Thursday, February 27, 2014

Rule #35 The Main Goal is Financial Independence, Not Retirement

"Let your money work for you. You don't work for money. That is exactly what Financial Freedom is..."
-Manoj Arora, From the Rat Race to Financial Freedom

My father asked me last month if I was retired for good.  Recently I started using the term 'retired' when people ask me what it is that I 'do".  I find it hard to answer the question to most people as I am not employed and I am not looking for work.  I have extended family members who, every time we meet, ask me if I've found work yet.  When I remind them that I'm not looking for work I get the feeling that they feel sorry me.  They shouldn't.  I quit my Professional Geologist career almost 3 years ago, at first to take a break from working as I was feeling a little burnt out, and then while off I decided I wanted to try something else... something with a slower pace.  I've taken up part-time Stay-at-Home-Dad and part-time Options Trader as my new vocations.  One doesn't pay well (at all!) and the other is an "Eat what you kill" type of income generation.  Both are certainly not as well paying or as predictable in their pay-out as my previous career.  While I do not have traditional work or income, I do have some growing dividend income and I can generate a modest return on my Options Trading account.  That coupled with Kim's paycheque provides a pretty good living for our family as it still allows us to save and grow our "save for later" investments.  With that said, we've never been focused on retiring in the traditional sense. We have no intention of working at the same job or career for 30-40 years and then stop working forever and spend our days golfing.  Thats just not what we want.  We've both taken mini-retirements to be home with our boys and we wouldn't have been able to do that if we socked all our money away for retirement at age 60.

Our focus rather, has always been on Financial Independence.  We define Financial Independence as having enough passive income now to cover a lifestyle that we are happy with without having to go to work for someone else.  We actually don't plan to stop "working" once we reach Financial Independence, but rather we will work when when want, where we want, and if we want as opposed to having to work to sustain a certain lifestyle.  Our plan is to have our investments pay our way.  This is in contrast to the typical pension most people strive for.  In order to get a standard retiree pension, employees are generally required to work for decades, in sometimes soul-crushing work, in order to get a pension for the last third of their lives.  By focusing on cash-flow producing assets such as dividend paying stocks in place of a pension, we do not need to wait til age 55-65 to turn a lump sum investment into a pension.  We've been building our non-employment cash-flow each year by buying what we sometimes refer to as "mini pensions" that we can turn on right now.   Since we've been aggressively saving and investing for over a decade now, we're well on our way to our goal and we hope to meet that goal at or ahead of schedule even as I pare back my employment income.  By aggressively saving and investing early, along with living on only one salary for over a decade, it has allowed us to transition from working for a living to working when we like.

Saturday, February 8, 2014

Rule #34 Find Yourself a Money Mentor.

"Try never to be the smartest person in the room. 
And if you are, I suggest you invite smarter people … 
or find a different room." - Michael Dell.

I never had a Money Mentor.  I've had a handful of technical and career mentors throughout my working career, some of whom have given me financial advice, but I've never had a formal mentor specifically for money.  By Money Mentor I mean someone who has been through the trials and tribulations of money management, specifically saving and investing, who can give a biased opinion of what to do with your money.  Unbiased opinions are nice, but biased opinions usually indicate experience and perhaps some specialization.  Their specialization usually comes from experience, training and real world dedication to a specific topic.  These people are the ones I want to learn from.  I wish I had had a Money Mentor early in my investing phase, about 15 years ago, to avoid the smacking I took during the "Dot Com Meltdown".  Someone who focused on slow steady cash-flow growth and not the buying and selling of in-fashion stocks or mutual funds.  It probably would have helped me not lose two thirds of our money in the 2000 big tech meltdown, assuming I would have listened of course.  While I feel like I've learned a ton by personal experience, someone there to point me in the right direction and help me cut through the bullshit would have been a huge asset.  I have mentored a couple of people in the last 7 years on the topic of money, pointing them towards specific investing styles and regularly discussing stocks, sectors and ways to invest their money efficiently.  Ultimately though, they have to own their own financial decisions.

