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.  

 

 

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.

7 reasons to pursue Financial Independence

Here’s the Financial Independence blog just published at moneysense.ca. I’m posting this here for those who may have missed it, even though it reprises a similar guest blog I did for Roger Wohlner at his blog this weekend over at The Chicago Financial Planner. You can find a link to that one via the MoneySense post and indeed to the original blog that spawned both of them at My Financial Independence Journey blog.

However, unlike those other blogs, in this version I’m continuing the publishing of the end-of-chapter summaries that appear in the new US edition and e-book. Those who bought the original edition of the book won’t have those summaries, nor the glossary at the end.

Chapter 5:  You can’t always get what you want

 A paid-for home is the cornerstone of financial independence; paying down mortgages

•A paid-for home is the cornerstone of financial independence.

 • Bad debt is consumer debt that charges high rates of interest and cannot be deducted from your income tax bill.

 • A home mortgage is good debt, especially in America, where you can write off the interest charges from your taxes.

 • The faster you pay off your mortgage, the less interest you’ll pay.

 • Aim for a 10 or 15 year amortization period, not 30 or 35 years.

 • Pay Yourself First by setting up an automatic draft to transfer 10 to 20% of your paycheck into investments.

 • Leverage means borrowing money in order to invest. It can work but requires emotional fortitude to stick to the program when markets are down.

 • Because you can write off some expenses, self employment is an often overlooked tax shelter.

 • Real estate is a major part of a diversified financial plan but those who don’t want to be landlords can instead buy REITs, or Real Estate Investment Trusts.

 

 

Independence Day and Financial Independence

Findependence Day US Edition

Now that Independence Day has come and gone, perhaps it’s time to start thinking about your Financial Independence Day, or my contraction for the same thing: Findependence Day.

Whether it arrives in the near future or many moons from now, we know that the day of leaving the workforce must some day arrive. The timing may or may not be under your control: health and employer willingness to retain your services also come into the picture. What IS under your control is the financial resources you can mobilize to maximize your freedom and flexibility once this event occurs. And this must be done while you’re still gainfully employed.

One difference in these terms is that while Independence Day comes around every year, Financial Independence Day is a more unique event. It’s not carved in stone, of course, and can be moved forward and backward depending on circumstances.

The illustration is from the cover of the new US edition of Findependence Day, complete with fireworks and balloons. The calendar depicted is from the future (2027), and July 4th is circled as the “Financial Independence Day” of one of the lead characters in the book – for this is a novel as well as a financial primer for young people just entering the workforce and embarking on family formation.

Recent reviews

The point, as financial planner Sheryl Garrett remarked in a recent Marketwatch.com review of four books (including this one) is that the book’s title is about making a target: a point in the future you are working toward: “Findependence Day is the day you have choices and freedom. It’s redefining retirement and reaching financial independence.” Sheryl wrote the foreword to the book, which you can access via this free preview here at Amazon.com.

You can also read a blog on the book just published at NextAvenue.org, tied to the Independence Day theme — here — as well as a podcast on the book, where  Al Emid interviews me for New Books in Investment: here.

Posted July 2nd, is this review from Book Pleasures’ Conny Crisalli, which is also posted on Amazon.com here. Click on “newest reviews.”

And finally, on July 4th (yes, Independence Day) is this interview with Preet Banerjee on his “Mostly Money” audio podcast.

The power of visualization

Anyone familiar with goal-setting and visualization will know that, as I say in the book, there’s some power in setting an actual date in the future as a goal by which something is to be achieved. Jamie feels that on the day he turns 50, his income from all sources will exceed the income he could get from a sole employer and so he will become “findependent.”

I note that there are starting to emerge other books that also focus in on Financial Independence rather than Retirement, even though the term so beloved of the financial industry and the media is Retirement. In his recent non fiction book, Financial Independence: Getting to Point X, author and financial advisor John Vento describes Point X as the inflection point when financial independence is achieved. I”ve not yet read the book or talked to the author but it seems to me that Point X and Findependence Day are very similar concepts.

It’s worth reading Wikipedia’s entry on Financial Independence, which reads as follows.

   … the state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses.

I first became aware of that entry just a few weeks ago when I wrote a guest blog for fee-only planner Roger Wohlner, aka The Chicago Financial Planner.  Since I’d finished the book by then it had no bearing on the book but the concept was not dramatically different.

Seek Findependence, Not Retirement

As I wrote for Roger in a blog entitled “Seek Findependence, Not Retirement,” the two terms are not the same. To be sure, you can’t really have retirement if you don’t first achieve financial independence, but seen the other way around, you can be financially independent and yet not choose to retire. Just look around at any big success in the business or art worlds and you’ll see the truth of that. Mick Jagger is findependent but still rocking, and the same can be said for Warren Buffett, Mark Zuckerberg and any number of other artists, musicians, actors and other celebrities.

