Tag Archives: saving

The Fundamentals of Financial Independence for the long haul

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By Howie Bick

Special to the Financial Independence Hub

 

Financial Independence is a goal that many have and encompasses a variety of different elements into its equation. Depending on the type of lifestyle you live, the type of costs and expenses you have, and the amount of income you generate, Financial Independence is something that incorporates each one in a different way.

Becoming Financially Independent is a process that takes a bit of time and learning a few important principles. Understanding what you can and cannot afford, what is essential versus non-essential, and the type of security or stability that you’re comfortable with as well, are all important when it comes to Financial Independence (aka Findependence).

Continuing to work and generate Income

Working towards Financial Independence is an ongoing battle, one that requires constant effort, continuous working, and keeping a close eye on expenses. Continuing to work is an important element to the Financial Independence equation, as it allows you to continue producing income, and keeping the flow of money coming in.

One of the aspects of life is the way it continuously moves and flows from one thing to another. Along the way, there are often costs, unexpected expenses, and bills that may arise. By continuing to work and generating income, you can not only have the ability to pay your current expenses or costs, but you can also maintain the assets or resources you’ve been able to acquire as well. If the time comes when the flow of income stops, you might look towards the assets or resources that you’ve been able to acquire or build up over time. Continuing to work and generate income is an element to the Financial Independence equation that is important to consider, and important to continue producing, in order to continue managing and keeping your expenses in check, while also protecting or preserving the assets or resources you’ve been able to acquire over time.

Managing Expenses

One of the important elements to the Financial Independence equation are the types of costs or expenses you have as well. Depending on the amount of costs or expenses you have, you can then figure out how much you need to generate or income you need to produce. Considering the amount of costs or expenses you have, gives you a framework of how much income or money you need to generate in order to continue moving forward, or to continue affording the lifestyle you’re currently living.

The expenses you have is something that is very well within your control, even though controlling them might be difficult. Whether it’s reducing the amount of money you spent on food or entertainment, or cutting down the costs of the monthly subscriptions or memberships you have, the costs or expenses that you have is something that is well within your control, and important to manage when trying to become Financially Independent (or “Findependent.”)

What you can afford versus what you can’t afford

This element is important, as it will guide you or direct you on the type of spending decisions you make, the type of purchases you decide to purchase, and the type of lifestyle you decide to live. The amount of income you have often plays an important role in what you can and what you can’t afford.

Based on the amount of income you have, you can get a sense of the type of house, apartment, or living space that you can afford. You can figure out what you may think is too much, or will be pushing the envelope too far, or what you feel comfortable with and is within your means. Part of figuring out what you can and cannot afford is also how you like to live. Whether it’s with a high level of security of comfort, or you like to push it to the limit, and try to maximize or utilize all the resources you do have. Part of it comes down to what you feel comfortable with, and what you’re ok with, because Financial Independence is something that is different for everyone, with different types of lifestyles, costs, expenses, and goals alike.

Living below your means

Part of transitioning and becoming Financially Independent for the long haul, is learning how to live below your means and what you can manage for the foreseeable future. Especially in the beginning it may be tough, as you’re accustomed to or familiar with a different type of lifestyle: one that you may not be able to afford, or able to manage, but by living below your means, you can begin your journey of Financial independence.

Living below your means means earning more than you spend, and deciding to make purchases or increases in lifestyle in a slow fashion, in a way that you can accumulate or save and prepare before taking on a larger share of expenses or costs. While it might not be what you once had, or what you envisioned, living below your means allows you to have the freedom and flexibility to navigate the other costs, expenses, or spending decisions you may want to make. Whether that’s opening a business one day, investing into assets you like, or rewarding yourself with something you desire, living below your means can be the engine to getting to where you want to go, and give you the ability to manage or navigate the different life expenses or unexpected costs that may come your way.

Saving and Preparing

Another element that can be important for your Financial Independence is saving and preparing for what may be ahead. Whether it’s a goal you have, a path you want to pursue, or something that unexpected that arises, through saving and preparing you can plan in advance, and use time to your advantage, or work your way to where you want to go, or be prepared for whatever comes your way.

It’s often very difficult to manage and navigate situations at the time they arise, without the resources you may need, or the resources you would like, which is the reason why saving and preparing can be helpful. By putting money aside or keeping a certain amount of funds or reserve on hand, you can be better prepared to manage whatever life throws at you, and to navigate any murky waters you might encounter. Continuing to put money away, whether it’s slowly, or quickly, can help you be prepared and navigate any unforeseen or unexpected life expenses that may come your way, or put you on a path to achieving or pursuing the type of lifestyle or goals you may have in mind. Continue Reading…

3 ways to build your Finances with minimal sacrifice

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Image by Pixabay

Gary Bordeaux

Special to the Financial Independence Hub

Money is an ever important facet of living in human society. As they say, “money makes the world go ‘round,” but it often seems like your bank account is never full enough to meet all your needs, let alone desires. However, there are methods available to help the average person get ahead of the curve to improve their finances and otherwise build their dream lives. Here’s what you need to know.

