I’ve occasionally come across people that refer to financial independence (FI) as ‘fuck you‘  (FU) money.  While if you hate your boss that might sound appealing, in my case I won’t bother…I like my boss.  Yet that did get me thinking, what are the benefits of going for financial independence before you ever get there. In my short journey, this is what I’ve learned.

  1. Open Your Month Money – Imagine for a moment that you had a 7 year worth of income emergency fund, do you think you would speak up more at work?  Well hell yes, that is exactly what happens with me.  I’m still respectful of others, but I always speak my mind now.  Why?  What’s the worst thing that can happen?  I get fired and I’ve got seven years of cash before I need to have another job.  The reduces my stress about speaking up hugely.
  2. I Can Walk Away Money – In negotiations the one party that can walk away from the deal holds most of the cards.  Which is why I was always schooled to never fall in love with a particular house, I can walk away from the deal.  Now could you do that with a job offer?  If you have lots of bills to pay, likely not.  Yet if you are on your way to FI, then you can start playing a little more aggressive negotiations. Ask for a raise before you start? Sure.  An extra week of vacation? Why not.  What can they do? Say no.  Then you can decide if you still want that job with out the extras.
  3. Can Earn Less Money – Could you handle a 20% pay cut if you were told you would lose your job otherwise?  How about 50%? I could handle either if I wanted to, since my expenses are much lower than my income. In fact, for three different jobs now I’ve chosen to earn less money than I could make.  Why? In some cases, what I wanted out of the job wasn’t money related.  One job I picked because of the geographic location (I wanted to move closer to my extended family), another I wanted the free time to pursue a personal interest and the last one I picked because I really wanted to work for a particular person.
  4. Stress Free Money – People are somewhat surprised when I tell them I never worry about money, but it is true.  I like to talk about money, think about where to invest it, run projections on when I will be FI, but I never worry about it. How? My bills will be paid regardless of if I get up and go to work this morning because of my savings.  If I get hit by a bus, my family will be fine (financially speaking) without me. I know exactly where my mortgage payment could come from if my paycheck was late a week.  Do you?
  5. Take the Extra Risk Money – Starting a small business can be a gut twisting exercise because of the risks involved.  In most cases the worries tend to focus around getting the startup cash and being able to afford to put in some time to get the business off the ground while you don’t take any profit.  With a large pile of savings, neither issue is a problem anymore.  You can take a unpaid leave from your work if you need to, you can finance the business startup costs if you want.  In summary, you can take more risk in other areas of your life since you have a financial buffer.

So what you have you learned on the your trip to FI?  Does FI = FU for you?

It’s Always the Right Time

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.

My wife has a very interesting negotiating tactic – special occasions.  Generally, these special occasions involve food, and are not foods we would normally eat.  A special occasion could be anything, for example, we somehow ended up at Harvey’s last weekend for double cheeseburgers because it was a holiday.  Now don’t get me wrong, Harvey’s hamburgers are probably the best hamburgers out there, but I could have made comparable food at home, which would probably be a little cheaper and healthier.  Another of her favourite “occasions” is when she is sick, in which case normally pizza is the only thing on the menu (although my home-made pad thai is making up ground on it lately).

These situations are of course ridiculous – we both understand this, but about 90% of our lives we a pretty healthy diet.  The odd time, we really just don’t feel like eating this, and these “occasions” are just a way to have things that we normally wouldn’t have.

I think that this way of thinking is similar to how people get into debt trouble.  Lots of people decide that they “need” things and use this need as an excuse to buy whatever this perceived need is.  These “needs” could be things like vacations to relax from a hectic life, a bigger house to hold all the stuff you own or a myriad of other “stories” made up.

Personal finance is no different from most areas of life – if my wife and I never ate “bad” food, we would probably be a little less happy, similar to not being able to buy anything “fun”.  Some people are able to justify a purchase, whatever their economic standing.   I don’t think I’m any better in this way, all I know is, if my wife and I ate unhealthy food as often as we found occasions to eat it we would be poorer from the food bills and bigger than we would like to be.

What it boils down to is knowing your weaknesses and ensuring that whatever justifications you have made up for a purchase don’t put you in a position that you can no longer achieve your financial goals (or in my case, allow me to walk up a flight of stairs).

So, now you know how my wife and I allow ourselves to completely destroy our otherwise impeccable diet.  I’m wondering if we’re on our own in having peculiar methods to otherwise mar a perfect plan?  Have you ever talked yourself into buying something that you thought you needed, but really didn’t, only to regret it later?

Book Review: The Contrarian Investor’s 13

I had two reasons for writing about this book. The first is that it fits well with the comments on my last blog post, where a couple readers discussed their investment strategies. The second reason is that I will present it to the grade 9 class that I taught on behalf of Junior Achievement and introduced to the stock market simulation. It’s the one book that I felt was most helpful with giving me the understanding and confidence I needed to start investing in stocks.

Benj Gallander, the author, is an independent investor who has been actively investing for over 25 years. He has learned a lot along the way, and he shares his knowledge and perspective in this book, in public speeches and in an investment newsletter. (You can find out more here: Gallander puts forward 13 rules that he feels have contributed to his success. When starting to invest, most people learn in baby steps, doing one thing at a time and adding other components as they improve in sophistication. That’s why I’m only going to comment on the most general of the rules, but I’m sure the other rules are equally applicable.

Rule 1 is: Prepare to think differently. Human beings seem to have a strong herding instinct. We tend to feel most comfortable doing what others are doing, so it’s difficult to stand out by taking an opposing view. Buying when everyone has been buying is what lead people to buy near the top of the tech bubble, and when selling was more common than buying, the stock market crashed. A contrarian, someone who buys when the majority are selling and sells when the majority are buying is most likely to buy low and sell high. Fear and greed are the two emotions that most often move individual investors to action. But those two emotions usually cloud good judgement and cause investors to make mistakes. Think for yourself and stick to your discipline.

Rule 2 and rule 6 are related and both reject the prevalent theory about the mechanical model of how stock market works. The stock market is not as simple as flipping a coin (heads the stock rises, tails it falls). That theory is known as the Random Walk theory, but it doesn’t reflect the huge run ups or precipitous crashes that exist in reality. That’s why calculations of risk represented by standard deviation, or the derivation of correlations, don’t reflect the true extend of potential outcomes. The stock market is a riskier place than mathematicians (or economists) seem to realize.

Rule 3 is to diversify, but not to overdiversify; rule 8 is to look to hit home runs in the stock market. Both of these rules advise against mediocre returns. If you buy an index fund, you are guaranteed to earn the market return (less fees) each year. If you want to beat the market, the most likely way is to own a focused portfolio (fewer than 30 holdings) and to aim high. Of course, there’s a real possibility of under performing the market, too. That’s the cost of making your own decisions.

Gallander also lays out his method of evaluating companies. His strategy could be called “deep value”. He looks for companies that have had some disappointing results or some bad news, but appear able to turn around, hence producing impressive stock returns. A number of the companies they’ve chosen to invest in have been taken over in mergers or acquisitions, profiting the investors and vindicating the research. Their returns are very impressive (over 15% per year compounded for last 15 years) and I believe that their strategy works. It’s somewhat different from my personal strategy, so I haven’t adopted it wholesale, but I feel that I have benefited from seeing behind the curtain.

What is the source that’s been most helpful to you in learning to invest? Do these rules fit with your strategy?