Part 2 of Money on Trees Q&A on Financial Independence

Part 2 of the question-and-answer session with Money on Trees has been posted, here.

Part 1 went up last week, here.

In both cases, the focus is heavily on young people getting started in the working world and how they can establish early the habits that will lead to ultimate “findependence.”

Financial Independence Q&A with Money on Trees

Here’s a Q&A about Financial Independence conducted with Money on Trees. The first part of the interview was posted Thursday morning here, with the second part scheduled for next Tuesday.

Note that I’ll be giving a similar talk about Findependence, real estate and personal finance tonight in Brampton (Pearson Convention Center) for the Real Estate Investment Network (REIN). REIN members attending will receive an e-book version of the MoneySense Beginner’s Guide to Personal Finance, plus the just-published April issue of the magazine, and possibly a copy of Findependence Day.

Interview with Dale Pinkert

Here’s a 20-minute audio interview conducted Friday with Dale Pinkert of FXStreet’s Live Analysis Room.

The chat touches on findependence, global currencies, central bank money printing and gold, currency hedging by investors in various countries, the loonie vs the US dollar, the need for portfolio rebalancing, MoneySense magazine, the aging of the baby boomers, the views of Harry Dent Jr. and Currency Wars author James Rickard, and more:

Click here to listen.

 

 

TFSAs our number 1 tax shelter

One of the first acts of the new year for our family was topping up our Tax Free Savings Accounts or TFSAs. You’ll see a number of TFSA stories running this week on the MoneySense.ca web site, some of them from the most recent edition of MoneySense magazine, which I edit. Julie Cazzin’s feature story on the Great TFSA Race should whet your appetite on the potential of this vehicle, with the winner racking up an incredible $300,000 in his TFSA, and runnerups at $72,212 and $61,700.

Of course, such returns can come only from capital gains on shrewdly picked stocks, and probably concentrated positions in relatively risky smaller stocks. If you make the mistake of parking your TFSA in GICs or some version of cash, your growth will be negligible. Assuming you put in $5,000 in January 2009 and maxed out every year thereafter, with $5,500 a year ago and $5,500 early in 2014, you would now have $31,000 cumulative contribution room: six years worth. Of course, if you’re one half of a couple, then your spouse also has $31,000 room for a combined $62,000. That’s what I would call significant money: enough to buy a luxury new car or to put a down payment on a first home.

TFSAs are too good to use on spending

However, the tax allure of TFSAs is such that it seems a terrible shame to have to actually spend the money, when its potential to grow into a huge nest egg is such an enticing alternative. Fortunately, the bitter pill of breaking into capital is sweetened somewhat by the fact you can replenish the TFSA, so you’re not actually losing contribution room. Because you can’t repay until the following year, however, you’ll keep more tax-free growth by cashing out towards the end of a calendar year, rather than early in the new year.

Note that in the case of the big winners of the TFSA Race, the bigger the TFSA when you cash out, the more contribution room you’ll eventually have when you recontribute. So in the case of Jim Nykyforuk, if he were to take his entire $300,000 out this year, in 2015 he’d be able to recontribute the same $300,000, plus of course the new $5,500 room he and everyone will qualify for by January 2015.

Those are big numbers but as I wrote in the editor’s note for the current issue (Dec/Jan 2014), it’s unlikely that most TFSAs will have grown anywhere near that much, even if they are in stocks. The risk-takers who won the contest had plenty of other money in other vehicles and they were willing to risk the TFSA capital for a big win, fully understanding it’s as easy to strike out as hit a grand-slam home run.

Diversified equities more prudent

I wouldn’t even recommend that most people emulate those aggressive strategies. From my correspondence with the kind of readers who gravitate to a “Couch Potato” portfolio so often seen in the pages of MoneySense, a typical all-equity TFSA would have grown from the original $25,500 contribution room to somewhere in the low $30,000 range at the end of 2013. In our family, for example, our TFSAs ranged from $32,000 to $34,000 and as of the January 2014 top-up would be just shy of $40,000 each. (This includes our daughter, whose aggressive investing strategy was unveiled in MoneySense in an earlier feature by Julie: How TFSAs can make your child a millionaire; Dec/Jan 2013)

The temptation to dip into such growing nest eggs must be considerable for younger people but when you consider the power of tax-free compounding, I’d still urge most to keep their hands off their TFSA for 30 or 40 years. Yes, those who have maxed out to this point now have enough to buy a brand new car, but I’d urge them to instead go with a used vehicle or take advantage of zero financing or ultra low interest rate deals on new cars. The other big temptation would be to dip into TFSAs for a down payment on a home but here again, I’d look first at the Home Buyer’s Plan provision of RRSPs first, or perhaps hit parents up for a down payment.

