Monday, June 3, 2019
My Take on Financial Independence
It seems like such a lofty term. Financial Independence. What does that even mean? You could ask 5 people and get 5 different answers. One definition is “Financial independence means you have enough wealth to live on, without working. The income you earn without having to work a job is commonly referred to as passive income. There are many strategies to achieve financial independence, each with their own benefits and drawbacks.” I personally quantify financial independence as the ability to live without worry of financial hardship due to circumstances beyond your control. Whatever your definition of financial independence is, the sad reality is most of us never achieve it. Today I will look at some hard stats regarding financial independence, but also show some reasons for our current state and remedies to it as well. I think it is a discussion worth having.
Most people never achieve financial independence
Here are some nasty stats for you about financial independence. We are officially the highest earning generation ever.
The average American household earns roughly $71,258. In Canada, the number is $70,336. Also, unemployment is at historic lows, with levels this low not being seen in almost half a century.
Sadly, we are also the most indebted generation ever. Our amazing neighbors to the south have a startling average household debt of over $132,529. This includes credit cards, loans, student loans, and mortgages. The average American household also owes over $16,061 in credit card debt and $28,535 in automobile debt. We up here in Canada do not fare much better with 44% of Canadians less than $200 a month away from financial disaster. The average “non-mortgage” debt for Canadians is roughly $29,312 per person. Troubling statistics indeed.
Even sadder is that these debt numbers are being heaped on some of our youngest citizens in the form of student debt. The average Canadian university graduate stands to leave school with over $26,000 in debt. Our American counterparts are leaving school with an average of $37,172 in student loan debt.
This leads to some troubling stats in other areas as well. With the amount of money needed to service this debt, only about 1/3 of Canadians are taking vacation time on an annual basis. The only logical explanation for me would be that they cannot afford to. What this leads to is another dramatic consequence, with 1 in 4 Canadians have left work due to stress-related reasons. Work is the 2nd leading cause of stress amongst adults in our country behind only one other issue, you guessed it, your financial situation.
As we get older it doesn’t seem to get much better. The average American has only $84,821 saved at the age of retirement. Even more shocking is that 1 in 3 Americans have less than $5,000 saved when they retire. This is far below what is needed for a comfortable nest egg. In Canada, 32% of our population is nearing retirement without any savings whatsoever. The vast majority of our citizens don’t even know what they need to save for a comfortable retirement.
Reasons for all this
While I do not claim to know the exact reasons for these troubling statistics, I do have some theories of my own.
Cost of living
I stick to what I call the “shopping cart test” for this one. We are all aware of housing prices going through the roof. We also know you can’t buy a reliable car for dirt cheap prices anymore. My “shopping cart test” refers to the cost to fill up your shopping cart. I remember going grocery shopping with my mom as a kid and her filling it to the brim with food for around $80. A full shopping cart these days will run you several hundred dollars if not more, depending on your selections. To feed a family every month approaches mortgage-sized payments. Add to that transportation, housing, and utilities and you are looking at a small fortune just to live day to day.
Dissolving of unions
I am not going to get into the validity of organized labor, but whatever your opinion on unions, there is one startling fact about their existence. As their place in our society has slowly faded away, our citizen’s ability to fund their retirements has also gone south. Organized labor is responsible for fighting for workers pensions, health care and other benefits such as vacation days. As they have gone wayside, so to have the benefits that they fought for. Coincidence? I don’t think so.
Lack of financial education
The lack of financial education in our schools is alarming. Most students enter the workforce without knowing what the difference between a checking and a savings account is, let alone how to invest for the future. It is this ignorance that allows the younger generation to spend their twenties, and increasingly their thirties, playing debt catch up. The effects of compound interest and reverse compound interest are not known and therefore shockingly applied to the younger generation without mercy. This leads to more youth staying home longer, sometimes well into their thirties. A task as simple as budgeting is often foreign to most people and this has dramatic consequences.
