Token Advice - #10 📈

Let’s talk Budgeting.

Money. It's one of the most crucial elements of our lives. Yet, so few of us are taught the intricacies of budgeting and the behaviors that influence our financial decisions. How often do we pause to reflect on the psychological factors that determine our spending patterns? Or the behavioral choices that could shape our financial future? Let's delve into this critical aspect of our lives, starting with a simple, yet revolutionary concept: reverse budgeting.

The Power of Reverse Budgeting: Paying Yourself First 💵

Traditional budgeting often begins with mapping out your monthly expenses and allocating what remains to savings. But what if we flipped this model on its head? That's the essence of the reverse budgeting method, where you 'pay yourself first'.

Before delving into monthly expenditures, you decide a set amount to save or invest. The rest is then spent as needed. It's simple yet transformative. However, its effectiveness is deeply tied to human behavior.

We're wired to prioritize immediate rewards over future ones, a phenomenon termed 'temporal discounting.' When we reverse budget, we challenge this intrinsic behavior. By setting aside savings at the outset, we prioritize our future selves, ensuring we're not left scrambling when unexpected expenses arise or retirement looms.

Reflect on this: How often do you prioritize your future self? Would paying yourself first change your current spending behavior?

The Challenges of Building an Emergency Fund

According to a 2019 Federal Reserve survey, 4 in 10 Americans wouldn't be able to cover a $400 emergency expense without borrowing or selling something. This brings us to the often discussed but seldom achieved goal of having an emergency fund.

The behavioral challenge here is multifaceted. Immediate needs and desires, coupled with the optimism bias ("I won't face an emergency soon"), can lead to procrastination. And then there's the overwhelming sensation of seeing a large goal ahead.

Question: Do you have a financial safety net in place? If not, what's holding you back?

5 Ways to Build an Emergency Fund

Given these challenges, how can we get creative in bolstering our emergency stash? Here are five innovative strategies to consider:

1. The Spare Change Jar: Digitally or physically, saving your spare change can accumulate substantial amounts over time. Apps like Acorns round up your purchases and invest the change, providing a dual benefit.

2. Themed Savings Challenges: Turn saving money into a game or themed challenge. For instance, try the “52-week challenge” where you save $1 in the first week, $2 in the second, and so on, until you save $52 in the 52nd week. By the end of the year, you'll have saved $1,378! Alternatively, you can theme your challenges around special events, holidays, or seasons – such as a "Summer Savings Spree" or a "Frugal Fall".

3. Automated Windfall Allocation: Whenever you receive unexpected money, whether it’s a tax refund, a bonus, or even a cash gift, have a rule in place. Allocate a certain percentage (like 50%) immediately to your emergency fund. While it's tempting to spend unexpected money on treats or luxury items, this method ensures you prioritize your future financial stability.

4. The No-Spend Day Challenge: Designate one day a week as a “no-spend day”. On this day, avoid making any non-essential purchases. This not only helps you save but also heightens your awareness of impulse spending. At the end of the month, calculate your savings from these no-spend days and transfer it to your emergency fund. Over time, you may even find yourself organically increasing the number of no-spend days.

5. Set Mini-Goals with Rewards: Instead of aiming straight for three months' worth of expenses, break it down. Celebrate when you hit one month, then two, and so forth.

Reflect on this: If you had a surprise expense today, why wouldn't you have savings to cover it? Are daily habits stopping you from saving, and do those habits match your bigger life goals?

Budgeting isn't just about numbers on a spreadsheet. It's a deeply behavioral process. Our financial decisions are influenced by cognitive biases, past experiences, and future aspirations. By recognizing these behaviors and proactively implementing strategies like reverse budgeting and creative saving, we can take the reins on our financial future.

Final Reflection: If you were to reimagine your budgeting process today, which behaviors would you seek to change? And more importantly, how would you go about making those changes stick?

What we’re watching in crypto:

Base Launch - Onchain Summer 🏖️

In March 2016, Brian Armstrong was just four years into building Coinbase as CEO when he wrote about the “why” behind what the company was building. Bitcoin was trading at $400, Ethereum had launched only eight months prior. There was no DeFi. No NFTs. No scaling solutions. Yet Coinbase was looking ahead and building toward a future where everyone has access to financial services around the globe. He titled the blog, The vision, mission, and strategy for Coinbase. We highly encourage you to read the full post, much of it remains prevalent today. Here’s the TLDR:

Vision:

Digital currency will bring about more innovation, efficiency, and equality of opportunity in the world by creating an open financial system.

