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Personal Finance: Our Approach

How to control one’s spending…. That is one of the hardest things to manage, especially as young adults right after finishing university. A paycheck comes every two weeks now and it feels as though a new door in life has opened. Many purchases that we would not have thought of, are looking very intriguing. And of course, it’s difficult not to drop a dollar on coffee every day or a few dollars on lunch or a few dozen dollars on shopping. Simply put, it feels good to spend money.

So, after looking at our credit card statements, googling how to budget, limiting our consumption of coffee and clothes, and failing at all that, we re-wrote our problem statement: how to spend money smartly.

The number one reason we were failing at controlling our spending was that we did not have a defined reason to budget or a goal that is attainable after we have saved enough money.

Why do we want to budget and control our spending?

You might be thinking “well to save money of course!”, but let’s take it a step further… It would feel much more comfortable if we knew what we were saving for. A house, a car, a vacation are all great reasons to do so, but there should not be just one goal. After you have reached a goal and acquired that new house, what’s next?

Before we dove into throwing our money into savings and investment accounts, we wrote down what we wanted (our goals) and how much we would need to reach those goals.

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Automated Trading and Investing

To reach our goal of “casually living”, we first take a few steps and make some effort to ensure that we can live comfortably in the future. One of the most important things to consider is our money.

We have already talked about our approach to handling our finances, budgeting, and how to spend money smartly. The other aspect of “casual finance” is how to have money work smartly for you. We will talk about how we invest our money in future posts, but the main topic here is automated trading.

Sounds too complicated? Too technical? Not enough time? Don’t be turned away. We certainly felt a little bit of hesitation before starting this. But I am so glad that we followed through.

Here’s how it started… We spend so much time at work, generating revenue for our employer, whereas our money is being lazy; it’s just sitting there in the bank in our checking or savings account, but the bank is using it to generate more money for themselves.

So why can’t we do the same?

It is pretty common for people to play on the stock market, trade some stocks here and there, and maybe even get some profit. Unfortunately, you have to monitor your trades at work and not everyone has time for that… we certainly don’t. And it becomes tiring over time, since you have added more stress on top of the usual work stress. After a couple of months of some stock trading while at work, it just became too much too handle.

But you need to have your money working for you all the time, even while you’re at work. So we did some research and found that it’s actually not that difficult to setup a trading program. There is a huge number of resources (listed below) available to help us on our journey, depending on if you want to use existing programs or build one yourself.

We were pretty confident in coding our simple trading strategy. If we are able to write down our decision-making on paper, then surely we can code it. And so that’s what we did.

Ever since that day a few months ago, we have become more and more involved in automated trading. Right now, during the coronavirus pandemic, there is a lot of free time available to us and we cannot afford to not use this time wisely. We hope to be ready by the time we go back to the office.

We will post weekly updates on our progress towards automated trading and what we have learned. A link will be provided below to the first update once it has been published.

Resources:

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How did the 2008 Financial Crisis Happen?

You may have heard about housing market crashes. But how do they influence the entire market? We have to look at what happened in the late 1990s.

Securitization of the Mortgage

In late 1990s, banks were delighted with the securitization for mortgage. The traditional mortgage involves a person goes to the bank, bank researches on how credible this person is, and lends out the money from the bank’s deposits. But with the help of securitization, the bank will not lend directly to the person. Instead, it would package a lot of loans and sell these packages to different investors, or commercial banks as a financial derivatives.

The securitization was a win – win – win for borrowers, lenders (investors), and banks because the investors have a lot more money that banks can deposit, so individuals now have access to larger loans, investors can earn more returns, and banks can make more money from the transaction fees.

With those benefits, banks wanted to provide as many loans as possible. So after banks make mortgages for everyone that has money, the next big problem is :

How can banks make mortgage to those who do not have money?

Subprime Mortgage

Banks designed subprime mortgages for people with no income, luring in the borrower with a low rate for the first three years, and attracting investors in with high returns. Borrowers will pay a much higher interest after the first three years, and will pay a penalty fee if they want to reconstruct the mortgage.

Lending to people with no income, subprime mortgages wouldn’t last long, right?

Not exactly! Thanks to the ever-rising housing prices, after three years with the subprime mortgage, a borrower who cannot pay the high payment will default and re-construct a new subprime mortgage, using the increased price to pay.

For example, suppose you bought a house worth $1 M in 2000 through a subprime mortgage, meaning you paid nothing up front as down payment.

In 2003, you realized that you cannot afford that high interest payment. But now, your house has increased by $0.5 M, so now it is worth $1.5 M. You sell the house and profit $0.5 Million. Using the profit to pay for the penalty, you constructed another subprime mortgage, hence no interest payment for another three years!

What caused the subprime mortgage crash in 2008?

The answer lies in the housing price. 2008 was the first year when housing prices decreased.

When the housing price decreases, people no longer have the incentive to pay back their subprime mortgage.

Continuing from the previous example, after you reconstruct another subprime mortgage in 2003 on the $1.5 M house, three years later, the value of the house has dropped to $1.2 M. You cannot sell the house to take profit because you would have a loss of $0.3 M.

Your two choices are to default or to pay the mortgage. However, there is really no incentive to pay because why would you pay out $1.5M for something that’s worth $1.2M only?

Additionally, you never paid anything into this mortgage (no down payment, no interest payment so far), so you don’t lose anything by defaulting on the subprime mortgage.

Therefore, after the housing price dropped in 2008, more and more people defaulted.

How did housing market affect the entire financial market?

The increase in default in subprime mortgage was making investors think lending money is risky, making it harder for any individual and company to borrow money. The consequence was the cost of borrowing has gone really high.

Businesses had to stop borrowing to finance new project, start to reduce cost by laying off labor. Individuals were scared to spend money

Individuals, worrying about getting laid off, prefered to save up their income instead of spending, lending to a decrease in aggregate spending, which made it harder for business to make money, hence laying off more people.

1990s: https://www.britannica.com/topic/subprime-mortgage