Some Niteans have asked about investing and personal finance management, so we've prepared this short document for everyone interested. Don't consider this as financial advice but as an introduction to personal finances and investing.
The first step of managing personal finances is tracking your spending. It's a similar thing as with company accounting. You track and categorize your income, expenses, and balance.
There are many options for tracking personal finances, from SaaS to apps, desktop software, free and paid. Dejan and Nejc use Banktivity on macOS. We're not fans, but it does the job well.
After you know your numbers, you can do the next steps.
Investing is risky, and there can be years where the return is negative. If you invested at the top before the 2008 crisis, you lost 50% by the beginning of 2009 and needed at least four years to get back to zero. That is also the worst time to sell your investments. Therefore you should always keep a 6-month emergency fund.
There is an easy risk-free 5-8% return per year for many people. What is it? Paying off your (short-term) loans. Save money and pay for furniture, car, or any other large purchase in cash.
Niteans are either sole proprietors or have companies that charge Niteo for the work. When you have a registered business, you can legitimately and legally save money on taxes when purchasing things for your company. This can be a computer, phone, desk, chair, software, or anything else you need for your job (and was not paid directly by Niteo).
You have two options to purchase something: either out-of-pocket from your savings or your company's pocket. The second option brings you considerable savings.
Let's look at an example of a computer purchase. In our first example, we'll buy our computer after we've paid taxes in the company. This tax can be corporate profit tax or, more often, salary taxes.
| Out-of-pocket | |
|---|---|
| Revenue | $2000 |
| Income | $2000 |
| Tax 20% | $400 |
| Computer | $1000 |
| Your balance | $600 |
Now, let's look at an example where we buy the computer as a company expense.
| Company expense | |
|---|---|
| Revenue | $2000 |
| Computer | $1000 |
| Income | $1000 |
| Tax 20% | $200 |
| Your balance | $800 |
As you can see, we've saved $200 by purchasing the computer for the company instead of ourselves. You can do this with all legitimate expenses for your company.
Talk to a local accountant as different jurisdictions have different rules for different types of companies.
Investing is a vast topic, and financial advisors will try to persuade you that you need them to navigate the market. But for most people investing can be simple, and advisors can do more harm than good.
We're assuming that:
- You're investing for the long term (decades, not years, much less months).
- You have at least $5000 to invest and plan to add regularly every year.
- You don't need the money now or in a year (better yet: only after retirement).
- You have the discipline to keep to a strategy even when it looks like it's not working. This means not selling when there is a panic in a market.
When it comes to investing in stocks (company shares) and bonds (loans with fixed interest from governments and corporations), data has shown nobody can beat the market average long-term (decades). Therefore, your goal is to replicate the market as much as possible and at the lowest cost possible. Stock picking, while fun, is closer to the lottery than investing. You might get lucky, but more probably, you'll have less at the end than if you invested in the market. Therefore, we'll be investing in funds that own billions worth of stocks and bonds.
What is the historical average yearly yield for long-term investing? 5.2% which compounded doubles your money every 14 years. That does not sound like a lot, but it is after inflation. In the same timeframe, inflation would decrease your purchasing power by 30% (data from 2007-2021).
There are two types of funds:
- Index funds that invest in a whole market and are non-managed (the fund rebalances automatically based on the market conditions). They have low fees.
- Managed funds that invest in whatever the fund traders think is the next big thing. They have high fees as the traders are paid for their analysis and stock picking.
As mentioned, data shows managed funds do not beat the market, so our portfolio will only hold index funds.
There are two main types of assets we're interested in:
- Stocks are shares of companies, be it Google and Microsoft or a small $50M company in Japan.
- Bonds are loans with a fixed interest rate, given by governments, municipalities, or corporations for short- or long-term (months to decades).
Stocks are high-yield and high-risk, bonds are low-yield and low-risk. We'll be using both in our portfolio. The younger you are, the more you can have in stocks (for higher yield), but the closer you get to retirement, the more you should have in bonds (for less risk).
In both cases, you want global exposure. There are times when the US has a better yield, and in other cases, emerging markets or Europe might have a better yield. Since nobody can predict the future, we just take the whole market.
We'll be buying whole-market index funds for stocks and bonds.
We're looking to invest in the lowest cost funds by a large and reputable fund. Niteo, Dejan, and Nejc all invest in Vanguard's funds:
- VWCE for the global stock market (VWRA for non-EU people)
- VAGF for the global bond market (BNDW for non-EU people)
How should you split your portfolio between the two assets? The most popular split is 70% stocks and 30% bonds. If you're young and have the stomach for higher volatility (change in portfolio value), you can go higher with the stocks. When you're closer to retirement, you start adding more to bonds.
There are many options for online brokerages, but you'll want to stick with old-school as the nice-looking apps usually have caveats. Niteo, Dejan, and Nejc use Interactive Brokers, and even though they have a terrible interface, they are the recommended choice available in most countries.
Talk to an accountant or a financial advisor (who does not want to sell you a managed fund) about your options, especially taxes.
If you'd like to learn more about investing, Ben Felix's YouTube channel is a great source.
- Open an Interactive Brokers account.
- For 70% of your portfolio, buy Vanguard's fund VWCE for the global stock market.
- For 30% of your portfolio, buy Vanguard's fund VAGF for the global bond market.
- Invest whenever your savings hit $5000.
- Buy and hold until retirement.
- If you have a house loan but want to invest, see Ben Felix's video on the topic.
- Another great resource is https://indexfundinvestor.eu/.