This might sound weird, as our society has become obsessed with this mystical three-digit number, but it is true. Chasing a high credit score is really a waste of time and money. Here’s why.
The score you have access to is not the one the bank uses
While I agree that having good credit is extremely important, the score can be very deceiving. The biggest problem is that consumers do not have access to the credit score that the banks uses. I know that sounds weird and it shocks everyone when they hear it, but Equifax has recently updated its website with the following notice:
The Equifax Credit Score is intended for your own educational use. It is also commercially available to third parties along with numerous other credit scores and models in the marketplace. Please keep in mind third parties may use a different scorewhen evaluating your creditworthiness. (Emphasis mine)
As you can see, the credit score you have access to as a consumer is for “educational” purposes only and can be completely different than what a lender will see.
For example, when you log onto your profile with your bank or a third-party app like Borrowell, Credit Karma, or Mogo the three-digit number you see is for “educational” purposes and not the score the bank will use on your next credit application. It is even worse, when you find out that the score you are paying for directly on Equifax.ca and TransUnion.ca is not what your lenders uses. Unfortunately, it is common to see over a 100-point difference between the “educational score” and what the bank actually uses. This is just one reason why the credit score provided to Canadians is very misleading.
A high score doesn’t mean you have good credit
An 800-credit score (which is really good) doesn’t mean you’ve been approved for best rates and terms. The score is just one aspect the banks are looking for. Continue Reading…
The term “financial independence” has many meanings to many people.
To some, this means the ability to work on your own terms.
To others, it boils down to not working at all but instead having “enough” to meet all needs and possible wants.
Where do I stand on this subject? This post will tell you in my six phases to financial independence.
Retirement should not be the goal: Financial security and independence should be
Is retirement your goal? To stop working altogether? While I think that’s fine I feel the traditional model of retirement is outdated and quite frankly, not very productive.
As humans, even our lizard brains are smart enough to know we need a sense of purpose to feel fulfilled. Working for decades, saving money for decades, only to come to an abrupt end of any working career might work for some people but it’s not something I aspire to do.
With people living longer, and more diverse needs of our society expanding, the opportunities to contribute and give back are growing as well. To that end, I never really aspire to fully “retire”.
Benefits of financial independence (FI)
In the coming years, I hope to realize some level of financial security and eventually, financial independence. For us, this is a totally worthwhile construct. The realization of FI can bring some key benefits:
The opportunity to regain more control of our most valuable commodity: time.
Enhanced opportunities to learn and grow.
Spend extra money on things that add value to your life, like experiences or entrepreneurship.
Whether it’s establishing a three-day work week, spending more time as a painter, snowboarder, or photographer, or you desire to get back to that woodworking hobby you’ve thought about: financial independence delivers a dose of freedom that’s hard to come by otherwise.
FI funds time for passions.
FI concepts explained elsewhere
There are many takes on what FI means to others.
There is no right or wrong, folks: only models and various assumptions at play.
For kicks, here are some select examples I found from authors and bloggers I follow.
JL Collins, author of The Simple Path to Wealth, popularized the concept of “F-you money”. This is not necessarily financially independent sums of money but rather, enough money to buy a modest level of time and freedom for something else.
Various bloggers subscribe to a “4% rule”* whereby you might be able to live off your investments for ~ 30 years, increasing your portfolio withdraws with the rate of inflation.
*Based on research conducted by certified financial planner William Bengen, who looked at various stock market returns and investment scenarios over many decades. The “rule” states that if you begin by withdrawing 4% of your nest egg’s value during your first year of retirement, assuming a 50/50 equity/bond asset mix, and then adjust subsequent withdrawals for inflation, you’ll avoid running out of money for 30 years. Bengen’s math noted you can always withdraw more than 4% of your portfolio in your retirement years however doing so dramatically increases your chances of exhausting your capital sooner than later.
For simplistic math, such bloggers calculated your “FI number” could be approximately your annual expenses x 25. So, if you’re annual expenses are about $40,000 per year (CDN $ or USD $ or other), then your “FI number” is a nest egg value of $1,000,000.
Using that framework, there are levels of FI some bloggers have adopted:
Half FI – saved up 50% of the end goal (in this case, $1 M).
Lean FI – saved up >50% of end goal to pay for very lean but life’s essentials like food, shelter and clothing (but nothing else is covered).
Flex FI – saved up closer to 80% of the end goal, this stage covers most pre-retirement spending including some discretionary expenses.
Financial Independence (FI) – saved up 100% of the end goal, you have ~ 25 times your annual expenses saved up whereby you could withdraw 4% (or more in good markets) for 30+ years (i.e., the 4% rule).
Fat FI – saved up at or > 120% of your end goal (in this case $1.2 M for this example), such that your annual withdrawal rate could be closer to 3% (vs. 4%) therefore making your retirement spending plan almost bulletproof.
