Financial Freedom

Financial literacy was not a topic that we discussed in my family. There was always a core value of “spend less than you earn” but I did not received a lot in terms of practical tips and tactics for how to lead a financially strong life.

As I grew into adulthood, I made a lot of mistakes. Many of them to do with credit cards and borrowing money that I could not afford. I learned the hard way about the realities of compound interest and how it can either be your greatest ally or enemy: especially when it is working against you, at 18%.

Three years ago, after my separation, I became the sole financial provider in my family; and I realized that I could not continue to live with my head in the sand. I had to learn how to be financially strong and strategic: especially if I wanted to be a good role model for my daughter.

I started to ask questions of friends and family who seemed to have it figured out. Some of them did. Many of them did not. In Canada, we are a country of citizens living with an extremely high level of personal debt. Financial literacy is not a common strength. It is a common weakness.

Over the years, I have read a number of books to try and raise my level of financial acumen; and, so far, I have landed on two that are my favourites. Combined together, I think that they provide a well rounded picture of what you need to know in order to take control of your financial future.

Smart Women Finish Rich by David Bach

David Bach has written ten consecutive New York Times bestsellers with more than seven million books in print. Although I dislike the flashy title, the basic principles of his approach are incredibly practical and helpful. His underlying message throughout the book is that you do not need to earn a lot of money to be wealthy. You just need to be smart about how you allocate it. The book is designed around a seven step plan for achieving financial security.

Step 1: Learn The Facts – And Myths – About Your Money
There are three primary myths that he takes apart in this chapter: make more money and you’ll be rich; someone will always be there to take care of you; and the government has inflation under control. All of these are false. You need to spend less than you earn and plan for the future, no matter what situation you find yourself in.

Step 2: Put Your Money Where Your Values Are
Bach describes an aspect of personal finance that many people skip over and do not think of as important. He encourages the reader to get very clear and identity personal money values. This is done by asking yourself the question, why is money important to me? For example, it could be that you value security, freedom, confidence, helping family, and independence. The answers are very personal and they will be different for each person. Why do this? When you are crystal clear on your core money values, they will drive your short and long-term financial goals.

Step 3: Figure Out Where You Stand Financially … And Where You Want To Go
Although this step can feel overwhelming at first, Bach boils down to “just get started.” Collect as much financial paperwork as you can and organize it by income, debts, and assets. This step is absolutely vital. Why? Being organized financially and knowing where you stand allows you to plan for your future. Once this is achieved, you can set specific and measurable goals, mapping out steps towards achieving each one.

Step 4: Use The Power Of The Latte Factor … How To Create Massive Wealth On Just A Few Dollars A Week!
This chapter lays out Bach’s theory of the “Latte Factor.” The basic idea is that if you trim out unnecessary spending (such as a morning latte), you can save a huge amount of money over time. For example, saving $5 each weekday could result in $100 for debt repayment or savings each month (or $1,200 a year).

Step 5: Practice Grandma’s Three Basket Approach To Financial Security
This is the longest chapter in the book, but it boils down to a very simple concept. Each month, pay yourself first. Set up automatic contributions to your security basket (insurance, emergency fund), your retirement basket (401(k) or RRSP contributions) and your dream basket (a trip, a renovation).

Step 6: Learn The Nine Biggest Mistakes Investors Make And How To Avoid Them
Most of these mistakes are either psychological (“giving up”) or debatable (30 year mortgage). In a nutshell, the best way to avoid most investment mistakes is to be informed, to set up automatic contributions, and always think about investing from a long term perspective.

Step 7: Follow The 12 Commandments Of Attracting Greater Wealth
The final step is some basic career management advice. Bach outlines the twelve steps to finding clarity in your work, securing fair compensation, and giving back.

The Millionaire Teacher by Andrew Hallam

Millionaire Teacher is written for those who are looking to enter the stock market for the first time. It is designed for a reader with little to no knowledge about investing. Hallam is very skilled at taking complicated investment concepts and boiling them down into easily understood, digestible advice. He outlines the benefits out playing the long game to build wealth through compounding returns and establishing a portfolio of passively managed index funds, rather than actively managed mutual funds.

I like this book as a companion to Smart Women Finish Rich, as it provides the tools to take action, once you have your financial house in order. It demystifies the world of investment and provides simple steps for taking back control of your financial future through making informed investment decisions.

Rule 1: Spend Like You Want to Grow Rich
This chapter covers what it actually means to be wealthy.  Hallam provides his own definition of what it means to be ‘rich’ or ‘wealthy’ beyond houses and cars. This section also looks at how to buy a car as an appreciating asset (hint: DON’T BUY BRAND NEW) and how Hallam achieved early retirement through being strategic with his money.

Rule 2: Use the Greatest Investment Ally You Have
This chapter talks extensively about the benefits of compound interest and the power of combining compound interest with long term investing. It clearly makes the case for starting early (a good lesson for our kids).

Rule 3: Small Percentages Pack Big Punches
Hallam makes the case for why actively managed mutual funds are a terrible investment. He demonstrates how the fees you pay add up and how they will ultimately put you behind when seeking to grow your investments.

Rule Four: Conquer the Enemy in the Mirror
In this chapter, Hallam demonstrates how our own behaviors work against us as investors. This chapter highlights how to not get caught up in emotions and how to remain patient when investing in index funds.

Rule 5: Build Mountains of Money with a Responsible Portfolio
This chapter clearly explains the difference between stocks and bonds.  Learn about level of safety or risk that comes along with investing in either and the importance of diversifying your index portfolio between different markets.

Rule 6: Sample a “Round the World” Ticket to Indexing
Learn about specific examples of index portfolios from different countries and the variety of ways to build an index portfolio.  This section provides helpful information by providing examples of specific index funds and how to start investing.

Rule 7: Peak Inside a Pilferer’s Playbook
Banks and financial advisors will actively try to guide you away from investing in passively managed index funds. This chapter provides some tips on how you can respond to a financial advisor’s advice. He also outlines how you can now take your money and directly invest in index funds through online platforms, such as Wealth Simple or Modern Advisor.

Rule 8: Avoid Seduction
Hallam details mistakes he has made over the years and he describes how easy it is to be seduced into seemingly ‘easy-money’ investments.

Rule 9: The 10% Stock Picking Solution…If You Really Can’t Help Yourself
This chapter is for those people who want to venture outside of index fund investing.  Hallam provides basic information on how to make decisions when picking singular stocks and indicators of a smart buy.

Taking the time to read these books, along with other blogs, articles and resources, has proven to be a really empowering experience for me. It may sound strange that learning about finance can be fun but it is true: especially when the penny starts to drop. There is nothing better than feeling in control: to make plans for the future and dream about what is possible, rather than worry about the unknown. Do you have any books or resources that you recommend? If so, would love to hear about them.

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