That’s because, as with the magazine, we try to appeal to all generations and to savers and investors spanning the whole spectrum of net worths. Anyone who has read the MoneySense Guide to Retiring Wealthy (a new edition is about to be published) should be familiar with this philosophy of building wealth. It’s a life-cycle approach to investing in which the slow creation of wealth accompanies life’s natural stages—decade by decade.
Yes Virginia, this is not about getting rich quick but about getting rich slowly and surely.
Converting human capital into financial capital
Thus, most of us finish our educations and embark on our first careers while in our 20s. Eventually, most of us settle down, marry, start families and buy our first homes. Not all, I realize, which is why some of our editorial is geared to singles and the divorced or widowed.
What our readers do share is that we all start out with tons of potential—human capital and the capacity to earn millions over a lifetime of work—but with very little financial capital.
In fact, depending on the situation with student loans and credit cards, many may be mired in debt throughout their 20s. Job one is to get debt-free, or arrange our affairs so the only major debt is the mortgage on our home. As I’ve written elsewhere, “the foundation of financial independence is a paid-for home.”
As the decades pass, we endeavour not only to eliminate all debt, including the mortgage, but to build wealth. The process to do this I’ve called “guerrilla frugality,” a sort of super-frugality that makes a lifelong habit out of creating a surplus between what we earn and what we spend.
When we’re in debt, we practice frugality and apply that surplus to paying off the debt. But notice I wrote “lifelong habit.” That’s because the game doesn’t end once we’re free of debt. Being debt-free isn’t the finish line, it just means you’ve left the starting gate.
Now you need to spend a few decades building wealth. The best way to do that is to continue to be frugal, applying the surplus now not to debt repayment but to investing in financial securities—the kind of equity and fixed-income investments often profiled in the MoneySense Couch Potato portfolios. It so happens the cover story in the June issue of the magazine now on the newsstands describes three such low-cost portfolios. It’s written by Editor-at-Large Dan Bortolotti, author of MoneySense Guide to the Perfect Portfolio.
Time to retire the term retirement?
Yes, most financial institutions and the media seem to have settled on the term “retirement” to describe the ultimate goal of all this wealth creation activity but I’ve long believed a more useful term is “financial independence,” which I’ve contracted to “Findependence.”
What’s the difference? For starters, financial independence is a far more doable goal, especially for young people just starting out on this journey. When the traditional retirement is half a century away, it’s little wonder young workers fail to contribute to RRSPs or (in the U.S) IRAs.
But by changing the goal to findependence perhaps just 10 or 15 years away, it’s much easier to undertake the kind of discipline needed to eliminate debt and build wealth. Think of all those technology heroes from Steve Jobs to Bill Gates to Mark Zuckerberg. They achieved financial independence early in life but that didn’t mean they then retired and faded off into the sunset. Far from it: financial independence just means you have options and the means to pursue your grandest goals.
The days of working 40 years for a single employer, then living on a Defined Benefit pension plan, are just about done. Since the financial crisis hit in 2008 (plaguing us even now with Greece and Europe) none of us can count on lifetime employment. The sooner you reach the magic day of achieving financial independence—I call this “Findependence Day”—the more secure you’ll feel about money and the economic environment in general.
With more attention to fitness and rising longevity, odds are most of us will continue to work even after we’ve achieved findependence but—and this is key—we will do it because we choose to, not because we feel we have to.
From my perspective, this is what MoneySense has always been about. You can expect this philosophy to pervade this blog and to some extent the magazine as we go foreword.
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