TFSAs should be priority for those with modest incomes

I’d think most MoneySense readers are in a position to do BOTH an RRSP AND a TFSA contribution but for those who aren’t, the TFSA should probably get the nod. If you can’t do both, odds are your income is relatively modest, in which case you may be in a lower tax bracket, which in turn makes the RRSP argument less compelling. By the same token, if your salary is relatively low and you want to maximize future sources of government retirement income like Old Age Security and/or the Guaranteed Income Supplement, then again the TFSA is compelling: all withdrawals will be totally tax free and not trigger dreaded “clawbacks” of OAS or GIS. Say you’re currently 47 years old and have $10,000 saved in a TFSA. In 20 years, you could contribute $5,500 20 times, for another $110,000 (and probably more if the government keeps adjusting the limit to inflation.) Even if growth was negligible because it’s invested in laddered 5-year GICs or a bond ETF equivalent, let’s assume you can get 2.5% interest (a figure that will likely be much higher 20 years from now.)

Even with no employer pension or other sources of income, someone living on some combination of CPP, OAS and GIS taken at age 67 would be able to generate some $3,250 a year of safe interest income from a nest egg that (conservatively) might have grown to $130,000 over that time. That’s almost $300 a month, guaranteed and tax free.

If you put it into Canadian blue chip stocks, you’d have a much bigger nest egg but either way, it’s nice to have an emergency fund and a source of regular income that’s independent of what government authorities provide — my idea of a modicum of financial independence even for those with modest means. Yes, I realize it’s tough for some to put aside even $5,500: if that’s the case, then at least shoot for $2,000 or $3,000 a year, even if it means going without expendable luxuries like alcohol, tobacco, fine dining, lottery tickets or even the much maligned daily latte habit at your local coffee shop. Find just $50 a week for your future and you’ll be on your way!

As for dual-income couples making good money, to me it’s a no-brainer that the TFSA should be maximized each and every year, and managed for maximum (or balanced) growth. The moment you make your January contribution, you should start accruing for the next year’s installment, even if it means parking in short-term cash vehicles and paying a little tax for the balance of the calendar year.

 

 

 

The new American dream: Living debt-free and attaining findependence

bookwithelecsignConventionally, the American dream refers to a well-paid job, a family of two or three children and a new home along with a sturdy retirement nest egg. However, the impact of the economic meltdown as well as over trillion dollar student loan debt has left many to reconsider that dream. They are now introspecting a lot about the reasons for their own financial plight. Moreover, they are looking for ways to resolve the issues that plague their financial independence or “findependence.”

A new survey by Credit.com and GfK Custom Research found 25% of respondents defined their version of the American dream as being able to lead a debt-free life. Such a response comes second only to the definition of becoming financially stable by the time one reaches the age of 65.

This answer came mostly from the group who belong to the retirement age of 65 or above. In addition, 18% of the survey participants have responded that they dream to buy a house of their own, while 7% want to opt for higher studies and pay off their education loans.

Despite the continuous grim economic outlook, people are positive regarding their ability to fulfill their customized American dream. Another survey by Credit.com has revealed that 54% have a belief they are about to fulfill their dream, while another 24% declared they have already attained it. This summed up to a total of 78% who were affirmative about their retirement prospects.

The advantages of being findependent

Post the the Great Recession of 2008, Americans have chosen a path that is not wrought with underwater-mortgages, overwhelming credit card balances, tedious car loans and multiple lines of student loans.

Instead, their new road leads them to a life that is debt-free – where they’re no longer burdened with an exhausting budget, a dreadful mailbox and life that’s controlled by the debt collectors and spiralling interest rates.

There are numerous benefits to living debt-free that would entice anyone living on the edge of bankruptcy to start following a debt management  strategy to get rid of his or her financial woes. Some are as follows:

Reduced interest charges – CreditCards.com has said that, on an average, rate of interest on credit cards is 14.95%. The average credit card debt for the consumer carrying a balance is almost $5,000. So, a lot of interest is paid by people that is also weighing down their monthly budgets. However, these are just the averages. For people with bad credit histories, the rate of interest could be several notches higher. Hence, being debt-free allows you to steer clear of wasting your hard-earned money on interests that would leave little tangible benefit for you to use at a later stage.

Increased retirement fund – According to a combined statistical data compiled by the Federal Reserve, the U.S Census Bureau and the Internal Revenue Service (IRS) of 2012, 25% of American households do not have any savings whatsoever. What’s more surprising is the average retirement fund is only $35,000. Indeed, avoiding sky-high interest debts could leave these people with more disposable income. It isn’t difficult to understand there are numerous ways to dodge long-term debt.

