Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

Free to Be: A Lesson in Financial Independence

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The guest blog below by certified financial planner Matthew Ardrey followed a discussion we had on social media about the distinction between traditional retirement and financial independence. Matthew, who is with T. E. Wealth, uses a definition of financial independence that is virtually identical to the one we use on this site, right down to having a paid-for home. We especially like this line: “One can be retired and not financially independent or vice versa.” Over to Matt:

MattArdrey
Matthew Ardrey, T.E. Wealth

By Matthew Ardrey, CFP

Special to the Financial Independence Hub

I was first introduced to the concept of retirement as a young boy, when my grandfather retired from the TTC on his 65th birthday. I understood that he no longer worked, and that this is what you do when you reach 65. From the eyes of a child, it seemed like a far away notion.

It wasn’t until 2000, when I started working in the financial services industry, that I was properly introduced to the concept of financial independence as it differs from retirement. The proprietary financial planning software we used at my workplace did not have a retirement calculator. Instead, it had a “Financial Independence Needs” analysis tool. As I was young and green, I saw it as a fancy way of saying retirement planner. Through the benefit of experience, I would soon discover that financial independence was something else entirely.

Retirement vs. Financial Independence

Retirement, by definition, is the cessation of work with the intent of not returning. Financial independence, on the other hand, is having sufficient financial assets to have the choice about whether or not you continue to work. So, one can be retired and not financially independent or vice versa.

When I explain financial independence to my clients, I let them know that the main differentiator is freedom of choice. If you are not financially independent, you have no choice but to continue working if you don’t want to alter other aspects of your life. Once you are financially independent, you can choose if you want to continue to work in the same capacity – or at all. This freedom to choose is empowering and it’s what I encourage all of my clients to work towards.

How to Get There

I’m often asked how one can get to this wonderful nirvana known as financial independence. The first step is to pay off your home. By having a debt-free residence, you have eliminated what is most people’s largest single expense. Without this hanging over your head, you have freed up significant cash-flow.

The second step is budgeting – both before and after you have reached financial independence. Before, determine what you will need to save to reach your goals, and pay yourself first. After, understand what and how you spend to determine if you have accumulated sufficient assets in the “before” stage.

Know Your Asset Returns

Understand the return on the assets that are funding your freedom. Which assets in your portfolio are generating income or appreciating, and at what rate are they growing? How are taxes affecting these returns? These are questions to which you should know the answer, as small changes in that rate compounded over a long period of time can have a significant effect.

Costs matter, period. Focus on the cost/benefit relationship of your investment structures. Benchmark both what you make and what you pay to make it. If you find that the costs are inordinate while the performance is average or worse yet, lackluster, take steps to fix the cost/benefit. Even better yet, get the jump on “CRM2” by asking your advisor to fully delineate all costs pertaining to your investments and what services are offered in exchange for these costs.

As I guide my clients towards their future goals, I find the word “retirement” is used less and less in my lexicon. When my clients leave the workforce, the pursuits they undertake tend to be much different from my grandfather’s, who retired 35 years ago. What they are pursuing is the freedom to make their life whatever they want it to be.

Matthew Ardrey is a Certified Financial Planner with T. E. Wealth. He can be reached at its Toronto offices here. He is also on Twitter as @MattArdreyCFP. 

Global Life Expectancy up more than 6 years since 1990

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Longevity Word Clocks Time Flying Durable Lasting Experience ConBy Jonathan Chevreau

Life expectancy around the world has risen by a whopping six years since 1990, according to a global survey released Friday.

As the CBC reports here, these longer lifetimes are occurring in both rich countries and poor ones, although for different reasons.

In the affluent west, it’s driven by falling death rates from the two big scourges of cancer and heart disease. In poorer countries, increased life expectancy is the result of progress in fighting tuberculosis, malaria and diarrhea. The tragic exception, however, is southern sub-Saharan Africa, where life expectancy has actually fallen five years because of rising deaths from HIV/AIDS.

The 2013 Global Burden of Disease Study was published in the Lancet medical journal.