My experience has been that most people like to talk about what they do.  Money may be a bit of a taboo subject at dinner parties, but I've found that one-on-one, people who understand money principles are usually generous in sharing what they know, especially if they know you are serious and you have done a bit of homework before approaching them.  Good mentors of any sort won't hold your hand or give you solid "must-do" recommendations.  They will help you sift through good and bad options but they wont tell you what to do.  Taking personal ownership over your finances is very important and a good mentor will emphasize this.  The mentor is there to bounce ideas off and he or she will lay out the pros and cons of such decisions, but ultimately you need to own the financial decisions you make.

My advice to young adults, or even older ones starting to invest, is to look around your network (both friends and professional) and even your parents network and identify people who have their shit together with regards to money.  Are they a savvy Real Estate investor? Stock investor? Trader? An Entrepreneur? Do any of those appeal to your interests?  Have they been doing it for awhile and have they experienced a downturn in the market?  The Downturn in the market thing is huge.  This is where the Experience is a very big asset.  Its relatively easy to make money in an upwardly trending market, but its what we do in downturns that make the difference in the long run.  Its where the opportunities are and where people tend either lose the most or make the most.  A sober second opinion can really make the difference.

Find yourself a mentor.  You'll be glad you did.

Friday, January 10, 2014

Rule #33 Don't spend all of that salary increase

One thing that people entering the workforce often do is adjust their lifestyle upward to match their paycheque.  They live at a level they can sustain with their income and as they receive pay raises they typically adjust their lifestyle incrementally further upward.  This presents itself, often unnoticeably, in the form of bigger houses, newer/fancier cars, eating/drinking out more, gym memberships, more vacation trips South, more electronic doo-dads, more/bigger gift giving etc.  It is also commonly associated with higher personal debt levels as banks will loan more to people as they make more.  This gradual incremental edging up of lifestyle expenses is often referred to as Lifestyle Creep.   There is typically an increase in the cost of living due to inflation, but usually "lifestyle creep" is a result of voluntary spending more than the inflation amount.  People then become trapped in a higher cost lifestyle that is difficult to pull back from once they get to that spending level.  It is very difficult to save and invest for the future if all of your pay increase is going towards Lifestyle Creep.  The other concern is what happens in the case of someone losing their job, getting a demotion, or changing to a lower paying job?  How about if you allocate some of that salary increases to saving/investing/debt reduction each year?  If you never let your lifestyle creep up with your salary, it will be easier to put that money to good use now.

Early in my career, the on-the-job learning curve was fairly steep, and so were the salary increases.   My base salary increased about 30% within the first 3-4 years as my value to the company went up.  Because I had gone from student living to full-time professional employment, the initial bump from TA wage to Professional salary was huge.  We began living on my salary alone and investing Kim's.  Our lifestyle had already skyrocketed from starving (but happy) students to full-on mature adults and we were living a very comfortable lifestyle.  We decided that any salary increases that were over and above the general cost-of-living would further go towards savings, investing and paying down any bad debt (debt that doesn't result in fiscal betterment).   So when I began receiving pay raises in the 5-8% per year the first few years that I was working, we were able to max out RRSPs, pay down debt, and save enough money to buy a used car with cash.  Once we were saving the amount we wanted to, we then started living on some of the salary increase but we have always used some of the pay increase to increase savings.  We have rejected lifestyle creep as best as we can.  We've done our best to reject spending money just because we have more of it.  If we had spent more of the money each year as we made it, it would leave very little wiggle room if, for some reason, our pay had decreased.

The way we ensured that the incremental raise on my paycheque went towards savings was to have automatic withdrawals set up on our account that would come out the exact same day as my paycheque would get deposited into it.  That way the additional money was not just sitting there waiting to be spent.  The money had already been allocated to our goal of saving, investing or debt reduction.  As pay raises came over the first 5-6 years of my professional career, so did our contributions to our investments.  At present, we've hit a happy medium where we're very happy with the amount we're contributing to our savings and investing accounts, so now when we get a raise, we are a bit more free to spend the money since our financial goals are being met, but we've been able to live well below our means for some time now and this financial manoeuvre has helped us set up a base that will help us reach Financial Independence without "doing without" in our later years.