Findependence Day: How to achieve Financial Independence — while you’re still young enough to enjoy it
Findependence Day is a financial primer that uses classic fiction structure to impart core financial concepts to young people just embarking on the working world and raising a family.
Findependence is a contraction of Financial Independence, so Findependence Day is the moment far off in the future when your income from all sources exceeds the income you could get from a single employer. Henceforth, you work because you want to work, not because you have to.
The financial concepts roll out in the order of a normal human “life cycle,” proceeding from saving for college, graduating, landing a first job, enrolling in an employer pension plan, getting married, buying a first home, saving for retirement, raising children and then the cycle begins as you save money for the education of your children.
The thrust of the novel is to impart enough major concepts that if all of the suggestions were implemented, you would achieve financial independence while you’re still young enough to enjoy it. Thus, in the book, a young couple named Jamie and Sheena want to reach their Findependence Day at the relatively young age of 50.
This is not a get-rich-quick book but a get-rich-slowly book. It takes 20 or 30 years to achieve financial independence and the book follows the couple over 22 years: hence the “financial Pilgrim’s Progress” description of one reviewer.
The book begins when Jamie & Sheena are 28 and featured guests on a financial reality TV show. Humiliated by their credit card debt before a nationwide TV audience, Jamie vows his Findependence Day will be the day he turns 50. But Sheena won’t buy into the “guerrilla frugality” habit needed to save money. Their disagreements over money escalate, as Jamie stakes everything on the big score when his hobby website attracts a big social networking site. Betrayed by his business partner, his world falls apart, threatening his dream of early financial independence.
Video clips on Findependence Day, BoomerCloud.com
Here’s a casual video shot over lunch last week by Norman Evans of DigitalCitizen.com. It’s about 2 minutes and talks about the new e-book mentioned last post, about Findependence Day and the coming e-book in an American-only edition. It also mentions the article last year on the rise of the Boomer Entrepreneur and Michael Morris’s new BoomerCloud.com venture. For full video on BoomerCloud.com, click here.
The ambient noise of fellow diners is a bit high.
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My best 2011 columns now a National Post e-book
If you’ve seen the ads in the print editions of the National Post and Financial Post this week, you may have noticed that you can now buy the best of my 2011 columns as a National Post e-book, for the bargain price of $1. This innovative new program, announced in December here, lets you buy these ebooks via Apple iTunes (or the Apple iBooks app), Amazon Kindle Store, Kobo eBooks, Google ebookstore and the Sony ReaderStore. I can confirm it works on the iBooks app on the Apple iPad.
It’s 143 pages, fairly substantial by e-book standards, and is organized into three parts: building wealth, drawing down on it in retirement, and financial literacy.
For more info, visit nationalpost.com/ebooks.
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New Masters of Money post: Spend Less, Save More in 2012
‘Tis the season for new year’s resolutions. Here is my latest Masters of Money blog with a simple mantra for 2012: Spend Less, Save More. You’ll also find similar posts from some of the other Masters of Money contributors, like the even more concise Make Do suggestion from Carolyn Cakebread, which you can find here.
On a similar theme is my end-0f-year piece in the Financial Post, entitled Time to Face the Spending Music.
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The start of a new Investing Season
In a few more hours, it will be January, time to face the spending music. But the new year also marks the start of another investing season, for those still solvent enough to take advantage of new contribution opportunities for RRSPs and tax-free savings accounts.
For those who overspent in December, the first order of business is to pay off high-interest credit-card debt or clear balances on overextended lines of credit. No registered investment beats wiping out high-interest debt.
But the sooner you’re clear, the earlier you can get back to the discipline of adding to taxadvantaged investments. The first opportunity is almost here. As of Jan. 1, any Canadian 18 or older can add another $5,000 to TFSAs. That brings the cumulative contribution room since the program commenced (in January 2009) to $20,000, plus any investment growth.
The second big opportunity also comes in the first quarter. This year’s RRSP contribution deadline is Feb. 29, since 2012 is a leap year. Procrastinators take note: Unlike prior years, March 1 will be too late in 2012. Get the money in there by midnight, Feb. 29.
There are significant differences between RRSPs and TFSA contribution rules. TFSAs are straightforward: You get $5,000 contribution room whether or not you earned taxable income the previous year.
2012 is a leap year so RRSP deadline is Feb. 29th this year
RRSPs are trickier. Feb. 29 is the contribution deadline for the 2011 tax year just ending. Tax returns must be filed for calendar 2011 by April 30; making an RRSP contribution in calendar 2011 or the first 60 days of 2012 is an excellent way to reduce tax owing. For those in the top 46% tax bracket, a $10,000 contribution will save you $4,600 in tax payable.
