NOTE: Please reference https://finances.vipulnaik.com/ for numerical details of my finances.
General learnings over the years
Some things I’ve learned over the years, both from what I did right, and from what I did wrong:
- Avoid the tyranny of cash: I use the term “tyranny of cash” for a situation where not having enough disposable cash causes me to spend extra financially or emotionally. For instance, because of not having enough cash, I might have to forgo buying something that will save me money long-term, or be good for my health or entertain me a lot (i.e., I might have to forgo things that are clearly high value-for-money).
By and large, I have succeeded in avoiding the tyranny of cash, at least when it comes to small-to-mid-range expenses. For instance, I’ve almost never deferred a < $1,000 expense purely because I am waiting for a paycheck. For mid-range expenses (expenses in the $1,000 to $20,000 range) I have sometimes deferred them to getting specific amounts of cash in the bank first, but this has been mostly about maintaining good discipline and has rarely been “forced” by a literal lack of cash.
A few things have helped me here: good income, alignment of expenses to income, focus on building a savings buffer first, and help from my parents at one specific perilous time (right after I finished my Ph.D. and was still unsure of my long-term trajectory). Without the last, I would have been closer to experiencing the tyranny of cash.
- Keep money as liquid as possible: With the exception of a small amount of money specifically dedicated to high-upside investments (such as my Bitcoin money) I try to keep all my money in liquid forms: paper cash, checking and savings accounts, and PayPal. One exception I make is forward payments to reduce transaction costs (for instance, paying a few months’ rent in advance, or paying insurance premiums annually instead of monthly). However, the exception of forward payments is in the same spirit as the general principle of liquidity: namely, together, they give me a very clear idea that the amount of money I have in the bank is truly money I can spend without fear. I don’t have to keep track of complicated financial instruments.
This lesson is contradictory to conventional financial wisdom in at least two ways. First, a lot of financial wisdom highlights the importance of keeping separate savings accounts that are difficult to access, primarily to deal with poor impulse control. However, I think that the value of liquidity to me is high, and I also don’t think my impulse control is weak. In general, when I want to spend large sums of money, it’s not an impulsive decision but a calculated effort to avail of a good opportunity or minimize transaction costs.
Second, liquidity comes at the cost of potential earnings from interest, as well as some potential tax savings that come from using some instruments such as retirement accounts. I think this is a good point; however, my estimate of interest rates these days, and the long time horizon needed to achieve a robust average interest rate, is pessimistic. I think balancing a large amount of liquid cash with a small amount of high-risk investment (such as Bitcoin, which I did make a fair amount of money from) has worked well for me. With that said, I do expect this to change at some level of wealth. My rough estimate is that once I get to a situation where I’m never finding myself dipping below $150,000 in liquid cash over a period of several months, I should start considering putting a few tens of thousands in mid-level risky investments (like the stock market).
A final point regarding investment is that it also depends on the stability of my long-term trajectory. For instance, some US-specific investments (such as US retirement accounts) would make more sense if I knew I was staying in the US till retirement.
- Be much more critical and skeptical about making donations and investments: In hindsight, I believe many of the donations and investments I made, especially in my early years, were things I should have either avoided making or made with smaller amounts of money. In recent years (since 2014) I’ve been much more conservative about donations, and stopped making investments.
A good rule of thumb I’ve found is to have a cooling down period of at least three months between the time I mentally decide to make a donation, and the time I actually fully review it and decide on it.
Another rule of thumb is to force myself to write the reasons clearly. With large sums of money, it’s easy to just spend them without appreciating the amount of effort it would cost to earn that money back; forcing myself to write the reasons clearly is a way to force myself to really appreciate what that money is costing me.
I’ll start the history from September 2007, when I joined the University of Chicago for graduate studies. Until that time, I wasn’t maintaining separate personal finances, and was largely relying on my parents and scholarships for financial support.
As somebody on a ‘F’ student visa status (see my immigration status for more) I had one major financial advantage over Americans in terms of finances: I didn’t need to pay Social Security taxes for the first five years (due to exclusion based on the Substantial Presence Test). This allowed me to build my savings at a slightly higher rate than might otherwise be feasible. Additionally, I also had a scholarship that paid additional money for the first two years, so I was rapidly able to build a decent savings buffer between 2007 and 2009 (reaching about $20,000 in savings).
In 2009, 2010, and 2011, however, I spent out a large amount of my savings making donations and in a one-off investment. While none of these decisions are ones that I believe were transparently and very clearly terrible, I think that with the benefit of hindsight I might not have made at least some of them. This would have allowed my savings buffer to grow to a larger amount and given me considerably greater flexibility. By October 2011, after all these had been done, my savings in the US were at a precariously low level of about $5000 (this isn’t as low as it sounds, because I had made some advance payments).
Between October 2011 and December 2013, I gradually built back my savings. However, I was working harder and longer hours and consequently eating out more, as well as spending more money on things like web hosting, so my savings rate fell. I still managed to get to a savings level of around $15,000, but I spent only $500 in charitable donations over that period.
I intended to work on Cognito Mentoring with Jonah Sinick starting January 2014. This would likely not pay well at the outset, and although I planned to do some contract work to meet the immigration status requirements of my Optional Practical Training (OPT) I expected to be losing about $500-1000 every month (i.e., that would be my gap between expenses and income). So I transferred about $5000 from one of my India accounts back to the US (this simply reversed a transfer I had made to India of the same amount). I also asked my parents to send me some money to provide a financial buffer. They each sent $5000, bringing my total savings at the end of December 2013 to $30,000.
