Take me with you when you go, girl
Take me anywhere you go
I’ve got nothin’ here but me, babe
Take me with you when you go — Jack White
Over my nearly 30 years of financial planning, death in a client family has given me both agonizingly poignant moments but also moments of tremendous encouragement for the human condition.
I have had the opportunity to work with bereaved spouses where we were able to allow them to stay in the family home and give their families the support and foundation they so desperately need.
I have also had the achingly sad moments of having to tell others how their worsened financial future will unfold due to their altered financial circumstances. The difference generally can be attributed to the existence of forward tax planning for the financial implications of the “first to die.”
Two major issues make the concept of retirement planning difficult to grasp for many members of Generation Y. This group, also known as the millennials, ranges in age from the young twenties to the mid thirties. At this age, they have anywhere from 30 to 40 years (or more) of a working career ahead of them.
That makes the concept of retirement pretty abstract. It’s difficult to envision something more years into the future than years you’ve been alive!
The other issue that complicates matters is the fact the average American is living longer than ever before. Gen Y isn’t likely to retire at 63 and expire a decade later. Their retirement savings will likely need to last more than 20 or 30 years if they don’t want to outlive their nest eggs.
These two factors – the fact that retirement is decades in the future, and the fact that retirement itself may last decades – makes it hard for Gen Yers to get excited about the concept of retirement planning. It’s overwhelming to think of putting away your hard-earned money today for a time in life you can’t even imagine, and it’s overwhelming when you think of the lump sum of money you’d need to save to rely on for more than 30 years in your old age.
Making the Shift from Retirement Planning to the Idea of Financial Independence
The idea of a “retirement” wasn’t originally designed for what millennials will likely face in the future. The economy, job market, and corporate culture has changed (read: no more pensions, no more life-time job with a single company). It’s unlikely that younger generations will reach a certain age and simply stop working – and reasons why they shouldn’t keep piling up.
It seems that avoiding work that leaves you unfulfilled or stressed, and taking occasional breaks from hard work, is rewarding and good for us. But putting a complete stop to work? That leads to boredom and other problems for retirees.
Ultimately, research suggests we need to have purpose at all stages of life. So instead of putting the focus on retiring from work at some distant, fuzzy point in the future and being inactive until our lives come to an end, we need to focus on building a great life right now while making progress toward financial independence.
What Is Financial Independence, and Why Is It Better for Gen Y?
Financial independence means developing enough income to pay all expenses indefinitely, without needing to work full-time to bring in that money.
Why is the concept of financial independence something easier for Gen Y to grasp than the concept of retirement? Because it completely changes the goal and makes it much more realistic and attainable.
You’ve probably heard of the 4% rule, which says that you can take 4% out of an account on an ongoing basis. According to this, a nest egg of $1,000,000 will produce around $40,000 per year. The flip side is by creating an income stream of $3,333/month, it is equivalent to having saved one million dollars! For many people, it’s much easier to create a passive income stream of a few thousand dollars per month than it is to save up a lump sum of a million dollars.
And for most people who are financially independent, they use this freedom from an obligatory job to pursue (paying) work they feel passionately about. So they don’t feel the need to just stop working, and view financial independence as an opportunity to pursue activities they enjoy without having to stress about the amount of money they generate.
How You Can Get Started Now
In addition to what you save and invest from your full-time job, you can get started on financial independence by creating additional income streams on the side. The goal is to make these streams as passive as possible, to create cash flow that funds your freedom.
It’s important to start now because very few streams of income are 100% passive – and almost none are passive when you begin to establish them. To get you going, consider these ideas that you could take to build a small stream of passive income:
Real estate: When you’re ready to move out of your starter home, don’t sell the property. Rent it out and let it become an income source for you instead. Note that this path is not for everyone; being a landlord can be tough and expensive if you want to go 100% passive (by hiring a management company to handle your tenants for you).
Building a side business: Your own business can become passive with time – but it takes a tremendous amount of work to grow it to that point. So start now! Create a side hustle or side business that you can work on and grow in your free time. This generates more income for you to invest now, and can provide an income stream in the future when you’re ready to scale back on your working hours.
Monetize a hobby: You can always take something you already enjoy and monetize it. If you work with something tangible (like creating art or other products), start selling what you make. If your hobby is something like an activity you do (think running or golfing), share your expertise and start teaching others.
Leverage your current assets: Wisely investing your current assets is another way to create passive income (via dividends, for example). This is another path that won’t be for everyone, but it is an option that’s available.
There’s no limit to what kind of small income streams you can create, especially if you’re willing to work hard and establish them now. Financial independence is within reach, and much more so than any fuzzy concepts about a far-off retirement that sees you generating zero income, forcing you to live off a massive amount that you had to first save.
So forget about trying to plan for retirement. Work to reach financial independence instead. You’ll get there sooner and have more fun doing it.
Alan Moore, MS, CFP® is the co-founder of the XY Planning Network and president of Serenity Financial Consulting, a fee-only RIA and location-independent financial planning firm. He is passionate about helping financial planners start and grow their own fee-only firms to serve Gen X & Gen Y clients largely ignored by traditional firms. Alan has been recognized by Investment News as a top “40 Under 40″ in financial planning, and by Wealth Management as one of “The 10 to Watch in 2015.” He frequently speaks on topics related to technology, marketing, and business coaching, and has been quoted in publications including The Wall Street Journal, Forbes and The New York Times. He lives in Bozeman, MT so he can hit the slopes on powder days.