Solving these problems is far from simple, but it is also not that difficult either. It all starts at home, during the day-to-day. We must make a conscious effort to know what we are up against and take the steps to negate it. I have 5 simple tasks we all can easily understand and apply to our lives.
1) Debt kills financial independence, avoid it, eliminate it, at all costs
I cannot stress this enough. The families I meet that carry debt throughout their adult lives, struggle to get by. I recently released a government of Canada statistic stating that the average Canadian spends 15% of their take-home pay per month on servicing non-mortgage debt. They also spend on average 7% of their take-home pay on servicing the interest on that debt alone. This is completely unacceptable. We are too heavily taxed, with too high a cost of living to support this kind of system. Reverse compound interest, or interest paid on debts, is absolutely crushing our monthly cash flows and prohibiting us from saving money. It is unsustainable and leads to the downfall of families. If you have debt, getting out of it must be your top focus.
2) You must save money, regularly, period
It is also not enough to just stay out of debt, you must save money on the regular. The reason is simple. If you don’t have savings you are at risk of a disaster ruining your financial plan. It is also important to understand that you must save money that you have no intention of spending. Yes, you read that right. You must save money that you may never use. What do I mean by this? Tomorrow is not promised to any of us. Many people die before they hit retirement age. While I believe firmly in savings goals, I also believe in saving for just saving’s sake. The reason is simple. It is too far away, too distant, to “imaginary,” to save for something like retirement. That’s the reason most do not. It just doesn’t seem like something that needs to be addressed right now. The problem is you’re wrong. It must be addressed, at all phases in life. How you address it when you are younger is by simply saving money, just to save it. Not for a trip, or a car, but to have it. If that can be done, retirement goals will not seem as lofty as you get older.
3) You must invest your money
With savings comes investing. A little thing called inflation will erode your money as time goes on. Ten years from now, your dollar will be worth 80 cents. 30 years from now it will be worth even less. Whatever your feelings are about the stock market, you will need its power to reach your goals. If you are not saving and investing your money, you will get crushed by inflation and you probably will not be able to save enough to reach your financial independence goals.
4) Get used to buying insurance
Seriously, get used to it. Personally owned insurance is the key to most peoples success. The reason for this is simple too. While you are growing your wealth, you will not have enough resources to weather a financial storm. Nothing derails financial plans and financial independence faster and with more efficiency than health problems. Injury, illness, and death ruins families. We are dependent on 2 incomes to get by these days, so if one of them is gone, the other person will suffer greatly. While no one likes paying for insurance, it is, in fact, one of the most important things you could do for your financial plan. Insurance saves families from financial ruin and as much as we may not like paying for it, there is not one family I have met that has been financially ruined because of buying insurance. I have seen many families ruined because they didn’t have adequate coverage. That’s a fact.
5) Pay off your home
We need to escape the notion of our house as a piggy bank. It actually makes me sick. When did the idea of borrowing against our home become so normal? The idea of owning a home is to actually OWN IT. Not refinance is multiples times in our life. When we do that, we only make one person wealthy, the bank. Carrying expensive mortgage costs into retirement is dangerous. It is far too costly, and seniors’ incomes are far too low to handle this kind of burden. If you do not save one cent for retirement but have a paid off mortgage, you have accomplished something decent. We all need somewhere to live and a paid off home is the cornerstone of any diligent financial plan.
I believe financial independence is obtainable by all of us. I also believe it won’t be easy. The outside forces of consumerism, tough economies, workplace stress, geopolitical turmoil, and the dreaded Joneses next door are all working against us. We must work within our zone to find solutions to these issues. If we can ignore the outside world and focus on each individually making our own lives better, I believe as a collective we can make financial independence a reality. It all starts with one action, one decision, one move in the right direction. Let’s get it!
“The greatest gifts you can give your children are the roots of responsibility and the wings of independence.” – Denis Waitley
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