Debt & Frugality

As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”

Managing Debt: How Business Leaders Overcame Financial Challenges

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Image via Pexels, Andrea Piacquadio

In this article, we’ve gathered seven effective strategies from founders and investment bankers on how to pay off significant debt while striving for financial independence. From embracing the “Snowball Method” to prioritizing high-interest debts, these experts share their personal approaches to achieving a debt-free life.

  • Embrace the “Snowball Method”
  • Achieve F.I.R.E. through Diversified Income
  • Reverse Order your Debt Payment Strategy
  • Utilize the “Debt Snowflake Method”
  • Consider Debt Settlement Options
  • Budget and Start a Side Hustle
  • Prioritize High-Interest Debts

Embrace the “Snowball Method”

In my journey to financial independence, I’ve found the “Snowball Method” to be an effective strategy for paying off significant debt. It’s like rolling a snowball down a hill; you start small and gain momentum. 

I began by paying off the smallest debts first, regardless of interest rates. The psychological boost of eliminating a debt was a powerful motivator, propelling me to tackle the next one. It’s akin to cleaning a cluttered room; you start with one corner and before you know it, the entire room is clean. 

This method may not be the fastest or the one that saves the most money in interest, but it’s the one that kept me going, and that’s what matters in the end. It’s not just about the numbers, it’s about the journey and the habits you build along the way. — James Allen, Founder, Billpin.com

Achieve F.I.R.E. through Diversified Income

I am an advocate of the F.I.R.E. movement, having both personal and professional experience with personal finance. I pursued F.I.R.E. because I wanted to follow my interests outside of my 9-to-5 job. I wanted to live a great life while exploring the world and spending more time with family and friends. Most importantly, I didn’t want to worry about finances all my life!

After making wise financial decisions over the years, I could leave my high-stress finance job in July 2019 to pursue my side hustles full-time. What I did was to diligently add to my emergency fund and invest as much as possible. In the first half of 2020, my partner and I could pay off $57,000 in debt, and we are now debt-free. I am now a full-time entrepreneur, with my businesses and side hustles generating a combined multi-six-figure per year income. — Samantha Hawrylack, Founder, How To FIRE

Reverse Order your Debt Payment Strategy

One strategy that has worked for me is to pay off my debt in the reverse order in which it was accrued. This means that I paid off the smallest debt first, and then worked my way through the rest of my debt: the highest interest rate last. 

The reason I did this was because it made me feel empowered and focused. I would think about how much money I was saving by paying off one bill early, and then use that motivation as fuel to keep going. — Jaanus Põder, Founder and CEO, Envoice

Utilize the “Debt Snowflake Method”

One effective strategy that helped me pay off significant debt while striving for financial independence is the “Debt Snowflake Method.” 

While the “Debt Snowball Method” is more well-known, the Debt Snowflake Method involves finding small, everyday ways to save or earn extra money and immediately using those funds to make additional debt payments. It might seem insignificant, but consistently directing small amounts toward debt can add up surprisingly quickly. 

For example, I would take advantage of cash-back apps, sell items I no longer needed, or even offer small freelance services during my free time. Every little contribution would go directly towards my debt, creating a snowflake effect that accelerated my debt payoff journey.  Continue Reading…

Lean FIRE (as opposed to Fat Fire)

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By Alain Guillot

Special to Financial Independence Hub

I was told on Twitter that living on less than $24k per year is very frugal. Maybe it is, but I would like to explain how I live on less than $24K and I feel that I live like a king. 

(Editor’s Note: The Twitter discussion below followed Monday’s Hub post on by Myownadvisor blogger Mark Seed: Is Fat Fire realistic?)

First of all, my net worth right now is about $500,000. If we use the 4% rule, I should be able to withdraw $20,000K/year ($1,667/month) in perpetuity.  

How I live  

Map of Alain’s neighbourhood in Montreal

I live in one of the best neighborhoods in Montreal. It’s called “Le Plateau Mont Royal.” I have a beautiful park 10 minutes walking distance to the east, and another more beautiful park 10 minutes walking distance to the west, and I have the Old Port, 20 minutes walking distance to the south. 

 

 

Alain on Duluth Street

 

The street where I live is pedestrian only; it’s a cobblestone street.

