Tiny Bits I learnt from "Budgeting Sucks"

Been a long time since I posted. Been insanely busy, might have to post infrequently =(

The Rich Dad company recently promoted the first chapter of an upcoming book: "Budgeting Sucks".

I think it is a fun read with some things to point out.

It is mostly focused on the States but I'll just write about items that is applicable to us Singaporeans :)

It promotes something called "Value Based Spending".

Value Based Spending is something I believe it and have been more or less constantly practicing it.

Take for an example, valuing every single thing by costs and only buy the cheapest purely because of costs is pretty demoralising.

Take for example, in a hawker centre, the cheapest items are chicken rice and maybe bak chou mee, you just eat both alternately because they are the cheapest, but they might leave you hungry because the portions may be small.

So, what I practice is eating what gives the most value for the amount I pay. For about 3 years at my job in Outram, I ate mostly chicken cutlet rice (I do eat others, and no, I do not eat fried stuff often outside lunch) because it was the most filling yet acceptable, taste wise (I don't deny I can't eat something everyday if I hate it).

Some more examples:

• I also prefer to order 2 ala carte $2 burgers and maybe an apple pie instead of a meal at Mcdonalds because it gives me more food for the cost.
• I bought a Dell Venue Pro 7 (Full Windows 8 instead of Windows RT) for $179 as my tablet instead of an android tablet or an iPad because it costs the same as a android tablet yet performs much more (I can do work on the go etc)

This way, it means your needs and specs (and maybe some wants), yet spending sufficiently thrifty that you still save. Of course, it will never beat people who completely go for cheap all the way in terms of savings but I find it less miserable and sad.

The next idea is that Exchange creates wealth. Budgeting kills exchange.

The book says that it is the basis of commerce, where both parties create value to each other. One would provide a service/good that the other require, and the other will pay for the service/good to get it.

My additional take on this is also buying goods/services from your friends, i.e. similar to how Japanese and Koreans company do or even the partnership of Mcdonalds and Coca Cola. Of course, with moderation (budgets aren't infinite, sadly). But if it is slightly more troublesome or more costly, I would definitely get it from a friend.This way, money circulates around you and your friends and everyone gets richer together :)

They went on to point out a few rules.

Rule: Budgeting creates a scarcity mindset

A scarcity mindset revolves around the idea that there simply isn’t enough to go around. It focuses on the extreme short term of every decision, while ignoring the long term of every choice. 

You get worried about losing your money to something else, so you opt to spend it now, else you might not get it in the future. It is similar to people offering you 2 apples tomorrow if you do not take it today, yet many people always take the apple first because you are very unsure you will get two tomorrow.

You also become stingy (don't confuse it with frugal) because you know if you spend it on someone else, you have less for yourself.

You mistrust investments because you worry you might lose it and have less for yourself. You become so risk adverse that you give up the future for the present.

Personal finance is hard with this scarcity mindset.

The book goes on to point out that Value Based Spending promotes generosity, gratitude and trust.

It then skips to "Create value and dollars will follow" where it says it is the opposite of budgeting. which is about constraint that crowds out abundance and velocity.

We want to build wealth and find cash flows through creating value and being efficient with money.

I feel that it is a major point to remember, creating a business that caters to a need somewhere, creating value for others, as well as spending your money efficiently to maximise your dollars. It would not do to be penny smart and dollar foolish.
 
They introduced a concept called "Cash Flow Banking" to live freely, because budgeting invites scarcity and fails to classify/differentiate expenses. Budgeting treats all expenses as equal and can limit Rainmaking, War Chest (equivalent of Emergency Funds) and Lifestyle Expenses that rob you of wealth. So supposedly, Cash Flow Banking solves it by taking into account living within your means but without limiting productivity through thinking in terms of confining and shrinking. Pay more attention to creating more value and increasing productivity.

People leak or lose money is generally due to lack of management and lack of emphasis/focus on efficiency.

Two hallmarks of Cash Flow Banking is to find lost money and adding spendable cash to live better, love life and live their wealth.