Financing Luxuries

When thinking of financing, one tends to think of a house or a car. This service has been integral in providing the working class with things that are necessary but prohibitively expensive for quite some time. However, there are other scenarios in which financing expensive products can be the best way to balance smart financial decision making with living your best life. For example, you can finance swimming pools to get the summertime recreation and relief you desire without spending a fortune on it in the moment. By spreading that cost out over time, you can bring your vacation to you without breaking the bank. This principle can also apply to many high end electronics, such as iPads, and it can also apply selectively with general retail products via layaway programs. Using these methods, you can gain the advantages of living beyond your means without actually taking the risk of doing so.

Reducing Costs

One of the most important methods of saving money is by spending less. Some might argue that refusing to spend money on creature comforts and luxuries is the right choice, that is only partially true. While some luxuries can be eliminated, those that enrich your life are important to maintaining mental health. Instead of making meaningful sacrifices, costs can be cut by simply buying less expensive alternatives to costly staples. Name brand products often fill that role, but you can often get the same value at a lower price by choosing off brand products instead. Continue Reading…

Retired Money: Should big savers still fear outliving their money?

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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

Mental Accounting and how we spend money

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We all have quirky behaviours when it comes to managing money. One trick we fall victim to is called mental accounting. We separate our money into different types of mental accounts, with different rules, depending upon how we get it, how we spend it, and how it makes us feel.

An easy example is when you have a fund set aside for something like a vacation or house down payment while at the same time carrying high-interest credit-card debt. Or how you decide to spend a $1,200 tax refund versus what you’d do with $100 per month if you had the right amount of tax coming off your paycheque in the first place.

I’m guilty of mental accounting every month when I budget $1,000 for groceries, $200 for dining out, $125 for clothing, and $75 for alcohol. I manipulate those mental accounts all the time, like when I overspend in one category and just take it out of another (shifting a meal from ‘dining’ to ‘entertainment’ for example).

The Mental Accounting challenge

Why do we assign money to these mental categories? One answer is to control how we think about it. If we were perfectly rational and could figure out the opportunity costs and complex trade-offs of every single financial transaction then it wouldn’t matter how we label our money: it would just come from a big pool called ‘our money.’ It’s just money, after all; totally fungible and interchangeable.

But because we’re human with cognitive limitations and emotions we need help with our money decisions. That’s where mental accounting comes in and acts as a useful shortcut for what decisions to make.

Another interesting way we classify our financial decisions has to do with the length of time between when we bought an item and when we consumed it.

Nobel Prize winner Richard Thaler studied wine purchases and consumption and found that advance purchases of wine are often thought of as investments. Months or years later, when the bottle is opened and consumed, the consumption feels free, as if no money was spent on wine that evening. Continue Reading…

Motley Fool: Best vehicles for an Emergency Fund

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What are the best investment vehicles for holding a safe and highly liquid Emergency Fund? That’s the focus of the third in my latest series of blogs for Motley Fool Canada introducing the basic principles of establishing Financial Independence.

You can find the latest instalment by clicking on the highlighted headline here: One Essential Tip for Achieving Financial Freedom.

In the first two installments of this new series of articles, we looked at two key steps toward Financial Independence: jettisoning debt and, once that is accomplished, applying the resulting surplus to savings and ultimately long-term investments.

As the latest blog argues, you could even argue that an emergency cash cushion should take precedence over both debt elimination and saving/investing.

What should you be looking at in an Emergency Fund? First, you need liquidity: the ability to access the cash at a moment’s notice. Second, you want safety of capital, which really means cash equivalents or fixed income, not equities normally held with a time horizon of more than five years. Third, assuming some sort of fixed income that’s not locked up like a 5-year GIC, you want at least a reasonable rate of interest to be paid on it.

Normally, you shouldn’t regard RRSP investments as an emergency cushion, since you’ll have to pay tax to access the funds. Most people will try to keep relatively high cash balances in their chequing accounts that can serve as a cushion, although typically these accounts pay next to nothing in interest income. One possibility is short-term or redeemable GICs that may pay somewhere between 1 and 2% per annum. Another good place to “park” such funds is a High Interest Savings Account (HISA).

As the name suggests, HISAs pay high amounts of interest, usually more than 2%. According to this source, several pay more than that: as of mid 2019, EQ Bank was paying 2.3%, Motus Bank up to 2.5%, Tangerine was offering a promotional rate of 2.75%, and Motive Financial was paying 2.8%, Wealth One Bank of Canada was paying 2.3% and WealthSimple 2%. Pretty nice returns for liquid cash cushions! Continue Reading…