Because I have been living in the same apartment for the past 12 years, my rent is low. $815/month. 

One of my small pleasures is to go downstairs, to a little park on the corner and drink a beer with my neighbors. (beer from the convenience store $2)

My apartment is what’s called a 3 ½. One bedroom, one living room, a kitchen, and a bathroom. I live on the second floor of a two floor building. 

 

 

The local supermarket

I do my groceries at a small family-owned supermarket where I have been shopping for 12 years and where I know the cashiers and the owners by first name basis. Because I follow a plant based diet, I eat 99% of the time fresh fruit and vegetables. My grocery bill hardly exceeds $10 per day ($300/month). I buy my fruits and vegetables daily. 

 

Continue Reading…

My 5 picks for classic books on Financial Independence and Retirement

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A book discovery service called Shepherd.com has just published a multi-book review by me about my recommendations for some of the best all-time books on Financial Independence and Retirement. You can find the full review by clicking here. Shepherd.com is a year old; an alternative to older services like Goodreads, it helps readers and authors share and discover books in various genres.

Picking just five books is of course a tricky exercise and having seen this published late in July, I soon thought of several other books I might have included as well or instead, notably David Chilton’s classic The Wealthy Barber. But it’s safe to say that with more than 2 million copies sold, that would not exactly be a ground-breaking new recommendation.

Chilton of course created a monster with the genre of the financial novel: a hybrid that combines a story and characters with an overlay of enduring financial insights and strategies for achieving financial freedom. He has spawned many imitators, such as Robert Gignac’s Rich is a State of Mind and my own Findependence Day, which is also flagged in the Shepherd reviews.

For this exercise, however, I opted to go with straight non-fiction financial books. My thinking was what books influenced me in my own journey to Semi-Retirement and Financial Independence, or the so-called FIRE movement, for Financial Independence Retire Early.

Here are the 5 books I did pick: go to the original link to get my analysis and reasons for each pick. Below I offer just a line each but each explanation is closer to 400 words so be sure to click on the original Shepherd link to get the full take on each. The five titles below each include hypertext to the Shepherd book store where you can order directly.

1.)

Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence

By Vicki Robin & Joe Dominguez

Probably first for most other proponents of the FIRE (Financial Independence Retire Early) movement is this classic, subtitled Transforming Your Relationship with Money and Achieving Financial Independence.

 

 

 

2.)

Enough: True Measures of Money, Business, and Life

By John C. Bogle

The late Jack Bogle, founder of Vanguard Group, published this excellent book in 2009. To me, the title speaks for itself. The sooner you realize you have “enough,” the sooner you can quit the rat race.

 

 

 

 

3.)

How to Retire Happy, Wild, and Free: Retirement Wisdom That You Won’t Get from Your Financial Advisor

By Ernie J. Zelinski

Edmonton-based author Ernie Zelinski is probably best known for this self-published international bestseller and several others, all on the theme of escaping from full-time employment as soon as possible.

 

 

 

 

 

4.)

Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life

By Moshe A. Milevsky, Alexandra C. Macqueen

This book by the famed Finance professor and a certified financial planner caters to anxious would-be retirees who do not have the luxury of having an inflation-indexed, guaranteed-for-life Defined Benefit pension plan offered by an employer.

 

 

 

 

5.)

Work Optional: Retire Early the Non-Penny-Pinching Way

By Tanja Hester

The phrase “Work Optional” describes the state of being financially independent enough that you don’t have to work for money anymore, but nevertheless choose to for reasons like having a purpose, or structure. As the subtitle suggests, it’s about retiring early without having to be a miserly penny pincher.

The great migration to Cash: Money Market and Short-Term Fixed Income

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Image from Pixabay: Alexander Lesnitsky

By Matt Montemurro, CFA, MBA, BMO ETFs

(Sponsor Content)

One of the biggest trends in the market, thus far in 2023, has been the flurry of inflows ($AUM) into money market and short-term fixed income. We have seen a “great migration to cash” as investors are literally being paid, handsomely, to park cash on the sidelines. We are now 6 months through the year and flows into the short end do not seem to be slowing down. Thus far YTD, we have seen $5.7bln flow into money market and ultra short-term fixed income ETFs, accounting for over 50% of all flows into fixed income ETFs in 2023 (Source: NBCFM ETF).