Cash Flow Banking concentrates on 3 main areas:

• Being aware where your money is going, know where are you spending each dollar.
• Personal accountability and being responsible for decisions you make.
• Communicate with your family, partner and financial team.

There are 3 measures of worth, Price, Cost and Value. 

• Price – How much you pay
• Cost – How it affects you economically
• Value – A subjective measurement, could be tangible or intangible, experiences, happiness, etc.

With these 3 factors, we can use it to determine if a purchase is worth it.

Lists two ways of getting wealthy (I am using a mixture of both):

• Old Way of Thinking – Saving and Scrimping to Wealth
• Invest early and automate your deposits to investments
• Starting early is the key to having compound interest work in your favor
• Focus on what you can cut out or cut back on
• The main system for building future wealth is a budget followed by a retirement plan.
• New Way of Thinking – Value Based Spending and Capturing Wealth
• Pay yourself first
• Sweep money to a wealth capture account, a certain percentage of your income
• 15% or more is a great percentage of money to save for the future
• Automate savings, be intentional with investing once you have saved up a good sum of money
• Turn your wealth capture account into a Cash Flow Banking System

The Five Cs to Cash Flow Banking (which they call it as a personal finance system for entrepreneurs, I seem to be using it already ^^")

1. Classify Expenses
• Manage lifestyle expenses such as dining out, travel, concerts, etc. Use the 3 measures of value to determine if something is worth it.
• Build up emergency funds by savings in cash-efficient ways that promote safety and liquidity 
• Enhance productive expenses such as investing in your education or business because it leads to more wealth.
• Eliminate destructive expenses which lead you in to unnecessary debt, such as buying a gym membership that you don't use. It takes away value from you instead of adding it, kinda like wasting money for no reason.
2. Concentrate on Cash Flow
• Focus on efficient spending to recover any lost money by ensure you do not overpay on taxes, interest, overlapping insurance or even using a costly and inefficient way of getting certain things done.
3. Create & Capture Wealth
• Setup an automatic transfer to sweep a percentage of your income into a "Wealth Capture Account" or in the case of OCBC iBanking you can just set an automatic transfer to lock up the money to buy into investments or even directly into POSB InvestSaver STI ETF monthly RSP.
4. Course Correct
• Sounds like CC cream :p 
• Review your finances every month, go through your financial foundation, loans and spending to make sure it is adding value to your life and not destructive. Make sure your Wealth Capture Account is growing. Try to get a partner (be it a spouse or family) to help you with this.
5. Compound your Value
• By following the first 4 Cs, you will feel more confident in your finances being taken care of, so now you have the freedom to grow businesses and personally.
• You can invest in your own personal education or expand your authority as an entrepreneur, or anything that increases your ability to create value and earn more money.
• Of course, you live within your means but you also seek to expand your means too.

An essential element of Cash Flow Banking is having a well-funded savings account to create liquidity. It includes short, mid and long term types of savings account.

• Short Term Accounts are for peace of mind (emergency funds), where you have 6-9 months supply of cash in a bank account in case of a cash-flow crunch, health/family issue or unexpected financial surprise.
• Mid Term account is a guilt-free spending or "fun" account to make sure you spend and enhance your enjoyment in life.
• Long term or wealth capture account is for liquid funds to capture opportunities (I call them war chests). It is not a retirement account.

Building Wealth with a Wealth Capture Account and an Automatic Wealth Ladder

You want to put systems in place to keep money we make from leaking (paying more than necessary for things you need/want) and being more effective with your money.

They recommended to optimise your cash flow to boost your savings to at least 18%, here's their reasons:

• 3% for replacing stuff that have worn out
• 3% to handle inflation
• 3% for tech advancement and change, because we buy things now that doesn't exist before
• 3% for buoyancy for increased tax
• 3% for increased future consumption
• 3% for fun/rewarding yourself

After that, once these savings grow beyond your basic needs (seems like they are investing it or a higher yield deposit account, it gets confusing here), you can start to invest them (Wealth Creation Account).

And here the chapter ends.

Hope everyone learnt something. :)