Achieving your Financial Orbit with Michael Anger #FinanceFriday
When I was 10 years old, I was introduced to the concept of compound interest, and it fascinated me. At my uncle’s arrangement, my cousins and I spent part of our weekends earning money by mowing lawns and shovelling snow for the older residents in our neighbourhood. Our total earnings might have amounted to perhaps $300 or $400 each in a year; not a lot by 2015 standards for an adult living in Toronto, but for a pre-teen who had put in the manual labour to earn every dollar of it, it seemed to be an enormous sum. One day, this same uncle took my cousins and I, along with our savings, to the bank. On the way, he explained that we were going to purchase Canada Savings Bonds with the money, and that by storing it for a few years instead of spending it all today, we would receive more money later. That sequence of events taught us a number of lessons that have turned out to be pivotal in my life.
Earning money by providing valuable work in exchange for it was easy to grasp, but discovering that the small amount of money I’d earned and saved up could also make money without me working for it was an epiphany that I’d ponder and reflect on for years, although without much further thought to the application of it, among all the usual experiences of growing up as a child. Money wasn’t a particularly high priority in my world at the time, nor do I think it should be for children, but the awareness of it was important. In my later teenage years, books on financial planning and real estate investment were as gripping for me as any best selling fiction novel at the time seemed to be for others. My interest came not from a desire for money specifically, but from expanding upon the compound interest epiphany, and from discovering new concepts and alternative ways of earning a living that didn’t follow a typical straight-line career path. It would still be another 8 years or so before I actually started actively investing in real estate, but I was absorbing the ideas and letting them coalesce in my mind.
As I wrote in my previous article, it’s important to know what you want out of life in terms of your goals and dreams, and the lifestyle you want, so that you can determine how much money you’re going need in order to achieve your vision. Having the money to afford your desired lifestyle is only one part of the formula, though… having the time to actually live it and enjoy is also critical.
I’ve never bought into the “corporate career model” of that is prevalent today. While it provides a steady and stable income for most, it also almost always comes with a list of serious trade-offs, such as as having a ceiling on how much you can earn in any given job role, and how much vacation time you get to take in any given year. It has never made sense to me to have just 2 to 4 weeks out of every 52 to determine for yourself, to go to all the places that you want to go, and to see, do, and experience everything that this world has to offer. How many of your biggest bucket list items can you complete if you can only dedicate 4-8% of the time in your life to actually doing them… realistically?
It’s time to get your time back!
I think a shift in commonly used terminology is required to change the investing and retirement conversation from one of Financial Freedom to one of Time Freedom, which (unless you plan to live on little to no income) inherently requires financial freedom as a component. I also prefer to use the term Financial Orbit rather than Financial Freedom… for more than mere semantics.
Financial Freedom can typically refer to one of 3 states in which one has enough money to live without needing to work;
- Amassed Wealth
Having enough liquid assets that you’ll never consume it all at your current and anticipated cost of living.
- Savings vs. Anticipated Lifespan
Having enough liquid assets that you can spend at the rate of your anticipated cost of living, and aren’t likely to consume completely during your anticipated life span.
- Ongoing Cash Flow (“Financial Orbit”)
Having enough cash flow from your assets such you only spend a portion of the income to cover your anticipated cost of living.
There are some inherent faults with the first two types of “Financial Freedom” that I’ve mentioned above;
1. Very, very few people will ever have the ability, resources, and circumstances in life to amass enormous wealth, and truly no amount of wealth is inexhaustible. Sure, nearly everyone dreams about it, and everyone does have the ability to achieve it, but it’s certainly, counting on acquiring enormous wealth is not a feat that most will ever realistically achieve, and therefore, I discount it as a true “plan” for attaining Financial Freedom.
2. With the great, and increasing, focus on health sciences and life extension technologies, we are living longer and healthier lives than ever before. There is no reliable way of determining how long or healthy we may expect to live in 20 or 30 years’ time, and outliving your savings is a very real possibility.