There is the concept of “Slow FI” that I like from The Fioneers. The concept of “Slow FI” arose because, using the Fioneers’ wording while “there were many positive things that could come with a decision to pursue FIRE, but I still felt that some aspects of it were at odds with my desire to live my best life now (YOLO).” They went on to state, because “our physical health is not guaranteed, and we could irreparably damage our mental health if we don’t attend to it.”
Well said.
My six phases of financial independence
(Picture from our catamaran cruise, Barbados 2019)
To the “Slow FI” valuable points, since we all only have one life to live, we should try and embrace happiness in everything we do today and not wait until “retirement” to find it. Continue Reading…
MoneySense.ca: Photo created by freepik – www.freepik.com
My latest MoneySense Retired Money column looks at the topic of whether average savers transitioning to Retirement really need to fear outliving their money. The piece picks up from a blog this summer from Michael James on Money, which will be republished in its entirety tomorrow here on the Hub.
You can access the full MoneySense column by clicking on the highlighted text: How long will your retirement nest egg last? In addition to citing Michael J. Wiener’s work, the piece passes on the views of two prominent recently retired actuaries: Malcolm Hamilton and Fred Vettese, as well as my co-author on Victory Lap Retirement, ex corporate banker Mike Drak.
Like this blog, despite being online the column’s scope is somewhat constrained by a word limit. In fact, in an email, Hamilton told me he didn’t think such a topic could be addressed in just 800 or 900 words.
Actuary and retirement expert Malcolm Hamilton
“Why? We presume that good advice is universal … that it applies to everyone. It does not, particularly when addressing concerns about running out of money. For years I have looked for evidence that large numbers of seniors spent too much and suffered as a consequence. I haven’t found anything persuasive.”
No one knows how much Canadians should save or how quickly they should draw down their savings after retirement, Hamilton added: “Some people are frugal. They save heavily before retirement and spend sparingly after retirement, leaving large amounts to their children when they die. We all want parents like this. Others are spendthrift. They save little before retirement and live frugally after retirement because they have no money except government pensions.”
Finding balance between extremes of Over-Saving and Over-Spending
I’ve said it before. So has American financial commentator Barry Ritholtz. Regardless of your political bent, it’s a bad idea to hitch your investment decisions to whoever is, is not, or is about to be in political power at any given time.
Given the upcoming Canadian election and all the related political storm and fury of late, it’s not impossible that we could end up with a minority government in the next election, with the NDP or Greens having the balance of power. As a side note, residents of British Columbia have been dealing with this scenario for the past couple of years. That said, this outcome is just speculation, and this post is not about how you and I may feel about that situation.
This is about the choices we make as investors. As I said in 2016, and I’ll repeat here:
“Even when political news is strongly felt, there will likely never be a good time to shift your investments — neither in reaction nor as a defense. First, no matter how certain one or another outcome may seem, how the market is going to respond to the news remains essentially unknown. Second, by the time you’ve heard the news, it’s already priced into the market anyway.”
I’ve now been a financial advisor long enough that I’ve heard this refrain many times over: “If ‘X’ is elected I’m moving out of Canada!” Over the years and through multiple conversations, “X” has represented candidates from across the political spectrum.
Ironically, a similar refrain is often heard in the U.S.: “If ‘Y’ is elected, I’m moving to Canada!”Which is why Dimensional Fund Advisors provided us with a telling graphic to illustrate how impotent political parties actually have been at helping or hindering capital markets. Continue Reading…
It has been 243 years since Adam Smith, “The Father of Economics” wrote An Inquiry into the Nature and Causes of the Wealth of Nations. In this magnus opus, Smith introduced the concept of the “invisible hand,” which can be described as an unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically.
The erosion of Hedge Fund returns
At Outcome, one of our favourite sayings is “In the end, Adam Smith always wins.” Whereas the timing of this triumph is uncertain, victory is nonetheless assured. It is not a question of if, but merely one of when.
Smith’s invisible hand has indeed been at work in the hedge fund industry. At the beginning of 2000, there were relatively few hedge funds, and the global hedge fund industry had roughly $300 billion under management. Between 2000 and 2007, the HFRX Global Hedge Fund Index produced annualized returns of 9.75%. Even during the “tech wreck” of 2001-2, when the MSCI All Country World Index of stocks fell 33.1%, hedge funds rose an impressive 13.8%.
As if following Smith’s playbook, this stellar performance attracted a massive influx of assets from investors and prompted the launch of countless new funds. The resulting increase in competition and “crowding” has had a predictable impact on results. From the beginning of 2008 through the end of last August, the HFRX Index declined at an annualized rate of -0.5% and has fallen 5.7% on a cumulative basis. Moreover, hedge funds failed to diversify investors during the financial crisis of 2008, when the HFRX Index plummeted 23.2%.
As always, Adam Smith wins.
Performance & Fees: Fundamentally disconnected
Despite the severe decline in average hedge fund performance, there has not been a proportionate decline in the high fees that they charge investors. Continue Reading…
Posted By 
By Richard Moxley
Posted By 
