Financial Freedom - Basic Concepts

How to take the stress out of Financial Planning and achieve Financial Freedom

Financial Freedom and the term known as FIRE have become popular these days. Numerous blogs and websites are devoted to this topic. Some of the most popular sites discuss the journey to Financial Independence and Retiring Early.

My substack will discuss several basic concepts that I am planning to introduce on a friends podcast coming up this week. From there I hope to use this substack to delve into these concepts. Some of my goals include helping young people set themselves up for future success using these principles. With some planning and maybe a little luck I hope to help young people achieve Financial Freedom at young age, or at least set them up for financial success, whether they decide to apprentice into trades, go to university or even become CEO of their own enterprise. These basic concepts will help setup success and take the stress out of financial planning

Recovering from your Past Self’s Mistakes

1. Payoff Credit Card Debt or better yet never incur Credit Card Debt

2. Never to late to start saving

3. Take Advantage of Free Money

Setting up your Future Self Using three simple concepts

1. Pay Yourself First

2. Dollar Cost Averaging

3. The Magic of Compound Interest

Paying off Credit Cards

This is probably one of the most important ways to avoid financial stress. Credit Cards are a wonderfully convenient tool that have changed how modern consumers spend money. Credit Cards make cash almost obsolete, and they even provide protection against unscrupulous vendors, thieves and can provide peace of mind while travelling or when purchasing big ticket items. Ecommerce would not exist without credit cards, which conveniently allow us to purchase almost anything online with a couple clicks.

However Credit Cards come with a huge asterisk next to them. They are the most expensive kind of debt when you don’t pay your monthly bill on time. The interest starts accruing at 19-22% immediately and is applied month after month as you continue to rack up more charges and more debt. This form of legal loan sharking can easily spiral out of control.

Treat your Credit Card with caution, not like a magic ATM machine. Make sure you can payoff your credit card every month. Don’t let your spending get out of control and end up with bills you can’t afford.

If you do have credit card debt, find a way to consolidate that debt into a lower interest rate loan and switch to using your debit card if you can’t control your spending on a credit card.

Never to late to start saving

Savings is a big part of correcting past mistakes and setting yourself up for future success and you will see how easy it can be when we discuss Paying yourself first. The best time to save is now, this will provide you with flexibility and peace of mind in knowing you have a cushion for emergencies, it gives you the ability to plan for big purchase items and will get you on track for financial freedom. There really is no better way to take the stress out of finances. Savings allow you to avoid credit card debt, savings will get you through an emergency car repair or unexpected layoff, or many other curve balls that life throws at us, not to mention starting us on the path to retirement.

Take advantage of free money

Generally this comes in the form of an employer retirement plan, stock purchase plan or profit sharing plan. Many employers offer some sort of employee matching program for retirement savings. This can be as simple as an RRSP contribution match up to a percentage of income. These types of programs are generally use it or lose it, so if you don’t contribute you don’t get the employer match. Why would you not take the free money that is being offered to you? This is the perfect way to start saving by paying yourself first and also is the perfect way to dollar cost average into the Market or company stock, offered through these types of programs. This extra 5% or more will make a huge difference to your retirement savings over the long term. What better way to destress your finances.

Looking after your future self

Pay Yourself First

You can probably figure out what this means. Paying yourself first simply means taking the money you need to save out of your paycheque at the beginning, rather than trying to save what’s left at the end of the month. It’s best to do this automatically, through an employer retirement program or by setting up automatic withdrawals to an investment account at your bank. Generally speaking you should be saving a minimum of 10% each paycheque, but if you factor in savings for a downpayment, a vehicle, and other big ticket expenses 20-30% of your paycheque maybe more appropriate to truly achieve all of your savings goals. This method of saving is the least stressful and best way to setup your future self. You will not miss the money when it comes off the top of your paycheque and you don’t need to worry about creating and sticking to a budget to succeed at saving this way. Its automatic.

Dollar Cost Averaging

One of the safest ways to invest into the market is by matching your investing dollars with your income and investing small amounts into the market over time. Thus eliminating almost all market risk from the long term investment equation. By investing the same amount every paycheque it doesn’t matter if the investment is high or low, because over time you will end up purchasing more shares when the stock is low and less shares when the stock is high, providing you with an average cost that allows you to take advantage of dips in the share price and unless the stock goes to zero, you will rack up decent gains over time.

The Magic of Compound Interest

This is the magic that every young person should put to work ASAP. It so powerful that it can make anyone wealthy over the long term, if you start saving when you are young the compounding growth will allow those early savings to be worth much more than what you are saving later on in your career. You will end up with millions of dollars to show for it. The money you save between aged 18-29 will be worth more than all of your savings between 30-65. For Example if you were to save $1000 per year from the time you were 18-29, meaning you saved a total of $12,000 over that 12 year period. If you were able to achieve an 8% annual return you would end up with $327,000. On the other hand if you waited until you were 30 to start saving and started saving a $1000 per year at an 8% annual return, you would have saved a total of $36,000 over that 36 year period and would end up with $202,000.

As long as you are able to make an average return of 5% or more this magic fact about saving when you are young is true. Now imagine if you could just match the average return of the S&P 500 over the last 90 years, which is above 10%. This would yield $758,000 on your initial 12,000 saved up in your early career/student days.

What if you could save a bit more, perhaps tax free. The beautiful thing is the government has created these tools in Canada. The TFSA is the perfect tool for anyone to build wealth, the best part is that you can start contributing at 18. Stay tuned for my next post where I will dive into this subject in detail.

Of course the other big assumption you need to make compound interest work its magic, is to ensure you can make at least 5% average annual returns. Realistically you need to achieve 8-10% for the power of compound interest to create true wealth. Luckily the markets are essentially rigged to create returns of 8-10%. I’ll dig into that topic and explain how the market indexes are designed to return positive growth decade after decade and how simple Index Funds will deliver these returns, even better than buying individual high flying stocks such as the FAANG stocks or now MAMAA stocks. Stay tuned for future posts on these subjects.