Most of us are not born on Independence Day but we can all pick a date in the future – not necessarily a birthday – circle a figurative calendar and declare “That’s my Findependence Day.”

A warning though. It’s quite possible that the day after Findependence Day will be very little different than the day before. It happened that I turned 60 in April, almost to the day when the US edition of the book was published. fireworksAs I related on my Financial Independence blog at MoneySense.ca, I hosted the world’s first Findependence Day Party, complete with balloons and fireworks. The following Monday, I was back at my day job at MoneySense magazine.

Findependence works in concert with related concepts like early retirement, phased retirement and even sabatticals and staycations. My thoughts on the latter can be seen in the blog published just before the one you’re reading now: Rehearsals for Retirement.

To everyone in America, I wish a happy Independence Day.

 

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 day after Findependence Day

magazine-issueSome may wonder why if I celebrated my Findependence Day and 60th birthday party over the weekend (see previous blog), then why on earth am I still going to work to engage in the stressful job of putting out a worldclass personal finance magazine.

My answer ran today on my sister blog housed at MoneySense.ca, which we call the Financial Independence blog.

Here it is in its entirety.

“Giving up” on saving? Don’t embrace this kind of defeatism

From time to time I see some in the media asking the question whether people are “giving up on saving.”  This was the thesis of a Maclean’s cover story last year and a version came up this week in the Financial Post.  It’s not a stance I sympathize with, which is why  I wrote a version of today’s blog earlier this week at www.moneysense.ca.

Here, I’ve reproduced and expanded on that blog.

It’s a free world of course and everyone can choose to maximize consumption today, even if it means paying more tax because of foregoing contributions to tax-assisted retirement plans (RRSPs in Canada, or in the United States, contributions to IRAs or 401(k)s.)

But giving up on saving does have consequences. This choice means you’re also giving up on more consumption in the future, and giving up the chance for freedom (or financial independence) while you’re still young enough to enjoy it.

People are perfectly free to spend to the full extent of current income but leaving no margin for error for job loss or other emergencies is just plain foolish. Any financial planner will tell you that enough savings to last six to nine months without employment income is the minimum prudent emergency cushion—an amount that can now be well taken care of by the cumulative $25,500 in TFSA contribution room now available to any Canadian 18 years of age or older. (For the benefit of any American readers, the Tax Free Savings Account is the equivalent of Roth plans, although TFSAs were only introduced in 2009. Same idea but different rules. See also note at end of blog).

Alternative is working till you drop

Beyond the customary emergency savings, giving up on saving for longer-term goals like retirement really means resolving to stay in the workforce (employers and circumstances permitting) right until 65, or 67 in the case of younger people. Indeed, the November issue of MoneySense did show how people can retire in luxury merely by finding a low-cost place to live (most of them outside the country) and living off such government income sources as CPP, OAS and GIS (in Canada) or Social Security (in the US).

While such a strategy is theoretically possible, “luxury” is a relative term and relying only on government money in old age strikes me as dangerous from a diversification point of view. In the U.S. in particular, given the nation’s parlous finances, putting all your eggs into the basket of Social Security seems an overly optimistic gamble. Not for nothing do the financial gurus counsel a three-legged stool that also includes employer pensions and private savings and investments, not to mention part-time work, real estate income and other “multiple streams of income.”

Frenzy of Rationalization

In the end, taking a defeatist attitude to saving is just making excuses. Blaming low interest rates or volatile stock markets is what my wife and I dub “a frenzy of rationalization” or FOR. It’s true that young people today have far more financial temptations than did the baby boomers: we never had to budget for cell phone plans or Internet access, nor were we under pressure to constantly upgrade to newer and better smartphones and other technological gadgets.

But again, if your perceived “needs” exactly equal your income, then the best you can hope for is to break even financially as the years pass, and that assumes steady employment. Lose that source of income and the trouble soon begins. Saving and investing means ultimately benefiting from the magic of compound interest (or compounded reinvested dividends). Giving up on saving and falling into debt should unemployment strike means the reverse and negative outcome: being subject to the disaster of compounding debt—and unfortunately, the interest rates that seem so minuscule if you’re a creditor turn out to be very high if you’re a debtor.

Far better to be a net beneficiary of even modest interest and dividend income than a victim of it. And that’s why, even though I’m personally on the cusp of Findependence I’m still not giving up on saving.

US edition of Findependence Day nearing publication

If you’re reading this blog, you shouldn’t need an explanation of the word Findependence, since this entire web site is dedicated to the book, Findependence Day. The original novel described here can be considered North American in scope but it has a lot of Canadian content with just a sprinkling of U.S. material. This will be rectified in a few months time when I’ll be releasing a new all-U.S. second edition of the book.  Watch this space for  updates on that.