While most homeowners won’t pay off their mortgages and reach financial freedom until right before retirement, I plan to do it a lot sooner — by age 31. I’ve managed to accomplish this in Toronto, Canada’s second most expensive housing market. How did I do it? Through frugal living, sacrifice and hard work. I was inspired to reach my “findependence” so early after reading Jonathan Chevreau’s book, Findependence Day: How to Achieve Financial Independence: While You’re Still Young Enough to Enjoy It. Here’s my story of how I plan to reach mortgage freedom and findependence and how you can, too.
My Journey Towards Mortgage Freedom and Independence
Sean Cooper
Owning a home has been a goal of mine ever since a young age. My lifelong goal of homeownership became a reality when I purchased a beautifully-renovated bungalow in the suburbs of Toronto in August 2012 for $425,000.
Buying a home at such a young age took a lot of sacrifices, but it has been well worth it. Instead of living on the main floor, I rent it out and live in the basement. I was inspired by the host of HGTV’s Income Property Scott McGillivray, who lived in the basement of his first house for nine years to get financially ahead. In my spare time I work as a freelance financial journalist.
Even after graduating from university, I continued to live like a student. I didn’t go out and buy a fancy car or go on a five-star vacation – I continue to ride my bicycle to work, pack my lunch and shop at discount grocers. Those savings alone add up to thousands a year. Instead of renting an expensive condo downtown, I was fortunate enough to be able to live at home, paying my parents rent, saving towards a down payment.
While not everyone can afford to buy a house at age 27 and be able to make the sacrifices I’ve made, there are still things you can do to help pay down your mortgage sooner and reach findependence.
Pay Yourself First
In the words of David Chilton, you should “pay yourself first.” I’ve been able to pay down my mortgage through pre-payment privileges. Most closed mortgages come with pre-payment privileges that allow you to make lump sum payments and increase your payment. The easiest way to pay down your mortgage is to pay yourself first: set up automatic withdrawals from your bank account, so you’re not tempted to spend. You’ll save thousands in interest over the life of your mortgage and be mortgage-free years sooner. Ease yourself into it – see what money you can afford to contribute right now towards your mortgage. Even an extra $25 a week can shave years off the life of your mortgage.
SMART Goal Setting
I’m a big fan of goal setting. Through goal setting I’ve been able to realize my lifelong dream of home ownership. Goals are most effective when they’re SMART (Specific, Measurable, Attainable, Realistic, and Timely). For example, if you’re saving towards a home, by putting aside an extra $200 per week in your savings account, you’ll have $10,400 saved in a year that you can use towards a down payment or a lump sum payment against your mortgage.
Create a Budget and Track Spending
It’s hard to know if you’re on your way to reaching your financial goals if you don’t have a budget. A budget is the most basic tool and effective tool for managing your money. Are you guilty of living paycheque to paycheque? Do you often wonder where your money goes each month? Not only can a budget help you gain control of your finances, it can help you achieve your long-term goals, like mortgage freedom.
A budget acts as a roadmap that helps you stay on course. Creating a budget doesn’t have to be complicated. It can be as simple as a Microsoft Excel spreadsheet. Just creating a budget can often lead to savings. You may be surprised how much you spend a month on coffee: by saving $2 a day, you’ll have $60 extra a month to put towards your mortgage.
While a budget is helpful, don’t forget to track your spending. Tracking your spend is vital to ensure you’re not going over-budget every month and putting your dreams of mortgage freedom in jeopardy.
Live Frugally
There’s a difference between frugal and cheap. Today it’s hip to be frugal. Being frugal means having the willpower to say no to spending from time to time. Changing a few costly spending habits can lead to big savings.
Rather than spending $10 everyday buying your lunch, why not brownbag your lunch instead? You’ll eat healthier and save a bundle. Instead of driving to work, why not take public transit or bike like me? The savings can add up quickly.
Frugal doesn’t have to mean being boring. You can still have an active social life. Instead of going to a pricey restaurant, you can host a potluck or have a picnic in the park.
Streams of Income
While living frugally can help save money, if you want to reach mortgage freedom sooner, boosting your income goes a long way. There are many ways you can bring in extra income: renting out your home, working part-time, or freelancing.
If you have some spare time in the evenings and on weekends, why not put it to good use by getting a part-time job? Rather than using your basement for storage, you could transform it into a rental suite and start bringing in a steady stream of income. With the extra money, subsidize your mortgage and make lump sum payments against your mortgage to pay it off years sooner.
If you’re willing and able to make a few small sacrifices, you can reach mortgage freedom and financial independence a lot sooner like me. You can work because you enjoy working, not because you have to.
Sean Cooper is a Personal Finance Expert and Financial Journalist. He is a first-time homebuyer and landlord who aspires to reach findependence by age 31. Follow him on Twitter @SeanCooperWrite and read his blogs and request his Writing and Web Design services on his website: http://www.seancooperwriter.com/
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By Doug Dahmer, Emeritus Retirement Income Specialists