Unlike TFSAs, there’s no one amount all Canadians can contribute to RRSPs. The maximum is 18% of the prior year’s earned income, to a limit of $22,450 (for the 2011 tax year, up from $22,000 in 2010). This is reduced for members of employer-sponsored registered pension plans. How much less is set by the PA or pension adjustment detailed in the T4 slip issued by employers early in 2011.
After you filed your 2010 taxes on or before April 30, 2011, the Canada Revenue Agency should have sent you the precise amount you can contribute to your RRSP in 2011. If you don’t have the information, guestimate it and contribute the same as the previous year.
How to get 14 months ahead of yourself with RRSPs
The other tricky thing about RRSPs and the new investing season is that once Jan. 1 arrives, you can also contribute the full amount for the 2012 tax year about to commence, not just the 2011 tax year now ending. In other words, you can get 14 months ahead of yourself by contributing an amount on Jan. 1, 2012, even though the RRSP deadline for the full year won’t occur until late February of 2013. The maximum RRSP contribution amount for calendar 2012 is $22,970.
Why do this? Anyone who believes in the time value of money and the power of tax-free compounding will tell you that, other things being equal, the sooner money is tax-sheltered and growing, the bigger the ultimate sum will be. It’s good discipline to maximize tax-sheltered savings as soon as you’re allowed to.
Because the new investing season is heavily loaded to the first two months, those conflicted between debt repayment and investing can adopt one of two strategies. Knowing we can dump tens of thousands of dollars into registered plans every January, our family starts accruing for this the previous summer, building up cash in non-registered accounts ready to transfer in January.
For those who find it hard to build up large lump sums in advance, the alternative is to set up pre-authorized chequing arrangements of 12 equal monthly payments into both your RRSP and TFSA. A $416.67 monthly payment maximizes the $5,000 annual allotment to TFSAs, while a whopping $1,914.17 a month is needed to get to the top RRSP limit of $22,970.
IMPORTANT 2012 TAX DEADLINES
Jan.1 First day you can contribute $5,000 to a TFSA for calendar 2012
Feb.29 RRSP deadline for 2011 tax year
April30 Tax filing deadline for 2011 tax year
Jan.1,2013 First day you can contribute $5,000 to a TFSA for calendar 2013
March1,2013 RRSP deadline for 2012 tax year
Stuck for a last-minute $30 gift idea? Give the gift of financial literacy with one of these 13 financial books
Story appeared Wednesday in the FP here.
There are a dozen suggestions, plus of course the book to which this web site is devoted, making it a Baker’s Dozen.
Four are American titles, the other nine Canadian. Don’t hold me to the $30 price: that seems to be about the average these days. That happened to be the original retail price of Findependence Day in the book stores. The good news is the price is now $16 (tax and postage included) but the less-good news is it’s primarily available through this web site.
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Vanguard ETFs begin trading in Canada
Photo credit: Jeff Hackett
How ironic that as criticism of high Canadian mutual fund fees focused on Investors Group the last week — see Do We Really Care About Fees? — Tuesday marked the first day of trading of the first six ETFs from Vanguard Canada on the TSX.
The six ETFs average fees of 0.24%, according to Vanguard Canada managing director Atul Tiwari, who briefed financial advisors at a session at the Royal York in Toronto Tuesday afternoon. That’s roughly eight times less than the MER of the average mutual fund sold in Canada, he said.
There are three ETFs providing exposure to the U.S., EAFE and Emerging Markets, plus three domestic ETFs built expressly for Canadian investors covering Canadian equities and fixed income. All six can be considered “core” ETFs for portfolio construction.
For now, there are no plans to provide Vanguard index mutual funds in Canada, Tiwari said. Distribution appears to be the challenge there.
Pictured is Charles Ellis, author of Winning the Loser’s Game, who addressed advisors with a talk similar to one he delivered to portfolio managers in November, reported in this blog here. In an interview, Ellis told me he’s personally invested mostly in Vanguard ETFs, except for a small position in Berkshire Hathaway. He also told the audience that going back a decade, he was mostly invested in Emerging Markets, a trade that worked out well until his wife said she wasn’t comfortable with the risk. He switched to large household name American blue chips and he remains happily married, he quipped.
For more details, see Vanguard Canada’s web site here.
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A financial literacy fable
TalkingFinLit.org
Thursday’s Financial Post and subsequently on my Wealthy Boomer blog, a controversy arose over articles I’ve written about the financial industry’s true commitment to financial literacy, or what some call FinLit.