Mission:

The mission of Coinbase is to create an open financial system for the world.

Strategy:

1. Be the easiest place to buy and sell digital currency - The most important thing Coinbase can do short term is to make it easy for people to convert their local currency into and out of digital currency.

2. Help the industry grow by building killer app prototypes - Once the infrastructure behind digital currency matures, we’ll enter the next phase of adoption: apps. These are the actual products that end consumers and businesses will use. In the future, you’ll see Coinbase build or buy other apps in the space to help drive consumer adoption. - This is what we’ll be discussing today.

Seven and a half years ago, Armstrong had this foresight. It’s one thing to have foresight into the future path of highly nascent technology, but something entirely different to act on it AND not waiver from it as boom/bust cycles come and go.

So much has changed in the crypto space the last seven years. Coinbase became a publicly traded company. The Bitcoin blockchain has settled trillions (with a T) in transactions. Ethereum has grown into a booming ecosystem of onchain financial applications and digital ownership solutions. Not to mention the prices of BTC and ETH have increased 100x in that time period as well. Coinbase could have fallen into the trap that many centralized exchanges did in 2022, prioritizing short-term profits over the long-term growth opportunity of onchain finance. They could have succombed to investors short-term interests after becoming publicly traded. They did neither of these things. What they did do, however, is follow exactly what Armstrong laid out years ago - 1. Work to create an open financial system for the world by becoming the easiest place to buy and sell cryptoassets and 2. Build apps in the space to help drive consumer adoption.

This week Coinbase launched Base, a layer-2 blockchain built on Ethereum using the OP Stack. In order for Ethereum to scale and become an open and usable financial system for the world, it needs to offload some of the work being done to blockchains that can scale, such as Base. On Ethereum, these are referred to as layer-2s.

To give you an analogy, think of Ethereum like a state and Base like a city within that state. On Ethereum, it can be expensive and time consuming to get from point A to point B. Base on the other hand is a city, getting from point A to point B is much easier and less expensive. Base has its own local set of rules, but ultimately reports all that happens within the city to Ethereum at the state level. When Base reports all its transactions to Ethereum in a batch, Ethereum settles the transactions and gets a fee from Base for doing so. Anyone can challenge the reports at any time and if someone finds that the city reports incorrectly, significant trust can be lost making it less appealing for citizens to live there. This incentivizes Base to report its transactions correctly to Ethereum. Meanwhile, businesses form in the city giving citizens a place to trade, buy new goods, etc. This is an anology for applications (businesses) building on Base (city).

To summarize:

State - Ethereum

City - Base

Businesses in the city - Onchain applications built on Base

Citizens of the city - Base users

In short, Base provides a low cost, efficient, and secure way for everyday people to self-custody their funds and interact with applications onchain. As a reminder, self-custody refers to the ability to own your digital assets outright with no third party in between. Similar to how we self-custody cash in the physical world. The Base team has been working with applications who have built solutions on other blockchains to build on Base as well. Just two days post-launch, Base already has over 100,000 daily active users and 100 apps that have deployed on its blockchain:

Assets moved onto Base by users have already grown to nearly $170 million (via L2beat):

In our view, Base is important for a few key reasons.

1. It narrows the user experience gap in moving assets onchain into a self-custodial wallet, where only the owner has control over them.

2. It allows developers to easily build onchain applications that interact with Coinbase’s traditional product suite. Base is an open source project that anyone can build on top of.

3. It showcases that a large publicly traded company can build onchain solutions at scale, the first of its kind.

To celebrate the Base launch, Coinbase partnered with 50+ brands, artists, and builders for Onchain Summer, what they’re calling “a month-long celebration of all the ways the new L2 ecosystem is powering the future of the internet”. In the post, you’ll find links for Coinbase Wallet and how to move onchain from the regular Coinbase app.

At 401 Financial, we also decided to celebrate in our own unique way by launching a commemorative NFT on the Base blockchain. It’s free to mint, only gas is required. Here’s a link!

401 Financial Cohort

Tune into Crypto Office Hours on Financial Advisor TV