2014 and early 2015
In January 2014, I moved to South Berkeley to live with Jonah. Between January and August 2014, I did a number of part-time jobs, including work for the Machine Intelligence Research Institute. The total income I got from these was in the ballpark of $12,000. My expenses (including tax payments and rent) over the same time period were about $19,000 (the tax payment was $3,000, which was probably an overpayment, but I wanted to be on the safe side). On August 18, 2014, I started my new job, at a pay of $100,000 per year. In practice, after accounting for various sorts of income tax withholding, this means a payment of about $2,750 every fortnight. I made about $22,000 from my job in the calendar year 2014. My expenditure over the time period was in the range of $10,000, bringing my total savings to about $12,000. My net savings through 2014 were about $5,000, and at the end of the year, I had somewhere between $34,000 and $35,000 in relatively liquid assets (bank account, Bitcoin, and PayPal).
You can get an overview of my expenses at my 2014 expenses page.
In December 2014, I bought about 8.9 Bitcoins at a cost of $3000 USD via Coinbase. I bought an additional $500 of Bitcoin in January 2015, bringing my total Bitcoin holdings to 11 bitcoins.
2015 through 2017
Between 2015 and 2017, I gradually built up my savings. In 2017, I sold about 7.5 Bitcoins out of the 11 Bitcoins I had bought 2014/early 2015 (I did not sell it all at once, but rather sold a lot initially and then sold the rest in small increments throughout the last few months of 2017). I also purchased and partly sold some Ethereum, again from Coinbase. I didn’t time my Bitcoin sale perfectly — if I had delayed selling some of the Bitcoin, I would have made way more money than I did. At the end of 2017, I have a little over $70,000 in savings in my bank balance, between 10,000 and 25,000 dollars in some other forms (PayPal, prepaid taxes and bills). In addition, I have a few tens of thousands of dollars in cryptocurrency (mostly the ~3.5 Bitcoin that I still have, and the corresponding Bitcoin Cash, but also some Ethereum). I also have some savings in India that I am not including for consideration here since I am not actively spending that or transfering to or from that pool of savings.
One of my major expenses during this time has been funding contract work. By the end of 2017, I had paid out about $70,000 in contract work payments. This has significantly affected the amount of money I have saved; a naive calculation that assumes I would have saved all this money would immediately add $70,000 to my savings as of the end of 2017, roughly doubling the amount. That is a nontrivial adjustment. However, there are other complications: I might have spent a bit of that money in other ways, for instance, on entertainment or on efficiency tools for myself. I might also have held off on selling some Bitcoin if I had the larger amount of cash savings that I would have had if I hadn’t been funding contract work.
One other factor that affected my savings rate was that the company I work at closed its Series A round in 2017. The term sheet was signed in March but the money got into the bank in May. On the one hand, this resulted in a significant increase in my salary, from $90,000 (which is the level it had been since May 2015) to $140,000 in May 2017. On the other hand, I also made some deferred payments to Issa Rice that I’d promised to pay him once the Series A round closes. That’s also why the contract work payout in 2017 was so much higher than in previous years.
A factor that negatively affected my long-term savings rate (though it was accompanied by a short-term windfall) was moving out as the landlords wanted to move in to our apartment. My rent situation in the place I’d been living in had been unusually good for Berkeley (rent in the range of $900/person). I moved to a place with a rent of $1137.50/month for my room, plus laundry costs that I didn’t have at the previous place. However, I did get a $10,000 buyout (half of a $20,000 buyout that the two of us leaving got). I also shared part of the buyout with the person I was asking to leave so I could move in to his room (he was anyway planning to leave, but the timing of departure wasn’t convenient for him, as he would ordinarily have left a month later).
2018 was a complicated year financially. On the one hand, I had a further salary increase, from $140,000 to $160,000, in May 2018. On the other hand, contract work expenses were also quite high, comparable to 2017. I also became the primary tenant of a five-person apartment, which complicated some accounting, since I needed to pay rent upfront for a number of people and then get payment back from them.
From a cash perspective, I saved very little money in 2018, but this apparent effect was mostly an artefact of the timing of cash outlays. Going into 2019, I had a similar cash situation as I had had in the beginning of 2018: about $80,000 in bank balance + PayPal, and in the range of $10,000 in prepayments.
2018 was also the first year since 2012 that I made donations, totaling $3,000. You can see more in the blog post my 2018 donations.
2019 was a relatively better year financially. The primary reason for this was the reduced level of contract work from Issa; the amount of contract work payment to him for 2019 was in the range of $5,000, compared to $18,000 in 2018. A secondary reason was that I was earning at a salary of $160,000 for the whole year. Also, some of the timing of cash outlays makes 2019 appear relatively better than it actually is from the perspective of actual expenses.
At year-end, I had reached around $140,000 in bank balance + PayPal. This may seem surprising, because the saving rate is much higher than 2018. It’s even more surprising because I had many unexpected expenses: laptop and phone theft replacement, and two large donations.
However, I anticipate around $50,000 in expenses in January 2020 ($29,000 in forward rent payments, and another expense that I’ll make only if I expect it to be paid back quickly). I expect these expenses to largely get recovered over the next few months (for rent, it’ll get recovered through payments from housemates over the next few months).