By: Larry MacDonald
Jonathan Chevreau’s Findependence Day is an entertaining read. I picked it up for a review of some financial-planning topics but found myself flipping the pages to see what was going to happen next to the central characters. To make sure I didn’t miss some of the pointers, I skipped back through the text and drew up a brief summary of some of the main ones (see below). Perhaps it is serviceable as a companion piece to the book (which, as I mentioned, does not have such a wrap-up).
1) You can become financially independent without the big score in business or investing by spending less than you earn (cut out lottery tickets, booze, restaurant meals/coffee, cigarettes, candy, etc.)
2) To stay on track, pick a date to be financially independent (“Findependence Day”); to get there, have a financial plan and even an advisor (whose value added includes advice on taxes, household finances, estate planning, insurance, registered plans, and so on).
3) Get rid of all credit-card debt and consumer loans.
4) As a foundation for financial independence, buy a house and pay off the mortgage as fast as possible. A 30- or 35-year mortgage is fine if you use the prepayment and accelerated-payment options to extinguish within 10-15 years.
5) Don’t start investing until at least half the mortgage is paid off; for investing, consider a preauthorized chequing account (PCA) that automatically transfers 10% to 20% of your paycheque into an investment account in which you have set up a Lazy Portfolio (mostly a diversified basket of exchange-traded funds such as, if I may suggest, the Couch Potato Portfolio).
6) If your job is secure and comes with a good pension (e.g. government, teacher), emphasize equities; if job income is insecure (e.g. commissioned sales), emphasize bonds and other less risky assets (alternatively, dollar-cost average into equities through a PCA).
7) Don’t invest a large part of your financial portfolio in your employer – diversify your portfolio to avoid having too many eggs in same basket
Save and invest job bonuses and pay raises.
9) Run your old car on the road longer; pay cash for a new car by contributing regularly to a Tax Free savings Account (TFSA).
10) Multiple streams of income are good; consider REITs as an alternative to owning rental properties and the hassles of being a landlord.
11) Hold fixed-income investments and high turnover mutual funds in tax-sheltered accounts; hold stocks in taxable accounts (except for U.S. dividend stocks because they are not eligible for dividend tax credits).
12) Portfolio management tips: a general-purpose asset allocation is 60% to stocks and 40% to bonds; favor exchange-traded funds and some mutual funds over individual stocks (except stocks with growing dividends), tilt toward small caps and value investments; diversify into foreign stocks; use currency hedging if foreign holdings over 25% of portfolio; consider real-return bonds for inflation protection; reinvest dividends through company reinvesting plans; and so on.
7 Responses to “ 12 tips for financial independence ”
Good basic ideas and principles. Re point 6 – suggest increase equities to 100% near retirement when all the pension would have been earned. The pension is a huge perpetual real return bond whose NPV likely dwarfs any other asset. Re 7 – invest in employer savings plan if employer contributes substantially (i.e. get the bonus amount), then sell regularly as it vests.
By CanadianInvestor on Dec 15, 2008
CanInvestor
Good points, which J. Chevreau mentioned and I overlooked.
Larry M.
By Larry MacDonald on Dec 15, 2008
Thanks for being the first reviewer to really “get” the fiction aspect of this book. As I explain in my blog today (www.wealthyboomer.ca) I did consider adding a short “What Jamie and Sheena learned” at the end of each chapter but ultimately decided not to because I feared jolting readers out of the “fictive dream” The irony is exactly what Larry so cogently observes, to the extent the fiction works, the danger is they gloss over the financial content. David Chilton and I describe the tradeoffs of mixing data dumps with fiction in a recent video interview housed at wwww.financialpost.com
By Jonathan Chevreau on Dec 16, 2008
Jonathan
Thanks for dropping by and your kind comments. I was almost going to mention the point you raised — that summaries of lessons learned at the the end of each chapter may have jolted readers out of the “fictive dream.” Perhaps then a summary at the very end? Still, readers serious about the personal finance thing likely would have done what I did, which was to go back into the book and review the relevant parts. Anyway, I’m sure the book will do quite well.
LM
By Larry MacDonald on Dec 16, 2008
They can do that, and don’t forget Theo’s Library at the back, which is just a two-page bibliography. It contains several other “financial novels” as well as some of the better non-fiction works I may have consulted in the research phase of the project. It all talks to the target audience. Advisors and sophisticated investors don’t need the sugar coating but some younger people may. There are lots of parents who are sophisticated investors themselves but their kids don’t want to read David Swenson or William Bernstein. So maybe it’s an xmas present, or a christening present or something to give to newwlyweds. Or it’s an auxiliary textbook for high school personal finance courses (they now exist) or university finance. We’ll see.
By Jonathan Chevreau on Dec 16, 2008
How much of these 12 suggestions are fictional suggestions and how much of it has actually been tested to help people achieve Financial Independence?
Are there any testimonial stories to support evidence that these top twelve have really worked and have been an instrumental foundation for anyone to create and maintain financial independence?
If so how applicable do you think these will be in the future, as the next 20 years will not be the same as the last 20 years.
Sincerley,
Concerned for peoples future,
By Adam S. Heinrich on Jan 18, 2009