I don't know if you agree with this point of view. It is not easy to make money, and spending money is a form of knowledge. How to master the art of spending money? How to allocate expenses reasonably In the uncertainty of life?
Can you tell the difference between consumption and investment? For example, is buying a fitness membership an investment? Lottery tickets are irrational speculation, and why do so many people buy them? How to turn money into a valuable asset?
01 Distinguish three "wallets"
"Spending money smartly is as hard as earning it".
Regarding this point, there is actually a big misunderstanding in spending money. Most people think that spending money means saving money and buying cheap things. Living within your means, being diligent and thrifty are the ways to spend money.
However, to really utilise money, you must know how to distinguish between three wallets.
Each of us has three wallets, a consumption wallet, a speculative wallet and an investment wallet.
Consumption wallet: To satisfy own needs such as clothes,
daily necessities, etc
Speculative wallet: To speculate and spend on items that
involves some luck, such as lottery tickets art pieces, thinking that they may
go up in value in the future
Investment wallet: To spend money on items that will go up in value in the future such as investment products, entrepreneurship, etc.
In general, spend more investment wallets, moderate consumption wallets, and avoiding speculative wallets are the first important things to remember about spending money.
02 Only buy things that will be worth more later
Since you want to spend more money in your investment wallet, how do you use it in real life? That's what we're going to talk about next: the principle of making more money.
This principle is: only buy things that will be more valuable later.
The question is: how can I know how much the things I buy will be worth in the future?
Probably the hardest part is estimating the values and discounting them. In the eyes of economists, almost all items can be converted into money for comparison.
For example, your job requires you to be fluent in Chinese, and once your Chinese proficiency improves, your monthly salary may increase.
Under such circumstances, it costs a few hundreds to sign up for a one-year training course, which seems to be a very cost-effective investment, because it can bring you more monetary returns in the future.
This is an estimate of what the purchase will be worth in the future and can help you decide whether to spend the money.
However, with regards to this estimate, there is a loophole. Because
you ignore an important factor, and that is time. In other words, future money
is not as valuable as present money.
Therefore, when you spend money and invest to calculate future income, you cannot directly compare the amount of money you may earn in the future with the amount you will spend now, but you have to give a discount to the future money. This discount is called in economics. Discount Rate.
This principle sounds simple, but most people are often disregard this problem.
If you understand the concept of discount rate, you will know that the sooner you get more money, the less discount you will lose. Not to mention that if you get the money in advance, you can make other investments and bring additional income.
In addition to considering the discount rate, another factor you need to consider is how long it will take to get the return, and at that point, whether the return you want will still mean as much to you.
If you tell a 20-year-old young man, "You give me 2 million now, and I will give you 10 million in 30 years", many young people will be willing, because for them, they will be 50 years old in 30 years, and still Lots of time to enjoy this money.
But if you say the same thing to an 80-year-old, he probably won't say yes, he thinks he may be running out of time and doesn't want to take the risk.
When people are young, they can appropriately allocate more stock assets, and their ability to withstand risk fluctuations will be relatively strong. Once there is a loss, they can also have the opportunity to use time and accumulated experience to "wait" the gains back.
02 Two strategies to reduce investment losses
When we invest, it is very likely that due to habit of judgment, the investment will fail. Is there any way to reduce the loss of investment?
In order to ensure stable investment and avoid risks, there are two strategies: one is a portfolio investment strategy and the other is an option strategy.
Portfolio investment strategy, to put it bluntly, is not to put all your eggs in one basket to avoid bankruptcy due to your misjudgment. You may already be familiar with this concept.
The second strategy is to use options. The essence of options is to pre-determine the right to spend a certain amount of money to buy a certain transaction within an agreed time.
For example, if you go to rent a house, you have to pay a deposit when you sign the contract. You may have to pay 10% of the rent. This deposit is actually an option.
If in the next month, you find a house with a cheaper rent, then you have the right to choose to abandon the transaction.
This is a right to backtrack that you buy yourself in the future when your investment may fail.
This idea can give us a good direction, that is, when you are not sure about the investment results, you can spend a little money first to buy the right to this investment opportunity.
After a period of time, if you feel that the investment opportunity is not good or there is a better opportunity, you can do not need this part of the deposit and pursue a better choice, then the risk of this investment in life will be greatly reduced.
Read also:
How to save money during grocery shopping
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