Money Market and Ultra Short-Term Fixed Income:  after years of being a forgotten segment of the market, how and why are they the leading asset gatherer?

With the accelerated path of rising rates, we have seen in the short end of the yield curve; (the overnight rate) the yield curve inverted. An inversion of the yield curve is caused when shorter-term rates rise faster than longer-term rates. Generally, this is something that occurs but reverses quite quickly.

Not this time. We are currently in a period of a prolonged yield curve inversion, which could be a leading indicator of economic weakness to come. This inversion is exactly what these money market and ultra short-term fixed income investors are looking to cash in on. Lock in higher shorter-term rates and take advantage of the inverted yield curve.

For too long, investors were forced to move outside of investment grade bonds and further out the yield curve to achieve their yield and return expectations. The market has shifted that paradigm on its head and allowed investors to truly get paid to wait on the sidelines in cash.

 Current Canadian Yield Curve

Source: Bloomberg, June 30, 2023

The short end appears to be the sweet spot for many investors, in terms of risk and reward.

Risk: by targeting the short end of the curve, investors will be minimizing their interest rate sensitivity (Duration exposure) and will generally be buying bonds that will be maturing in less than 1 year. Buying investment grade bonds, issued by high quality issuers, this close to maturity provides investors with downside protection as all these bonds will mature at par.[1]

Reward: Achieve a higher yield to maturity than further out the curve. Allowing investors to earn higher yields for lower interest rate sensitivity risk. The current market isn’t paying investors to lend money for longer periods. The front end provides an extremely attractive proposition for investors.

Today’s market is uniquely positioned and many market participants expect volatility to be on the horizon and as higher interest rates make their way through the economy, potentially causing growth to slowdown. Money market and short-term fixed income are well positioned for this environment, as investors can weather the potential volatility in the market while still meeting income and return needs. Continue Reading…

Bad Retirement Spending Plans

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Image courtesy Pexels/Feyza Nur Demirci

By Michael J. Wiener

Special to Financial Independence Hub

A recent research paper by Chen and Munnell from Boston College asks the important question “Do Retirees Want Constant, Increasing, or Decreasing Consumption?”  The accepted wisdom until recently was that retirees naturally want to spend less as they age.  This new research challenges this conclusion.

What we all agree on is that the average retiree spends less each year (adjusted for inflation) over the course of retirement.  However, averages can hide a lot of information.  The debate is whether this decreasing spending is voluntary or not.  However, it’s important to recognize that the answer is different for each retiree.  Some don’t spend less over time, some spend less voluntarily, and some are forced to spend less as their savings dwindle.

I’ve been saying for some time that not all spending reductions by retirees are voluntary and that this affects the average spending levels across all retirees.  I’ve discussed this subject with many people, including a good discussion with Benjamin Felix, who was good enough to point me to the new Chen and Munnel research.  (Larry Swedroe also discussed this research.)

Research Findings

“On average, household consumption declines about 0.7-0.8 percent a year over retirement.  However, consumption for wealthy and healthy households is virtually flat, declining only 0.3 percent a year over their retirement.  Thus, at least in part, wealth and health constraints help explain the observed pattern of declining consumption.”

“Retirees likely prefer to enjoy constant consumption in retirement.  The results suggest that a retirement saving shortfall exists since consumption declines are larger for households without assets.”

Resistance

Some commentators want to believe that it is safe to assume declining spending in a retiree’s financial plan.  They dismiss involuntary reductions in observed retirement spending as insignificant.  However, this new research makes it clear that retirees’ preferred spending levels are much flatter than the observed spending data.  (For the record, Ben Felix says he assumes flat inflation-adjusted spending in his clients’ retirement plans.)

The idea that we’ll want to spend less as we age is seductive; it means we don’t have to save as much for retirement, can retire earlier, and can safely overspend in early retirement.  What’s not to like?  The problem is that average retirement spending data shows spending declines right from the first years of retirement.  Does it make sense that people still in their 60s suddenly want to just sit around inside their homes?  It’s plausible that retirees tend to become homebodies deep into their retirements, but not in the early years. Continue Reading…