The Practical Guide to Financial Independence

Building wealth and being happy doing it.  Sounds like nice things to aspire to.

I found someone else that wants to help you too:  Graeme Falco.

Graeme reached out to me recently to share his new book appropriately titled Building Wealth and Being Happy: A Practical Guide to Financial Independence..  Although Graeme is not a financial advisor he does seem to know a thing or two about money. He’s a chartered professional accountant.  Building Wealth and Being Happy provides an overview of financial independence, why you might want it, and the various paths you can take to get there.  Before I giveaway three (3) paperback copies of Building Wealth and Being Happy I took some time to read Graeme’s book and interview him.

Graeme, thanks for the books!  Nice of you to follow my site as well…

Thanks for having me Mark! I’m happy to be here and have always enjoyed the enterprising and enthusiastic tone of your website. For any newcomers, let me start by defining financial independence (“FI”): it is the amount of wealth needed so you are no longer dependent on an active source of income like a job; you can rely on passive income generated by your savings. My book discusses all sorts of strategies to get to FI – stocks, bonds, gold, real estate, and what works and what doesn’t work.

Historical data tells us that a good FI goal to shoot for is a 4% safe withdrawal rate – i.e. if you have a $1,000,000 portfolio of stocks and bonds then you can live off $40,000 per year.  As you mentioned though the key is to be happy not only once you’ve reached FI, but while you’re building wealth as well. And that’s why I spend a fair bit of time diving into studies done on the relationship between money and happiness in the book.

As a reader of this site, you already know my game plan for financial independence – get out of debt while saving; investing in a low-cost but diversified way; letting time in the markets do its thing.  This sounds simple but it’s not easy – why?

It really is all about persistence.  You need time for compound growth to get to work for you – so save early and often.  It’s similar to losing weight: you can’t lose it all in one month or even three months. Meeting your goals takes dedication.  It takes doing the small, sometimes unpleasant things, repeatedly over and over until it evolves into a way of life.

One reason it’s difficult to become a regular saver and investor is that as a species we don’t do a great job of thinking about our future selves. Historically, it was advantageous for us to use up all of our scarce resources; for example, to eat all the available food as quickly as possible in case it spoils.  It shouldn’t be that way with money of course.

I think it’s important for us to separate the adrenaline filled rush of new and exciting things or situations from real happiness. Many people get stuck in a loop – the hedonic treadmill – of loving their fancy new vehicles. But in less than a year, that car becomes just “the car”, and they seek out that same warm feeling they got for another one.  The discussion on happiness studies and how to avoid getting stuck on the hedonic treadmill is covered in Chapter 1.

In Chapter 3 you tell investors to trust the stock market but be wary of financial advisors.  What are your thoughts on DIY (Do-It-Yourself) investing using indexed funds versus using the help of a fee-only advisor?  What using a robo-advisor as a hassle-way free to invest?

I’m very much a proponent of a low-fee, DIY approach.

I have nothing personal against advisors, but I do subscribe to long term market efficiency, a hypothesis developed by Professor Eugene Fama that asset prices fully reflect available information. Andrew Hallam’s dog-walking analogy describes it very well:  the owner represents a company’s true underlying value.  The dog on the leash represents that company’s stock price. Throughout the course of the walk, the dog often falls behind or runs ahead of its owner (and yes, some dogs have much longer leashes than others).  When they end their walk at home, the dog and owner are side by side. Using this analogy, in the long run, the price of a stock will always reflect what it is really worth – not the day-to-day emotions of investors.

The implication of this – it’s very difficult for advisors to beat the market.  There are some caveats and extreme situations where using an advisor may be warranted, but I don’t believe they’re the best option for most people.

Robo-advisors are interesting.  There are benefits for sure but I’m not entirely convinced.

Fee-only advisors might work for some people who get a headache just looking at their bank statements.

If you read my book, you don’t need to pay for any advisor: robo, fee-only, or otherwise.

I guess this might be a good time to ask you this:  how do you invest and why?

Low-fee, broad based index tracking ETFs (Exchange Traded Funds) of course!

I think equity and bond ETFs are a great, simple solution for the average investor. My book has both US and Canadian information, so I go into detail about how to use your RRSP and TFSA in a tax efficient manner.

Specifically in the book, check out Appendix H: Is currency risk a part of a diversified portfolio?  I make a case that because Canada’s stock market is such a small part of the world’s stock market, Canadians need to question whether their portfolio is truly diversified.

I’ve asked other contributors to this site this question – I will ask you:  should we be paying off our mortgage first OR invest while paying off the mortgage?

Great question! This is a win-win situation – there’s no wrong answer.  Paying off the mortgage provides you with a guaranteed return because you save yourself future interest costs. Of course, investing in the stock market could provide a return even greater than that.  There’s a lot more detail to cover on that question in my book, but for most people there’s probably some middle ground between the two options to be found.

Given the high costs of housing in Canada today, it might be some time before young people get to ask themselves that question. Don’t worry, Building Wealth and Being Happy goes into detail on whether you should rent or buy a place to live. For a few of the big cities in Canada right now, the answer leans heavily towards rent. But choosing a place to live isn’t strictly a financial decision.  There are emotional and lifestyle needs that fit into that answer, and Building Wealth and Being Happy discusses those as well.

Appendix B was interesting – the pitfalls of dividend investing (and you know I’m a dividend investor). What advice do you have for me and others investing this way?

I promise I don’t hate dividends! I do smile when I get that cash in my brokerage account – and that’s part of the problem. One of the reasons why I don’t prioritize dividends goes back to the efficient market hypothesis we discussed above. It’s the same reason why financial advisors aren’t able to beat the market: information about companies’ dividends and expectations for dividend growth is publicly available information and is already factored into the underlying stock price.

There are other reasons why I’m a proponent of a total return perspective, which dividends are a part of (capital growth + dividends = total return), but I won’t spoil them for you.  You’ll have to read Appendix B to find out!

Lastly Graeme, what final message do you have for readers for their FI path?

Don’t burn out!  I suggest you experiment to find the right balance between saving and spending.  Some people strive for FI as their holy grail of happiness. Upon reaching their goal these same people sometimes wake up to find out it’s just another day. Achieving FI won’t solve all of your problems. If you’re miserable now, you’ll be miserable no matter how much money you have. The good news is – you can strike a balance and you don’t have to wait to improve your life situation.

I hope readers enjoy the book and use the information to carve out their own path to FI.

FREE book and giveaway

Building wealth and being happy doing it is something we’re actively working on.  The balancing act isn’t always easy but over time we see progress – something my wife and I are proud of.  I want to thank Graeme for this interview and the books I’m ready to giveaway to a few lucky readers. I’ll draw three names at random over the next few weeks.  Enter below!

a Rafflecopter giveaway

Graeme has also, for one day only, made the e-book version of Building Wealth and Being Happy: A Practical Guide to Financial Independence FREE on Amazon on Monday, January 30^th.  Go grab it while you can!

You can read his site here and follow him on Twitter here.