3. Add both of these together with unknowable future rates of inflation and currency fluctuations, and there are simply too many variables, in my view, to consider either amassing enormous wealth or diminishing nest egg strategies to provide true and reliable Financial Freedom.
I only consider the 3rd state – Ongoing Cash Flow – to be true Financial Freedom, or what I call Financial Orbit. Fortunately, in my experience, it is also the most achievable for the average person. More on that in future articles…
Just like when a satellite is launched into orbit around the Earth, there is a large amount of planning, physical effort, and dedication required to put it there, but once it arrives in place, it takes no additional effort to remain there for decades. It’s the same with Financial Orbit. It may take years of financial discipline and saving to achieve, but with the right investments, registered plan structures, strategies and tactics that makes optimal use of all of your available resources, it is achievable and realistic to have more net passive cash flow income on a monthly basis than is required to cover your cost of living. The remainder can be re-invested to account and overcome the effects of inflation. No matter how long you live, you’ll never outlive your money, nor will you experience a long-term decrease in your standard of living due to inflation, provided you re-invest more than the long term rate of inflation (which isn’t too hard). For a number of reasons, including the fact that they don’t typically pay a regular and reliable monthly income, you aren’t likely to achieve Financial Orbit through market-traded stocks, funds, or commodities – and that’s why I no longer invest in any of those asset classes myself, and why I’ve turned to alternative investments which give me much more security, reliability, and control.
Remember, also, as I covered in my last article, that Financial Orbit is achievable at whatever level you determine affords you the things that are most important to you in life. There is no magic number other than the one you set for yourself. If you live at a reasonably affordable level, your Financial Orbit will be easier to attain with a lower amount of input and resultant monthly income. If you want to live lavishly, well, that’s possible, too.
The Government is your partner in achieving Financial Orbit.
We are lucky, as Canadians, to have access to a range of tax-efficient registered plan structures that we can use to greatly accelerate our launch into Financial Orbit, although they do come with a number of restrictions on the types of investments that can be made with them. In coming articles I’ll detail how I use these structures myself, and the potential they afford to all Canadians.
As with most investment objectives, time invested is a critical factor… especially when we are talking about the power of compounded growth within tax free or tax deferred plans… so making the decision to aim for Financial Orbit and getting underway isn’t something you’ll want to delay too long on. If you’d like to know more about about the types of investments and registered plan structures that I’m personally using to generate my own Financial Orbit and how you can too, shoot me an email firstname.lastname@example.org or call me on 1 855 4 MONEY 4U (1 855 466 6394), and we’ll talk.
A closing thought… Labour Day weekend signals the end of summer’s lazy days and the return to school and work. It’s also an opportunity to take a bit of time and think about how life would look in Financial Orbit, where every weekend could be a long weekend if you want it to be. When we get back into work mode next week, I’ll be moving more into the specifics of what I’ve done, what’s worked and what hasn’t, and what I’m doing now, and really getting into the meat and potatoes of investing for cash flow. For now, enjoy these last few days of “time freedom”, even if Financial Orbit isn’t quite yet your reality!
I’ll see you again next week…
(oh, PS… for those thinking that I forgot about annuities… here is an article that fairly accurately sums up my thoughts on annuities and why I don’t like them, from my personal perspective as an investor; http://www.emarotta.com/the-false-promises-of-annuities-and-annuity-calculators/ — I can do a LOT better over 15 years than 0% ROI!)
Michael Anger is a hands-on alternative investing expert, having started investing in Canada Savings Bonds at the age of 10. He has expanded and branching out considerably since then, and has experience investing in market securities, private mortgages, and real estate, including flipping and buying rental properties in Canada, New Zealand, and the USA.
Michael currently assists investors in achieving a passive, double-digit, cashflow return with income paid monthly on their cash or registered plans (RRSP, TFSA, LIRA, RESP, etc), and makes himself available at no charge to talk to and help investors at all levels with their investment objectives, challenges, and goals.