a lot more today?
Do you understand why the banks call you day in and day out to give away loans for every little need? What’s in it for them? Do you see how the banks make money when you take money from them?
I believe these are very basic ideas and anyone will be able to answer them at a micro level.
But things start to get murky when the same events play out at a macro level and over large periods of time that we cannot fathom.
What is the impact of home loan defaults on the overall economy? Why do banks need recapitalization? Why does inflation fluctuate over time?
We don’t quite understand how the economy functions.
Ray Dalio is the founder of the largest Hedge Fund in the world.
In this 6 year old video, he explains that the economy functions just like a machine. It has parts that move, parts with predictable movements. These are endless chains of causes and effects that we can very easily understand and even manipulate if we are in positions of power.
How The Economic Machine Works by Ray Dalio
(31 mins)
#2
Personal Finance
Macro economics may feel like a distant concept from an individual’s point of view.
But what is at the back, and often at the top of most people’s minds is their personal finance.
You may not care about how or why the central bank manipulates interest rates, but you care deeply about your pay-check every month.
And what do you do with your pay-check?
More importantly, what should you do with your pay-check?
Is there a right answer to that question? And is there a common right answer to that question that applies to us all?
What we all do with our money should be as different and varied as our personalities are, right? after all its personal finance.
Maybe?Maybe not?
Turns out, there are some very basic set of personal finance rules that most people on the planet will be greatly benefited by.
And they are pretty simple rules.
So simple, that they can just fit on an index card, or can be summed up in just 87 words.
Yet very few people on the planet follow these rules.
And that’s because, we don’t talk enough about money. Its one of those taboo subjects that makes people awkward. They start looking away and quickly change topic.
And even the professional advise that we take from people in the finance industry can be often more beneficial to the adviser than the advisee. Yeah, that happens, a lot!!!
This podcast from Freakonomics radio, explores the answer to the most basic personal finance questions. Questions, that we often don’t discuss but should talk about a lot more.
Surprisingly, questions very few of us can answer well.
Let this be the first lesson in your long personal finance journey.
Everything You Always Wanted to Know About Money (But Were Afraid to Ask) (Ep. 298)
(44 mins)
#3
The Savings
There are a couple of confusions around money.
People often mistake their net-worth for their self-worth. That’s a philosophical question, and we can dig deeper into it, but lets park that for some other day.
Another, more practical mistake people make, is that they confuse their income with their net-worth or wealth.A high income is not an indicator of great wealth.
A high income with a higher savings rates is the bedrock of great wealth.
Yea, think about it.
Our basic needs start to plateau after a certain income level. Our spending post that point is often out of Ego or vanity or just poor money management skills. Even if you don’t want to be very wealthy in life, you still want to be financially healthy in life. You want to retire with a decent nest egg for your old age, you want some money saved up for an unfortunate rainy day.
A lot of money may not be the answer to all of life’s problems, but lack of money is definitely the source of many of life’s problems.
And often the solution to these problems is to start with saving some money regularly, it can be a little amount initially and grow slowly, but starting is important.
Here’s a post from our favourite finance writer Morgan Housel.
He tries to convince us to save more money in the most eloquent way possible, like only he can.
Let Me Convince You To Save Money
(4 mins)
#4
The Greed & The Downfall
For a very long time, I found it difficult to wrap my around the idea that how home loan defaults by the American middle class can bring down the entire Global economy.
They could lead to job losses, enormous wealth destruction and even deaths.
The movie “The Big Short” tells us the story of the 2008 meltdown. It explores how people who knew what was coming, made a lot of money during the period while everyone around them was going down in flames.
It is also a great lesson about the fact that unlimited greed can lead to unlimited destruction. Our relationship with money should always be in that context.
Give it a watch
Watch it on Netflix
The Big Short | Netflix
(130 mins)
Trailer-
#5
As we sign off for the week, here’s a quote worth thinking about.
“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.”
-Albert Einstein
Ok, Einstein might or might not have said it, thats disputed. But the concept is still powerful.
We are wired to think in linear additive terms and not in exponential terms. We often underestimate the power of compounding - Be it with habits or relationships or money
Once we see compounding in action in different parts of our life, we will be equipped to make better choices.
Think about it.
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Ciao
Aditi & Ayush
This was Wisdom Letter #11. In case you missed last week’s letter, check it out here- #10 its called “The Carbon Conundrum”.
Check out our entire archive.
And if you’re wondering why we are doing this project, what is the point of it? checkout the intro post, it might make some sense!