Financial Independence - Millionaire on the Prairie

The Honest Truth

Roughly 20 years ago, I landed my first professional office job. It entailed monthly meetings with my manager, wherein I updated him on my current workload. He was an amiable man and most meetings were sprinkled with little nuggets of life advice.

One of the acorns of advice that has always stayed with me is the following. “Never believe that this place needs you. Always remember that you can be replaced.”

It sounds harsh, doesn’t it? As I look back on those words, I appreciate them because they are the honest truth.

My manager wasn’t being mean or obnoxious. He was being truthful. If I hadn’t been hired to do my job, then my organization would have hired someone else. And if I had chosen to walk out at that very minute, the organization would have tackled the task of finding my replacement.

That particular acorn took root.

For nearly two decades, those words have rolled around in my head. The honest truth they embodied has been one of the underlying reasons of why I save and invest. It is imperative that my money works as hard for me as I do for it. My money must insulate me to the greatest extent possible from the financial consequences should my organization decide that it’s time for me to be replaced, that it can survive without my contributions to its operations.

If you’re somewhat sentient when this post is published, then you can’t help but be aware that a great many people have lost their jobs through no fault of their own because of the COVID-19 pandemic. The news reports are rife with articles of the millions of people who have had no choice but to turn to the government for financial assistance to survive.

However, I suspect that there is a cohort of the Recently-Let-Go who haven’t had to ask for financial assistance. I’m willing to guess that this cohort is compromised of people who’ve worked for a couple of decades and who made the choice to live below their means throughout their working lives so that they could invest their money. I wouldn’t be surprised if this fortunate cohort has made the choice to stay out of debt no matter how often credit was offered to them. And I’ve assumed that this cohort is going to keep a tight, heavy lid on their status so that they can continue to live as they always have – social distancing & hand-washing as required – without drawing the ire of their family, friends, neighbours & former co-workers. Check out the comments on this article.

Continued employment isn’t guaranteed.

As a result of my manager’s words, I’ve always known that my employment was at the whim of someone else. Sure – I’d likely find another position somewhere else, but what if it took me a long time to do so? How would I pay for my life between one employer and the next? Even if I tried to become self-employed (something that has never held any appeal to me), how would I pay for my life before the money started rolling in?

Hearing the honest truth from my manager during a routine monthly meeting incentivized me to do all of the following things:

pay off my student loans as quickly as possible;
build my emergency fund through automatic transfers every payday;
re-pay the loan on my SUV in 6 months by making gargantuan payments every two weeks & by sacrificing a little bit of fun & frivolity;
invest a portion every paycheque in the stock market once the mortgage on my principle residence had been paid off;
move out of mutual funds and into exchange traded funds once I learned how deeply management expense ratios impacted my overall rate of return;
stay out of debt by paying off my credit cards every single month; and
pay cash for everything.

I know those last two bullet points sound contradictory, but they aren’t. If I don’t have cash, then I don’t use my credit cards. Once the cash is in my bank account, then out comes my credit card to make the purchase. This method means that I earn cash back or points towards groceries. The charge is applied to my account then I send a payment from my bank account to my credit card. Best of both worlds – I always pay cash while taking advantage of the perks of having my credit cards. If you can’t pay off your credit cards every month, then don’t do what I do. Only spend cash or use a debit card!

Motivation comes from unlikely sources.

It’s taken me a long time to see the link between words spoken nearly 20 years ago and the financial choices that I’ve made in my life. The honest truth from my manager’s lips motivated me to build as big a financial cushion as I could as fast as humanly possible. It didn’t happen overnight, and there were many mistakes made along the way. To this day, payday still means that a chunk of money is set aside for the future.

Another source of motivation for me comes from our current global pandemic. COVID-19 has me re-assessing whether my emergency fund is big enough. For record, I have made plans to increase it. It’s my firm belief that no one has ever regretted having “too much money” during an emergency.

In a similar vein, the money saved from staying home while most everything is closed has been re-directed into sinking funds. There are still big expenses on the horizon. Property taxes will still have to be paid at some point. My home and vehicle insurance premiums are still due in a few months. Birthdays and other celebrations might still require me to open my wallet, even if I can only visit with people via video and telephone. The annually recurring expenses of living will continue to come around, whether we’re still in a pandemic or not.

Do yourself a favour! Go back to my manager’s works and let them sink in. At the end of the day, your employer can always choose to replace you. Sooner or later, there is going to be a parting of the ways for reasons that may be beyond your control. Be proactive – take the steps today to ensure that you’ll be financially okay when that time comes.

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Weekly Tip: Live below your means so that you have money to invest. This is another way of saying pay yourself first. After you’ve paid yourself, then you can get down to the business of paying everyone else.

One of my Biggest Money Mistakes

Tempus fungit… which is Latin for time flies. And boy does it ever!

In 2006, I was fortunate enough to pay off my house. Unfortunately, I wasn’t smart enough to immediately turn my former mortgage payments into investment contributions. Instead, I didn’t start dollar-cost-averaging into the stock market until 2011. This was on one of my biggest money mistakes.

I missed the 2008 stock crash (Yay!!!) but I also missed 2 years of the recovery between 2009 and when I started investing in 2011 (Boo!!!!).

And what did I do with my money between 2006 and 2011? I seem to recall a trip to Hawaii in 2007. I’m sure I made some renovations to my home. I financed my vehicle and paid it off in six months. The rest of the money… I haven’t a clue where it went.

Coulda…Woulda…Shoulda….

