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It was only a few months ago that I learned about the tragedy of wealthy sports stars. In the United States, many top professional athletes, whether in the NFL, NBA, or even golf, are paid millions of dollars to entertain us every week. However, when they retire, many of these sports stars think they could continue their luxurious spending lifestyles, despite not having the same level of income as when they were professional athletes. Because of this, even though they were millionaires, many eventually filed for bankruptcy because of a lack of good money management skills.

This week, I was going to go into dealing with debt as part of being our own bank, but I realized that before talking about how to manage debt, it would be a good idea to explain how to manage money, along with a few skills I’ve picked up over the years. These skills have allowed me to be in a financial position where I can actually understand and manage debt well.

Ironically, had I thought of this earlier, this could have worked well as an earlier post in this series. After all, being our own bank often starts with developing and refining good money management skills. I’ve found that, just like almost everything in life, whether you start out with a lot of money or very little of it, it isn’t the amount that you have that counts, but how you well steward and manage it that ultimately decides whether you keep it.

Assets and Liabilities, Income and Expenses

These terms are pretty popular now among people who want to learn about finances. For me, I first heard about them while listening to Robert Kiyosaki talk about his now-famous (though fictional) Rich Dad, Poor Dad story. However you may feel about the guy, the idea of assets, liabilities, income, and expenses are still an important part of understanding how to manage money well. While these terms are popular, I’ll give a brief summary of them here anyways.

Basically, income is the flow of money into our possession. Expenses take away that money. Assets are items which increase our income, and liabilities are items that obligate us with more expenses. Here’s a simple way to think about it: Let’s say I own the house I live in. That house has expenses, such as utilities, taxes, and mortgages. Since I live in it by myself, the house is a liability to me, because it’s obligating me to pay for the expenses mentioned. However, if I rent out the house, I now have income. If the rental income beats out those expenses, the house is now an asset. If it doesn’t, it's still a liability.

Viewed in this way, money management is really just managing the flow of income and expenses. Income (i.e. from a job) needs to be higher than the things I need to spend money on (i.e. food, shelter, etc.). Liabilities are a near necessity in life, simply because of the laws of thermodynamics. However, I can overcome this by making sure that, as I grow in wealth, I have more assets than liabilities. By doing so, I make sure that my money grows faster than the debts I’m taking on.

Budgeting

To manage those things, it’s typically a good idea to budget your expenses. There are many ways you can go about budgeting. For example, I used to follow the 70-20-10 rule. This means that, with the sum of my income per month, I would set aside 70% of it for regular living expenses (i.e. renting an apartment, groceries, other bills, etc.), 20% for my own pleasure, and 10% for my savings. It’s an excellent way to start if you have never done money management before. However, the goal of this rule isn't to stagnate at those percentages, but rather to decrease the ‘expenses’ portion as much as possible, so that you can gain in the other categories (pleasures and savings).

To get started, it’s a good idea to set aside time bimonthly or even weekly to go over your spendings. At the outset, it’s good to put whatever overall costs you can predict into a spreadsheet-style format. Take a look at monthly or yearly expenses and write them down. This includes the more predictable things, like rent cost, utilities costs, gas costs, and others. Then calculate the average and total monthly expenses as well as the total annual sum. This will provide a good grounding point to understand what you’re spending money on.

Afterwards, it’s a good idea to see what expenses you have that can be reduced or even removed. For example, if your phone bill is quite high, and you don’t use your phone very often for calling, then it may be better to get a cheaper prepaid plan. If your groceries expenses can be reduced by going to a cheaper store to buy the same goods, then it may be prudent to do so. Reduce, experiment, and improve on what you have. There’s no need to get locked into one method just because it may have worked for you or someone else. It’s also a good idea to get a friend to help keep you accountable to what you’re doing with your expenses.

I’ve found that the main challenge with budgeting is in unpredictable life circumstances. However, barring urgent family or health emergencies, most of these challenges can be reigned in simply with a bit of self control. There usually isn’t a need to do something big, like a vacation to some far away country, if you don’t need to. Certainly, if you’ve saved for it, you can. But, as we have discussed in our series so far, if you save a bit further and invest in assets which increase your income, you won’t need to worry about those life events emptying your stash when you least expect it.

Savings

I realized that I may have given off the impression that I deeply dislike the idea of having a savings account from my previous posts in this series. But nothing could be further from the truth. I think saving money and having a savings account is an essential part of money management, especially when we’re first starting out in this journey to be our own bank.

It is important, however, to make a mental shift from thinking we need a ‘savings account’ at a bank to needing ‘savings’. Having a savings account with a traditional bank or financial institution, with their meager interest rates, won’t help us much, especially when we need to beat the average inflation rates. Instead, it would be much better to convert the money I’m saving into USDC and keep it in a Celsius account or similar service to earn better interest on my money.

And this is the heart of the concept of savings. Because my savings, as per its name, are meant to be used only in certain situations, it’s better for me to put the majority of it in an asset which has better guaranteed capital growth, even if it has lower liquidity. By doing so, I solidify the money I have instead of losing its value to inflation. And thus, rather than believing that savings is equivalent to a savings account, I put what I’m saving into other things that have better returns than any account a bank could ever give me.

Notice, of course, that I said “the majority” of my savings. It’s a good idea to have some of our savings be more liquid, in case of emergencies.

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