For more, see my latest MoneySense blog just posted here.
The headline on today’s blog so perfectly sums up the subtle difference between “Retirement” and “Financial Independence” (aka “Findependence”) that I felt compelled to devote a whole blog to the idea.
It was used in a guest post earlier this week by certified financial planner Matthew Ardrey on our sister site, the Financial Independence Hub, and you can find the whole post here.
Foundation is a paid-for home
Ardrey, who is with T.E. Wealth, seems to view the topic of Financial Independence just as we do on these sites, even down to the basic principle repeated often in the book to which this site (FindependenceDay.com) is devoted. In the book, one of the two financial planning characters, Theo, tells his young clients more than once: “The foundation of Financial Independence is a paid-for home.”
Here’s what Ardrey tells clients just starting down the road to Financial Independence:
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.
Even Ardrey mistook FI for Retirement early on
Ardrey and I have followed each other on Twitter for some time. Ardrey posts as @MattArdreyCFP. But it was only recently, in response to something on one of these sites, that Ardrey casually dropped the fact that he’s been preaching Financial Independence (as opposed to traditional Retirement) to his clients since he entered the financial planning business at the turn of the century.
He noted that the financial planning software used at the financial firm where he got his start did not have a retirement calculator. Instead it had an an analysis tool on “Financial Independence Needs.” At the time, being new to the business, Ardrey thought it was just a fancy way of referring to retirement planning but as the years progressed, “I would soon discover that financial independence was something else entirely.”
So, to return to the headline today, what exactly IS the difference? Here’s the key passage:
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.
It’s all about Freedom of Choice
This is of course pretty much what I’ve been saying, or at least the characters in the book and ebooks: “When you’re financially independent, you work because you want to, not because you have to (financially speaking).” And that’s exactly what Aubrey tell his clients:
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.
Some real examples
So far in this blog, I’ve reiterated Ardrey’s views. I want to close with some examples closer to home. I can think of a few friends or family members who are “retired, but not financially independent.” One couple in particular comes to mind: they do not work and live entirely on government largesse: some combination of CPP, OAS and GIS. Once upon a time they owned a home, a cottage and a car but today they rent a small apartment above a store. They have time freedom, yes, but no financial freedom. They depend entirely on the one source of income from the Government and if that dried up, I don’t know what they would do. Even with it, they are severely constrained in what they can do. So they are indeed “retired, but not financially independent.”
For the opposite situation, I need look only in the mirror. My wife and I choose to continue to work, and keep deferring future income sources that could be taken now if we chose: employer pensions, CPP, drawdowns from registered and non-registered investments, etc. Our home was paid for early in the 1990s, our cars are paid for and we have no debt. We are in fact financially independent but NOT retired, paradoxical as that may seem.
And finally …
Today is Boxing Day and I will probably CHOOSE not to do much more work on these sites, or for paying clients, until the New Year begins, apart from a few pre-arranged pieces and guest blogs. I wish all readers a very Happy New Year. See you on the other side!
You need three days to settle trades so next week just before New Year’s will be too late. Christmas on Thursday is obviously a holiday and Canadian markets are closed Friday for Boxing Day.
Americans have a little bit longer since US markets will be open part of the day Friday.
More details in my current MoneySense blog.
Oh, and if you’re still scrambling to buy Christmas gifts, there are some ideas at our sister site here.
From 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.
4.) Large purchases.
5.) Dubious places.
By Robb Engen, Boomer & Echo
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 percent (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 percent 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.
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. 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 and sister site Financial Independence Hub is to bring these terms into general usage and displace “Retirement.” — JC