Hieu Nguyen Phi, FRM

How I enjoy my life

HieuNP

15 minutes read

From my perspectives about finance and my experience in self-reliance and growth in active Saigon (i.e. Ho Chi Minh City) for almost 7 or 8 years, plus recently seeing some health-related problems, I gradually have a positive feedbacks to my life and hope to contribute some little thing to the community. So I decided to share my viewpoints and tips about personal finance, which was also suggested by my friends and students.

The Objective

So, let’s get started by the ultimate objectives of personal finance. The personal finance goals to make your life easier by escaping the financial pressure and dealing with your income in an effective way. Somehow it’s rather similar to the risk-return tradeoff, which is a basic background for financial students. Simply, the tradeoff tells that if you want to collect more cash in the future, you have to suffer some level of risk today. However, in my opinion, it is not every body who would reach their desired level of return, due to at least two following reasons:

  • Beggar’s bags are bottomless.
  • The scarcity of the economic resources. We can understand the economic resources as the things you own and they rely on the characteristics of those things.

For instance, your diamond ring is marked to market at VND 30 million but for you, it is worth VND 50 million. It is all about the mismatch between the market (as the buyer) and you (as the seller). And the have question for the economists is that how to obtain an agreement between yourself and the market gives you. This is optimization problem.

Regards to personal finance, optimization can be divided into two sub-groups:

  1. given a constant income, how to spend better.
  2. given a constant living cost, how to leverage your income.

#The Middle Income Trap

Common people find easy to fall into their own income traps. According to the middle income trap, a country will have lost their competitive edge in the exportation of manufactured goods because their wages are on a rising trend. As applying into individuals, we find that the higher level of income we reach, the more cost we spend. And this will prevent our lives from being better.

Personally, this theory is rather true as comparing me when I was a senior university student and myself when I was a risk management senior executive. The common point at both times is that I have no excess cash at all. In the former period, my income per month is at most VND 3 million and this covers all aspects in my life, such as renting cost, tuition, water and electronic bills, etc. Compared to the fundamental income of average VND 3.1 million offered by the government at that time, it is easily find hard to survive. A VND 20,000 - lunch meals made my day! But stepping into working environment with ten-time larger income make the VND 80,000-100,000 meals no more luxury. Perhaps the restaurants you eat create cleaner, more delicious menus but undoubtedly you spend more for the same demand as your income increases. A few months later I realize that on average, VND 90,000 would be sufficient for the lunch and the dinner if I prepare those meals by myself. Therefore, the excess cash is derived from the difference in VND 90,000 for self preparation and VND 160,000-200,000 for restaurants. That’s why I see that after working for ages, my friends started to buy houses, or cars while my situation remains unchanged, no new houses, no new cars.

A lesson obviously is that I need to stay away from this income trap, as soon as possible!

#Strategies

The group (1) is about managing something we own and the group (2) is related to something out of our range. Therefore the best strategy is that from group (1), we need to learn how to manage our costs such that they become consistent over time. After that, the problem naturally turns into the group (2) where given a constant living costs, how we leverage our income.

Inspired from the book Everything you need to know about Personal Finance in 1000 words by C.J. Carlsen, the following is my tips on this active field.

Spending

The primary principle in personal finance is that never let the cost outweigh the income we earn. To do that, we need to follow some rules.

Rule 1: Do not use credit cards for shopping.

Absolutely not! Financial schoolmates will probably agree with me about the asymmetry effect. The effect is that the market will tend to react more negatively to worse information than the magnitude of the market reaction for positive information. In terms of absolute value, the market change for what is negative is greater than the change in the market for what is positive.

And with personal finance, using a credit card is a way to bring negative information to yourself at the time you need to pay this consumer loan. It will make individual psychology focus on the cost of borrowing and all things that the individual has to do is pay the debt. In other words, the only motivation for an individual to make money is to pay the debt he or she has borrowed and spent. Moreover, the power of reward/discipline is extremely terrifying. If you pay the loan on time, no matter what happens, the bank will reward you by expanding your loan limit. But actually it’s much heavier than the previous because there will be times when you will not be able to repay the loan on time, the compounding interest and the penalty for late repayment will kill you. That is a nightmare.

So the safest way is to not use a credit card. Or if it is used, do not spend on anything beyond your ability to make money, and keep away items that lose value over time. As an example, you borrow money to buy phones. The payment period is usually ranged from 6 months to 1 year but I noticed that many phone firms within just 3 months have launched the new product, making the price of your just-bought phone has dropped more than 20%. So before we pay off the loan, the amount of money that can be repaid by selling the phone to a third party in the event of a loan default is reduced by 20% or more.