For those born in 2012, life expectancy in Canada is now 80 for males and 84 for women, according to this report in May of 2014.

The Hub’s Take

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How to use Credit Cards as if they were Debit Cards (and why you should)

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credit card readerFrom Daily Finance comes this useful (and timely, given the season) article on the times when debit cards should be avoided in favour of credit cards.

I have to admit that over the years, I have personally favoured cash or debit cards, on the theory that you can’t get in too much trouble spending money you’ve at least already earned. To me, overspending to rack up “Points” for even more consumption is just not worth it, especially if it also means ever having to pay the dreaded double-digit interest rates that accompany most every credit card these days.

Reluctantly, however, I’ve come round to the view that with proper discipline, credit cards can provide convenience, a paper trail and most important, more security than debit cards in several situations. And yes, while I’m not driven by it, there may also be the convenience of “points” on purchases, points the writer says can amount to 2 to 6%.

The key, as it always is with credit cards, is to make sure you never get caught paying those exorbitant rates of interest. I’ve never quite understood how it is we’ve been in an era of almost-zero interest rates the last five years when you’re lending out money (via bonds or GICs) but when you’re a debtor suddenly the rate is close to 20%. Am I the only one who thinks there’s a major disconnect here? Better to be on the receiving end of that deal rather than the dishing it out deal: I wish I’d bought Visa or Mastercard stock a few years ago.

Using credit cards as if they were debit cards

The valuable point made by the writer — Jeffrey Weber — is that he finally “learned how to use my credit card like a debit card.” By paying off the full balance each month, never spending more than he can afford and “eliminating interest from the equation,” he is able to avoid using debit cards at all while enjoying the few advantages that go with prudent use of credit cards.

Personally, I do one of two things now, both of which are variants of Weber’s approach. Earlier this week, with Christmas presents for others high on the agenda, I loaded up my MasterCard with several transactions. I also did the same with my business Visa card for some needed equipment. In both cases, when I returned from the shopping spree, I signed on to my home computer and immediately used my online banking to pay off the newly incurred debts instantly. Yes, I realize I could have delayed a few weeks to benefit from the free “float” but I don’t wish to tempt the fates. If you’re going to use a credit card like a debit card, in my mind that means moving the funds out of your bank account the moment (or at least by end of day) you’re incurred the purchases. Besides, who wants to have a fabulous holiday season only to have it all ruined by humungous bills to be paid by the middle of January. That’s TFSA season after all!

The second variant is more foolproof and will even let you take advantage of that float I’m missing out with the “ad hoc” method. Just ask your friendly local financial institution to automatically move funds from your bank account to pay off any outstanding balances before any interest charges come due.

The 5 places you never should use debit cards

Weber’s article lists five specific situations where someone still juggling both credit cards and debit cards should use only credit cards. I’ve just listed the headings: go to the original link for his rationale on each point:

1.) Online purchases.

2.) Gas.

3.) Hotels.

4.) Large purchases.

5.) Dubious places.

Why I Pushed My Findependence Day Back 5 Years

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robb-engen
Robb Engen, Boomer & Echo

By Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

Last summer I thought I’d be financially free by 40. Reality – and unplanned expenses – set in this year and I’ve adjusted that ambitious projection by five years. I’m still on track to reach a net worth of $1 million by the time I turn 41, but financial independence will have to wait a few more years.

Here’s why:

Remember, financial independence doesn’t necessarily mean retirement. It simply means the date your income from investments exceeds your day-to-day expenses so that you no longer have to rely on regular employment to meet your needs.

My initial projection was indeed ambitious – with us having a paid-off mortgage by 2020 and increasing the income withdrawn from our business by 100 per cent (from $3,000 per month to $6,000).

But borrowing $35,000 to develop our basement this year meant we couldn’t continue our aggressive mortgage pay-down, and a four-year car loan has cut into our ability to save as much as we wanted.