More, they could even find out the ways to direct their income as well as increase their savings at the end of it all. The bottom line is the absence of monthly bills with exorbitant interest lets you save all the more aggressively for retirement, home purchase, college and even build up an emergency fund.

Finally, that one benefit sought by everyone is complete solace and peace of mind. Hence, being debt free and attaining financial independence would translate into a life with less worries. These are a few of the advantages of findependence that you cannot support with a survey report or reflect through statistics.

 This blog was written by Zindaida Grace, a financial writer and researcher associated with the Oak View Law Group.  

 

 

Toginet Radio interview with Steve Jorgenson

togonet_logo.jpgHere is a 15-minute Internet interview about Findependence Day with Toginet Radio’s Steve Jorgenson, which aired this morning (Sunday, August 18th).

It you have difficulty accessing the clip, just go to Toginet.com and check the schedule for Sunday, August 18th: the 11 am time slot. It’s under Recent Shows over to the right.

The clip contains interviews with three authors: the Findependence Day interview with me is the second of three, and you can go directly to about the 19.48 minute mark on iTunes if you don’t have time to listen to them all.

The host does a nice job in teasing out where the name Findependence came from, to explain what the expression “Freedom, Not Stuff” means, the need for financial literacy, the difference between retirement and findependence and other things.

Why Findependence is a Better Goal than Retirement

Here’s a guest blog I wrote that’s just published on the Retirement and Good Living site, a boomer lifestyle site whose audience is 75-80% American with the balance Canadian. The theme is of course why, especially for younger folk, Financial Independence may be a more accessible, less threatening goal than traditional Retirement. The link is here.

Rehearsals for Retirement

ochscoverIf you like folksingers from the 1960s, you’re probably familiar with Phil Ochs, who sang “I ain’t marching anymore” and many more catchy protest songs. He came to a sad end (self-inflicted) and one of his last albums was entitled Rehearsals for Retirement. (Yes, I still have the original vinyl and the song title is actually one of the chapter titles in Findependence Day).

That title also serves as today’s blog title and happens to be a key strategy for those who are pursuing financial independence. I’m taking this week off from my day job at MoneySense but it’s more or less a “Staycation”: a working vacation spent at home. Other terms for this are “Veranda Beach” or (in Quebec), “Balconville.”

In the book, I write that the day after Findependence may well be the same as the days and weeks before: you continue to practice whatever craft or profession that got you to Findependence. You’re not “retired,” you’re still productive and you still wish to be engaged in the world, connecting with the workplace, colleagues, friends and family — either virtually or physically.

Definition of Findependence

Let’s step back a second and review the definition of financial independence (findependence for short). I wrote about this on my Financial Independence blog last week at MoneySense.ca, which you can find here. Based on how I interpret the Wikipedia definition of financial independence, it is a prerequisite for retirement: that is, you can’t have retirement without findependence, but on the flip side, you CAN have findependence without retirement. Findependence is also the precursor to such variations on retirement as phased retirement,  semi-retirement and today’s theme of “rehearsals for retirement.”  A one-year “sabattical” is one long such rehearsal but as I write below, even a one-week paid vacation from your day job can be a rehearsal if it’s a working staycation.

Varieties of Staycations

There are I suppose two or three types of staycations: one is where you really take a vacation from work of any kind; another is where you continue to work, but on your own projects rather than an employer’s.  Your time being your own, you can also do a hybrid of these, which is the route I’m going this week: doing various errands and chores one normally might tackle on weekends, but also engaging in social media, writing and other work-like tasks.

As I experience this, I’m reflecting that a working staycation is very much like Och’s Rehearsals for Retirement. I have several friends who are both findependent and fully retired, in that they no longer perusue economic (money-making) activities. But of course, they end up as busy as anyone else: household chores, shopping and maintenance don’t go away even if full-time employment ceases to be. You may pursue various artistic or entrepreneurial activities that may or may not lead to economic reward down the road.

If you still have a day job but have reached the point where you have several weeks of paid vacation each year, you may find a working staycation an excellent trial run for retirement. When I wrote the first edition of Findependence Day in the summer of 2008, I began the writing during my paid vacation weeks from my newspaper staff columnist job. Since I had been a freelance writer for several years in the 1980s, I was familiar with the rhythmn of writing at home. At some point I can see finishing my journalism career in the same way, supplementing the various “Findependence” sources of multiple income with the odd freelance assignment, book royalties and the like.

As I write the first draft of the blog entry you’re now reading, I’m doing so on a MacBook Air in my back yard. The sun is shining, a waterfall is splashing into our fish pond, cardinals and blue jays are pecking away at a bird feeder and life is good. I’ll go back into the house to polish this and format it for the web but this is an example of the kind of life I describe as “findependence.”