And if you miss a credit card, be sure to restore your credit balance to its original limit. At the very least you will not be under pressure to repay when your interest is paid and over your life.

Rule 2: The same product, but in other market will offer a lower price with the same quality.

Try to find the best supplier. A dumbbell would be a typical example. I have searched prices in the market, and the basic price of many suppliers to the unit price is VND 10,000/kg. So to buy a pair of 10-kg weight dumbbells you need to spend VND 200,000 in total. However, I found out a supplier in Lotte mart sold a pair of the-same-quality dumbbells is 150,000 VND, and another supplier in the suburbs sold on Lazada for the price of VND 129,000. Take a moment to look for a good supplier and you will be surprised when you will have a pretty large sum of money from the expenditure at the end of the month.

Rule 3: Never focus too much on the details without regard for the whole.

For example, you are looking for the cheapest on the market as a rule of 2 but forget that maybe among the tools you have bought there is one that helps you do the same function on your item you want to buy.

Today, the trend towards the production of versatile products is not uncommon and with relatively comparable quality. Some argue that many of these functions will soon break down. This is true under the condition that you use it very often. If the frequency of the use is not very high then you should consider the versatile gadgets instead of looking for specialized tools that are certainly more expensive. On the other hand, if it is a regular tool you use, try to invest in good-quality one because you should consider the time you use that tool instead of just considering the price. In the past, there was an advertisement on the multi-function blender, sponsored by Best Buy Group of America. Until the time frame for movie at 12 p.m on HTV7, it lasted for 10 minutes. The strength of the advertisement is very “creepy”. They make you believe what they say, like missionaries. After the time of self-reliance, I used that multi-function blender for about 6, 7 months and it was being go to sell the scraps because the plugged machine was fumigated. I was so panic because of fear of fire apartment :D And so, instead of buying fruit for self-preparation, I decided to spend more money to buy smoothies outside. Until then, a friend gave me the Phillips machine dedicated to grinding fruit, everything was different. I have used it for nearly 2 years without any failure.

Rule 4: As Ramit Sethi writes in his book, “I will teach you to be rich”: “live a rich life by spending extravagantly on the things you love, and cut costs mercilessly on the things you do not.”

Think about the item you want to buy before you actually pay for it. Think for at least 60 seconds for small items, and think for 1 day for larger items. Think about your feelings after 6 months and ask yourself: are you happy anymore? If not, do not buy this item, it does not make our life better.

##Savings

Similar to spending, to save more efficiently we should still follow some rules.

Rule 1: Savings only when the debt is paid off.

Loan interest will kill you gradually and you will never save on success. But if you save money after paying interest, you will benefit from compounding interest because saving is a simple way for you to lend to the bank. Of course I do not advise you to use piggy bank on the saving purpose, for at least two reasons. One is that money is a financial asset, which itself produces more value over time and if it is buried in a piggy bank, over the years, VND 1,000 is still VND 1,000, the value of time stored in that VND 1,000 will not be realized. Second, getting close to a large amount of unused money is like living near a time bomb. No matter when the devil inside you wakes up and our best solution is to stay away from the negative source of your desires. Like the way you want to go into monastery, go to the temple. If you do not want to go to the temple, make sure your mind is extremely stable and persistent.

Rule 2: Save as soon as possible.

If you start saving VND 100,000 per month when you are 18 years old and continue for next 10 years, then stop saving and let that money grow until you are 60 years old. The money amount will become VND 234,654,000. However, if you wait until you are 28 and start saving VND 132,000 per month, then you need to save for 32 years and achieve the amount of VND 234,654,000 when you are 60 years old.

Rule 3: Save up to 6-month living expenses.

That is, if you lose VND 96 million for living in one year, you must save at least VND 48 million a year. This will be the amount of money used in the unanticipated (unexpected) situations. Once you reach this level of savings, you may want to think about saving more or investing somewhere. A colleague told me that if I save at least 20% of my income every month, I would easily achieve that goal.

Rule 4: Always have a savings map by setting the budget.

Budgets are the expected savings in your annual or five-year plan and you will know where you are in the map to achieve your savings goals. You can apply the Jars method to set your budget. Although this is a recommended model for spending, you can still apply it for savings. According to this, long-term savings account for 10% of income, for your long-term goals, and saving 10% of income for travelling, take care of yourself, and so on.

Another method is simpler than the Jars model is:

\[\text{Monthly Savings} = \text{Monthly Income} - \text{Fixed Expenditure} - \text{Variable Expenditure}\]

Moreover, creating such a budget also tells you how much you need to save to meet your personal demands, even if you can use it to adjust your savings habits accordingly. For example, the savings target at the age of 25 for career would be preferred to the 45-year saving goal for enjoyment. It then creates the habit of saving during each stage of life in a more active way.