That’s okay – on paper the original plan didn’t factor in these expenses, plus I hadn’t fleshed out exactly how I’d make those numbers work. Now I have a better idea, but unfortunately it’ll cost us five years. Here’s our financial Freedom 45 plan:

Financial independence at 45

In late 2016, once we pay off the HELOC and car loan, we’ll have $27,000 per year to save toward our ‘findependence’ goal. With that amount, we’ll put $12,000 into my RRSP and $10,000 into our TFSAs, plus throw an extra $5,000 payment toward our mortgage.

That pushes our mortgage freedom date back to January 1, 2025. At that time, our home should be worth $600,000 (using a conservative 3 per cent annual growth rate), my RRSP should be worth $380,000, tax-free savings accounts should total in excess of $150,000, and the commuted value of my defined benefit pension will be roughly $310,000.

The key to paying our monthly expenses after financial independence will come from our business income. We currently withdraw $3,000 per month from our small business, which includes income earned from three websites, freelance writing, and from my fee-only financial planning business.

My original plan showed business income increasing to $6,000 per month in five years, but without any clear path to explain how to double revenue. And, after losing my main freelancing gig at the Toronto Star, this goal seemed unrealistic.

But the fee-only planning service has gone better than anticipated – earning $10,000 in less than one year and expected to grow to $18,000 in year two as existing clients stay on and I continue to add one or two clients per month.

After completing the CFP certification in two years I’ll have the opportunity to ramp up my efforts and potentially offer fee-only planning services full-time. At that point, between existing and new clients, the service could bring in roughly $36,000 per year.

My three blogs collectively earn about the same – $36,000 per year – after expenses and so if I can maintain or increase that income then I’ll be able to meet my $6,000 per month goal for business income.

Our projected expenses haven’t changed. After the mortgage is paid off we could live comfortably on $36,000 per year, which leaves the additional $36,000 of income to go toward taxes, short-term savings, and retirement.

Final thoughts

A financial plan is just words on a page unless you commit to taking action. Even if your financial independence date seems like a moving target, it’ll become more precise as you monitor and update projections based on your true reality.

While it’s disappointing to push financial independence back five years, it’s comforting to know that I’m zeroing in on a target date that’s based on reality and not a wild projection.

Editor’s Note:You can find the original version of this blog at Boomer & Echo earlier this week, here. Note too the several comments at the bottom. When we can coordinate at both ends, we hope to make Robb or Marie’s blog available here as many Thursdays as we can manage. Also, in his original headline, Robb used the phrase “Findependence Date.” When I asked why not “Day,” he said he “didn’t want to steal your thunder.” I realize that good bloggers respect others’  intellectual property but let me make it clear that I’m fine with people using the phrase Findependence Day and Findependence. Half the point of this site is to bring these terms into general usage and displace “Retirement.” — JC

An Aging World: Not to be obsessed

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We’ve mentioned Mark Venning and ChangeRangers.com several times in this site as well as sister site FindependenceDay.com. His insights on Aging and Longevity are a big reason why we have included a regular section of the Hub on this topic. One of his aphorisms is particularly insightful and directly related to financial planning and financial independence: “Plan for longevity, not retirement.”

As the previous blog in this section (by Doug Dahmer)  explained, the fatal flaw in most retirement plans is failing to take into account extended longevity. Mark also regularly writes on this theme, as in a recent piece on Financing Longevity, which also provides a nod to the Financial Independence Hub.

Below, specially for the Hub, Mark has composed a year-end reflection on these themes, based on his recent travels. We hope to run more like this in the new year!

markvenning
Mark Venning, ChangeRangers.com

By Mark Venning,

Special to the Financial Independence Hub

Hardly a day goes by that there isn’t some symposium, book or report (not to mention a blog post or three like this one) about an aging world, longevity and retirement. You can even Google search longevity calculators that can project how long you can expect to live. It’s an aging obsession.

As Ted C. Fishman says in his 2010 book, Shock of Gray – “…although the aging world is the sum of choices made by large populations, how we navigate the future of this world – how we love and care for ourselves and those we cherish – will also be an intensely personal matter.”

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