Personal Finance Lessons in "Findependence Day"
Follow a Couple through the Major Financial Decisions of Life
Feb 23, 2009
Jamie and Sheena are both 28 and in debt up to their eyeballs. They appear on a financial makeover television show and learn that to reach their Findependence Day – a contraction for Financial Independence Day – they’ll have to practice Guerrilla Frugality.
They learn Guerrilla Frugality is a life-long stance to money. Early in life, they must spend less than they earn and allocate the difference to eliminating all debts, beginning with credit cards and ending with a mortgage. Later, when debt-free, they have to “pay themselves first” to build their investments.
The novel takes the couple through roughly 12 sequential steps, many of which will occur in the same order for most young couples. They are told by two different certified financial planners (CFPs) to get a financial plan to map out their financial future.
In the early days they don’t need to worry about investing in the stock market: debt repayment and pre-paying a mortgage are the top priorities. But if they are offered an employer-sponsored pension plan with “matching” contributions they should take their employer up on the offer – for many, this will be their first real exposure to the stock market. Those without such corporate pensions should maximize contributions to the RRSP or Registered Retirement Savings Plans.
Early on, they are renting but they learn that the “foundation of financial independence is a paid-for home.” When Sheena becomes pregnant, the couple learns the importance of life insurance. They’re told that during a normal life cycle, workers gradually turn their human capital – the ability to earn a living – into financial capital. Term life insurance protects families in case a young breadwinner unexpectedly dies, thereby replacing the financial capital they’ll never live long enough to earn, for the benefit of the survivors. They also learn to invest in their children’s future education by maximizing saving in Registered Education Savings Plans (RESPs).
Another priority is emergency savings accounts, which is especially necessary in these tough economic times. The first line of defense is Canada’s new Tax Free Savings Accounts or TFSAs. In order to build up six to nine months worth of savings in case of job loss, Jamie and Sheena put $5,000 each into the TFSA in the first year, in a highly liquid high-interest savings account.
Jamie and Sheena use the TFSA to accumulate a 25% down payment on their first home, then learn about “prepaying” a mortgage to save tons on interest payments. Continuing with their Guerilla Frugality habits, they pay it off completely within 13 years.
As Jamie approaches his goal of declaring his Findependence Day by his 50th birthday, he develops Multiple Streams of Income, adding business and real estate income to his sources of income. The couple also learns about the “Leaky Bucket,” which is non-registered savings: the last priority after the tax-sheltered TFSAs, RESPs and RRSPs.
However, the path of true love does not always run smoothly and the couple separate. Jamie is betrayed and cheated by a business partner in one of his ventures. As the novel approaches the end, it appears that Jamie’s dream of early findependence is threatened and that Sheena, who expects a good teacher pension at 55, will beat him to the punch.
What's the outcome? You’ll just have to read the novel and find out!