Make more money

Until you feel that the cost has been significantly reduced and you can not cut it anymore, it is the time to consider the way to expand your income.

Many people advise me, including my parents, to spend less time playing PS4 games and surfing facebook, but reading more. I have to admit that I am a fairly lazy reader, but I can not deny that books help us solve problems in a very fast-paced way. The goal is to learn faster from the authors’ stories, failures, and successes around the world. Moreover, I also recommend that you balance the book between non-fictions and casual books. The non-fiction are specialized books that help you quickly achieve a higher level, while casual books will forge your soul as well as your lifestyle, helping you improve yourself at both aspects of professional qualifications and ethics.

I was not able to balance these two books. Specifically in the first 2 years of university, I only read books such as How to Win Friends and Influence People by Dale Carnegie, Heart Seeds by NTV Publication, … not much attention to the non-fiction books for my majors. As a result, my education was bad like you wouldn’t believe. I went to class to hear lecture without understanding. At the same time, I read many books to enrich and listened to every one who said that learning was not the only way to success, soft skills would be more important. But later I realized that without professional knowledge, I was nothing. I did have bachelor degree but my quality was the same as a high school student. As working, I did not understand why people should do so, I just imitate how to be like the work that people do. I realized that soft skills are important but it will not help me stay in office. My battlefield is so intense because basically I did not have any internal resources and there were numerous people like me outside.

What makes me so different and can not make companies not need me is that I have things that many people out there do not have. When I went to work for another 6 months at a small investment fund, I understood this and began to read the non-fiction books. I gradually understood why my superiors did so, understood the dynamics of the economy and was able to explain what is going on around my life, such as why the bank differed in the interest rate for VND deposit but always 0% for USD deposit. However, that period has made me narrow in my world, just because I read too many monographs, making my thoughts narrow in the model that I imagine, and I started to far move away from reality and think about the things which currently the practice in the market as well as people, technology, could not reach.

Balancing casual books and monographs is important, but more importantly, you should not let yourself step back. Simply because desperate diseases must have desperate remedies. The latter generation will soon overtake you and you will gradually become the heirloom of the society if you are still stuck in place without moving forward.

Besides, you should start thinking about a small business that you own. You have to realize that this is a side business, not your career. Do not spend too much time on it if you are not passionate about it. On the other hand, when you give your society the knowledge and use your skills to help people become better, your life will be filled with joy.

Meet people around you, see how they move their lives. Try to feel the rhythm of life, harmony with nature, maybe this will not create money but the premise that you can make money. This is also very important.

Investing

When you can earn a good income, to a limit, when all the work you can think of and work becomes saturated, that is the time you should start to invest. I really do not encourage you to invest too early for two reasons. One is that you have not done your best when there is so much work out there to do, instead of investing, because the simple things out there are leveraging tools. Investing is simply the last solution when you can not break anything. Then let your money work for you.

Remember, let money work for you, you never work for money. Investing is the way you are comfortable about the cash flow, not the way you experience the series of days of anxiety to look at stock prices up and down. Have a property before shedding money for someone.

Make your life simple

This is where you make your life as simple as possible by applying technology, automating things, and enjoy your life. Take advantage of the technology to automatically send savings, automatically pay the expense.

At this stage, you probably already feel the way Bill Gates live every day. You do not need to be the richest person in the world, but be the richest person in your world. The problem is that you define what the wealth is.

comments powered by Disqus

Recent posts

See more

Categories

About

I am Hieu Nguyen Phi, FRM, a Quantitative Risk Analyst from Ho Chi Minh City, Vietnam. I have a background in International Finance by Foreign Trade University. I have also charterred the FRM certification by [GARP](https://www.garp.org/#!/home) since 2018, after 2 years of experience in Risk management in banking and investing sectors. I also inspired by Mr Sheldon L. Cooper, a fictional character in the CBS television series The Big Bang Theory. He is who he is and doesn't pretend to be someone he isn't. He is so serious about anything he's doing, from academic tasks to real-life businesses. With my inherent laziness, I always look for the best and most efficient (in terms of time and my energy capacity) approach to resolve my practical issues. Currently, I am employed by [Viet Capital Bank](https://www.vietcapitalbank.com.vn) as Risk Analyst and Modeler. My responsibility is to build risk models and to perform required analyses for the bank's Credit Risk Portfolio. For further details about my job, please contact to my personal email **hieunguyenphi94@gmail.com**.