New year, new TFSA room & giant step to Findependence

A belated Happy New Year to all readers and a reminder that every adult Canadian can take a big step this week towards their ultimate financial independence. I refer of course to the fact we can all contribute another $5,500 to our Tax Free Savings Accounts (TFSAs), bringing the total cumulative room to $25,500 (going back to the program’s launch in 2009). For the benefit of any American readers, Canada’s TFSA is the equivalent of the U.S. Roth plans, albeit with different rules.

In other words, if you acted at this time each year, you’d have contributed $5,000 in each of 2009, 2010, 2011 and 2012. Now that it’s 2013, the annual limit has been raised to $5,500, the first time the limit has been adjusted to accommodate inflation.

Of course, assuming you invested wisely in each of those years, your balance should by now be well north of $25,500, and in some cases may have grown past $30,000.

TFSAs a particular boon for young people

I truly believe that maximizing the TFSA is the single biggest step Canadians can take in their quest for financial freedom. As we noted in Julie Cazzin’s “Make Your Child a Millionaire” feature in the current issue of MoneySense, the TFSA is especially a boon to young people because they have such a long investment time horizon ahead of them.

Unlike RRSPs, which require earned income the prior year, an 18 year old can qualify for the full TFSA $5,500 limit this year (they may need parental assistance to come up with the money, but that’s permitted by the rules. Think of it as a tax-effective early inheritance!). Not only that, but they can contribute to TFSAs well into old age, unlike RRSPs, which end after age 71. You better believe that half a century of maximizing TFSAs and investing wisely will mean multi-millions down the road.

Do this right from the get-go and you may not even have to worry about RRSP contributions, although those in higher tax brackets should probably do both.

But how to invest wisely? For the young in particular, but also older people seeking income, I think equities are the only way to go in TFSAs, especially with interest rates being so low as they are now.

I’m all for international investing but if you already have lots of RRSP contribution room, I’d use the RRSP for US dividend-paying stocks, since the tax treaty shelters Canadians from the 15% foreign withholding tax.

Despite the “tax-free” moniker, TFSAs won’t stop you from being dinged by that tax on foreign securities. For this reason, I like TFSAs for Canadian dividend-paying stocks. Yes, I realize the dividend tax credit makes Canadian dividends a good choice for non-registered (taxable) accounts, since the tax is roughly half what it is on interest income. However, Canadian dividends also result in the annoying “gross-up” calculation come tax-time, and such phantom dividend income can ultimately hurt you on the OAS clawback. And to me, zero tax is preferable to even a “low” rate of tax, especially if you plan to reinvest those dividends.

Canadian Dividend ETFs are my choice

For all these reasons, my personal choice for TFSAs this year are Canadian dividend-paying ETFs. A year ago, when it was part of the Claymore family, I publicly stated that the iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ/TSX) was a tempting choice, at least for those who already have plenty of exposure to the big Canadian banks.  To be included in that index a stock has to be a common stock or income trust listed on the TSE and have increased dividends for at least five consecutive years.

This year, there is a valid new alternative from Vanguard Canada: the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY/TSX). The management fee on VDY is just 0.30%, half the 0.60% of CDZ. (MER is 0.67%, we don’t yet know what VDY’s MER will be). But keep in mind that VDY amounts to a big bet on the major banks: a whopping 59% of the ETF is in Canadian financials and in fact the top four holdings are all the big banks.  CDZ has much less exposure to financials (just 21%) and minimal exposure to the big six banks in particular.

Half and half is one compromise

One way to go might be to split your contribution between both ETFs: say $2,750 in each. Remember, though, this assumes you have plenty of US and foreign stock exposure in your RRSP. Younger people for whom the TFSA comprises the lion’s share of their wealth should strive for plenty of US and foreign stock exposure through similar types of ETFs. We’ll be looking in depth at these in the next issue of MoneySense, currently in production.

Two prominent boomers reach Findependence at 62

As I noted in a recent MoneySense blog, age 62 seems to be the magic age for some prominent Canadian members of the financial industry (banking and pensions respectively) to “retire.” Of course, we prefer to say they’ve reached their “Findependence Day,” since I doubt either BMO’s outgoing chief economist, Sherry Cooper, or Mercer partner and actuary Malcolm Hamilton, will be moving from full-time employment to full-stop traditional retirement.

As I say at the bottom of the blog, more boomers are leaving center stage but I expect many will linger in the theatre for some time yet, whether they embark on writing, public speaking, consulting or shift more to volunteering and charitable work.

So is 62 a “good” age to declare one’s Findependence? As always, comments welcome below.

– 62 –

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