Tips For Financial Independence

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.

Comments

[bigmoney:]

the middle class is dependent on corporate health insurance, so I am not sure how they can achieve financial independence. A uninsured hospital stay can chew through alot of cash in a hurry.

2008 Dec 17 09:06 PM

[granger:]

good, quick list, thank you

2008 Dec 21 02:48 AM

[User 328446:]

Thanks for these tips.

It seems to me that JC's book was intended for young people with informed parents. Great! However, for those of us that aren't quite boomers (41), single,not from affluent families and dedicated to career, it does raise a few questions.

I finally bought my first house 2 years ago, finally obtained a position where I earn a good wage. Should I really wait until my house is 1/2 paid off before I start investing?

My employer is government - What do you mean "Don’t invest a large part of your financial portfolio in your employer?"

Although I have made significant positive changes in my strategies, I still have much to learn but I feel that the clock is ticking quickly away. Surely these questions will appear amateurish to you, but please keep in mind your answers will probably help me more than the people that are already fully aware of what they're doing and the path they're on.

I hope to hear from you!

Thanks and Happy New Year!

2008 Dec 30 09:44 PM