In the course of revisiting this topic, I linked back to a little “fable” I wrote about a year ago after the Investment Funds Institute of Canada (IFIC) announced what it was doing to “promote” financial literacy.
I was skeptical then, just as I’m currently skeptical about Investors Group’s wrapping itself in the FinLit flag even while its fees remain near the highest in the country that studies have shown have pretty much the highest MERs (Management Expense Ratios) in the world.
For those who missed it first time, here is the fable about FinLit Frank and his efforts to instill financial literacy in his daughter, MERry. Who knows, maybe Frank is an Investors Group executive?
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New Masters of Money post: Never break into capital
Masters of Money
The fourth blog installment by me in the Investor Education Fund’s Masters of Money has just been posted. It deals with how some people — usually financially weak — don’t have a proper respect for the value of capital when it comes their way. Regular readers won’t be surprised that I’m in the “never break into capital” camp unless it’s a dire emergency.
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Charles Ellis tells money managers how to win loser’s game
Photo credit: Jeff Hackett
As noted in my Wealthy Boomer blog here, American indexing guru and author Charles Ellis [seen in photo on left] gave Canadian money managers both a history and arithmetic lesson on Tuesday. His point in a nutshell is that annual mutual fund Management Expense Ratios (MERs) of 2.5% or so (in Canada) are “terrible” but even the investment counselling fees of 1% (plus or minus 50 basis points) are also excessive.
These numbers may seem small when expressed as a percentage of assets but Ellis said the way to look at it is as a percentage of the return generated by active managers. So even if the active manager could generate a pre-fee return of 10%, the 2.5% fee takes that down t0 7.5%, so amounts to a 25% reduction of the return: or ten times the 2.5% figure that seems so insignificant. If returns are more likely pre-fee 6 or 7%, then a 1% fee takes it down to 5 or 6%, and amounts to a 15% reduction of return, he said.
Ellis himself prefers market-cap weighted index funds or ETFs of firms like Vanguard Group (which recently set up shop in Canada.) Investors can buy the “market” for as little as 10 basis points (0.1%), which long ago was a figure that customers of money managers were accustomed to pay. But as he related in his Monday talk in Toronto, customers didn’t balk when one firm hiked it to 25 beeps, others followed suit and eventually even a full 1% didn’t seem out of line.
This cost-conscious approach consistent with Findependence Day model
None of this should surprise readers of this blog, since the Findependence Day model cuts costs to the bone by emphasizing use of discount brokerages to cut commission costs, and then implementing trades of ETFs or index funds, the fees of which will range from about 8 or 9 beeps to 55 beeps for most mainstream ETFs, and perhaps a bit more for some esoteric ones. Of course, you can also try and pick your own individual securities, although Ellis would probably call that the “loser’s game,” as per the title of his book, Winning the Loser’s Game.
The third point is that you can still benefit from good advice by engaging a fee-only financial planner who charges by the hour, month, quarter or year, or perhaps by the project (which might be a financial plan or portfolio assessment). You can also go the fee-based route but keep in mind that a 1% fee will be on top of the underlying MERs of the ETFs, which could easily run 1.5% or so. For some investors, especially buy-and-hold investors who don’t trade frequently, a traditional commission-based full-service advisor could make sense from a cost perspective, at least relative to a high-fee-based alternative.
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Talk for Credit Canada’s Credit Education Week
In addition to November being Financial Literacy Month, this week is also Credit Education Week. On Tuesday at the YMCA in Toronto, as part of the launch of Credit Education Week, I gave the following talk which touched on all of credit, financial literacy, the sandwich generation and of course financial independence. All recipients at the talk received copies of Findependence Day courtesy of Capital One.
Here’s the text of the talk:
Dreamfilm.ca
Laurie had asked me to talk today about the Sandwich Generation. I’ll do that and also talk about life cycle financial planning and the concepts behind “findependence” or financial independence.
Some of you may remember around the turn of the millennium, the National Post distributed four issues of a glossy magazine I helped create, called The Wealthy Boomer.
Well, it just so happens that the final issue featured a cover story on the Sandwich Generation.
We’d commissioned a nice if predictable cover that depicted a frazzled middle-aged baby boomer tearing out her hair as she attempted to grapple with the conflicting demands of an aging parent and screaming children.
I could relate to that at the time because in 2000, we had a nine-year old daughter, four parents and two busy careers. Today, however, daughter is 20 and away at college, and all four grandparents have passed away.
From Sandwiched to Empty Nester