If you’re contemplating such a step but unsure about whether you’re suited for it, I recommend trying a week or two of a working Staycation during paid leave from your current day job.

Not yet retirement, but perhaps a rehearsal for it!

Note to US book reviewers & financial bloggers

One of the activities in which I’m engaged this week is promotion of the US edition of Findependence Day. Any journalist in the mainstream media can request a review copy by emailing promotions@trafford.com.   If you’re a financial blogger or a financial planner with a newsletter or good social media followings, I’d be glad to mail you an access card in order to download the e-book edition in most major formats. I’ll also email you a Word file of the end-of-chapter summaries, such as the one below. You can reach me at jonathan@findependenceday.com.

Chapter 3 summary

Finally, as promised, here’s the next installment of the end-of-chapter summaries of the main lessons learned in the book:

Chapter 3: Poor Boy Blues

You can’t save by spending; Be an Owner, Not a Loaner

• Frugality needs to be a lifetime habit, ranging from brown-bagging work lunches to taking public transit half the time.

• Don’t just focus on cutting expenses through small sacrifices; find ways to increase your income.

• Beware financial industry gimmicks like “spend ‘n save” cards.

• Department store credit cards charge the highest rates of interest.

• The secret of building wealth is to be a business owner.

• Be an owner, not a loaner means investing in stocks rather than bonds; or better yet, starting your own business.

• While the biggest fortunes come from starting a business, most of us are better off diversifying our equity exposure through index funds or Exchange-Traded Funds (ETFs).

 

 

 

 

Retiring Retirement

falkHere’ a post from my Financial Independence blog at MoneySense.ca, posted this week from the Morningstar annual conference held in Toronto on Wednesday. Pictured is Michael Falk, a partner with Illinois-based Focus Consulting Group, and I’m reporting on his talk entitled Prime Minister, There’s a Hole in My Safety Net.

And as promised a few weeks back, here’s the second-chapter summary of financial lessons learned in the second chapter of the new US edition of Findependence Day:

Chapter 2: Money Money Money: It’s a Rich Man’s World

• The best investment is paying off debt

• A line of credit lets you consolidate high-interest loans at one combined lower interest rate.

• A more effective method is to spend less than you earn.

• Avoid paying only the minimum monthly payment on your credit card. Better yet, pay balances off in full and never pay a dime interest.

• Build a six-month cash cushion.

• Mutual funds offer young investors professional security selection and diversification and through equity funds, exposure to the stock market.

• Financial Independence is not the same thing as Retirement. It means you continue to work because you want to, not because you have to.

• As your portfolio grows, you can lower investment management costs by using a discount brokerage, buying low-cost passively managed investments, and engaging a fee-only financial planner.

• During Semi-Retirement or the “First Retirement” you can give back to the community by volunteering, and discover talents you never knew you had.

 

 

 

The basic financial literacy lessons underlying Findependence Day

ipad-3-concept.pngWhile Findependence Day is at one level a “novel,” complete with a multi-layered plot, characters, setting etc., it’s a hybrid creation that also attempts to weave the basic lessons of financial literacy into the story.

As indicated last post, the new US edition, including the e-books, includes a feature not present in the original North American (i.e. Canadian) edition: end-of-chapter lessons of the basic concepts learned.

In retrospect, I should have done this from the get-go since the book is first and foremost a financial literacy primer.

As I create a backgrounder for the press, I’ve gone through the exercise of extracting the 18 end-of-chapter summaries (“What Jamie & Sheena learned this chapter”) into a single document. It reinforces that if you toss out the story, there’s plenty of useful material there, so much so that I sincerely believe that if anyone took every lesson to heart, they would indeed “achieve financial independence while they’re still young enough to enjoy it.”

Those who have only the Canadian edition can view the new foreword and an example of the end-of-chapter summaries by previewing the free Amazon Kindle version here. And you can get the e-book version for $3.99 or less in most tablet and e-reader formats by clicking through the Trafford link here.

But for those who would rather not, I’ve decided I’m going to roll out the 18 summaries in this blog perhaps on a weekly basis. We’ll start with chapter 1, even though that’s already available in the sneak preview:

Chapter 1 Summary: Take it to the Limit 

Topic: Credit cards and other forms of bad debt

• You can’t start building wealth until you’ve eliminated debt.

• To save, you must stop spending.

• To stop spending, you must embrace “guerrilla frugality” and be willing to make small sacrifices.

• The foundation of Financial Independence is a paid-for home.

Findependence Day is simply a contraction of Financial Independence Day.

• The key to manifesting your Findependence Day is to pick an actual date in the future and visualize it happening.

• To reinforce the idea that saving is more important than spending, take to heart the motto “Freedom, Not Stuff!”

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