Now that it’s 2020, I really regret that I didn’t start using dollar cost averaging the very second that I no longer owed money on my mortgage. If I had, then I would be 5 years closer to my retirement goals. Sure, I’ve got 9 years of consistent investing under my belt but I could have had 14 years of investing behind me. Why did I wait so long? Partly, it was because I listened to well-intentioned friends and family who told me to relax and enjoy my money.

The choice to listen was mine, and I accept full responsibility for it. At the time, I was younger and far less money-wise than I am now. However, I just wish that I’d found blogs like this one – or any of the other super-awesome blogs out there – earlier than 2011. Right now, I follow Personal Finance Club on Instagram. He encourages his followers to “Invest early and often”. You might want to check him out, follow him for a while, learn stuff that you might not already know… or not. The choice is yours.

I love PFC’s mantra and I wish I’d found this Instagram account in 2006. As it is, I started following PFC on Instagram in 2018. By then, I was already investing regularly but I still really like the graphics on his account. In any event, his advice is great. If I’d started in 2006, then I would have had 20 years of retirement savings under my belt by the time I hit my planned retirement date. As it currently stands, I’ll only have 15 years of savings in my kitty.

Unfortunately, I learned too late than procrastination is a time-waster. Even if you love your job, save and invest for financial independence. If your budget will allow, start working towards financial independence while you’re also paying down your debt. If that’s not possible, then start saving and investing your former debt payments once the debt is gone. There’s no need to duplicate my money mistakes! Do not use your former payments for day-to-day living. Instead, turn your former debt payments into investment contributions so that your money starts working hard for you as soon as possible.

Once I finally committed to investing for my dotage, I set up automatic transfers and began building my army of money soldiers. I’m happy that I’ve been able to consistently invest month-in, month-out since 2011. Yet, I still regret that I didn’t start in 2006 so that I’d be that much closer to financial independence.

Procrastination is to be avoided…

You don’t have to in any way adopt, imitate or copy one of my biggest money mistakes. Experience is a great teacher. You can just as easily learn from someone else’s experience as your own. Why not learn from mine? You need not make all the mistakes yourself.

Take a good look at what’s happening to so many people during the COVID-19 pandemic. Far too many people have lost their employment through no fault of their own. From what I’m reading in the media, precious few of those people have enough money tucked away to survive a job loss. They do not have the luxury of not worrying about how to pay for what they need. In short, they were not financially independent when the pandemic hit.

The best reason to consistently work towards financial independence is because you don’t know when you’ll want to stop – or when you’ll be forced to stop – working for a paycheque. If you love your job and can’t wait to spring out of bed to do it, then save for financial independence anyway. Being financially independent doesn’t mean that you’re obliged to quit doing what makes you happy.

Should the unthinkable happen and you stop loving your job, being financially independent also means that you have the option to stop doing what no longer brings you joy. You can quit to do something else without wondering how to put food in your belly.

And if you find yourself unceremoniously tossed out of your job, being financially independent means you won’t be in the position of wondering how to pay for the expenses of your life.

As stated by the Physician Philosopher, financial independence is the escape hatch. His article is about burnout among medical doctors, specifically, but the principle applies to any employment situation that you may want to leave. When you aren’t concerned about financial consequences, it is so very much easier to leave your employment whenever the mood strikes. Conversely, financial independence gives you the luxury of tending to your wounded pride, without any additional financial stress, should your employer unilaterally decide to send you on your way.

Please don’t be a procrastinator! Start working towards financial independence today.

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Weekly Tip: Pay the lowest management expense ratios (MERs) as possible while still meeting your investment goals. When two products are essentially the same yet priced differently, it makes no sense to pay more than necessary to acquire what you need. Use this calculator from the British Columbia Securities Commission to see the impact that MERs have over long periods of time. The lower your MER, the higher your final investment amount.

It’s Okay to Keep Your Money

If you’re not already aware, then let me be the first to say the following: it’s okay to keep your money! You don’t have to spend all of it.

Now, you probably shouldn’t keep all of it either. After all, doing so means you won’t eat, nor have a roof over your heard or clothes on your back. Keeping every single penny of what you earn causes just as many problems as spending it all! A balance should be found as soon as possible.

Today’s post is based on my observation that there’s a goodly number of people out there who appear to operate on the belief that they simply must ensure that their expenses are equal to their income. I’m here to tell that such a belief is simply not true. It’s a formula guaranteed to keep you running in a hamster wheel for your whole life. Without keeping a little bit of your own money, you’ll never have the option of quitting whatever it is you’re paid to do now so that you can do whatever it is that you really want to do with your time.

You’re More than a Conduit

From what I’ve seen on a daily basis, there are many people who are little more than conduits between their paycheques and various retailers. These are people who work hard for their money, possibly at jobs they love and possibly not. They leave the comfort of their homes when they’d rather not. Nearly all are giving up time otherwise spent doing what they truly enjoy so that they can go to work and earn a paycheque. They’re foregoing sleep and health and time with friends & family all so that they can meet work obligations!

And then they turn around and spend every cent they’ve earned with barely a thought about the effort expended to earn it. I find this behaviour utterly baffling!

My comments are directed at those of you whose income don’t keep you on the absolute edge of solvency. I’m targeting those of you who can live well away from the edge yet you choose to put yourselves there. You work so hard for your money and you choose to spend it all.

Has no one told you that you don’t need to spend your money this way?

Again, it’s perfectly okay to keep your money.

Contrary to what the AdMan and the Creditor tell you every waking moment of your day, you’re not obligated to spend everything you earn. I will admit that the advertisements are enticing. Beautiful people are selling me everything from toothpaste to Tesla’s. Their sparkling white teeth and full heads of shiny hair inspire confidence that the products they’re hawking will complete my life. All I have to do is hand over my money and my life will be perfect.

It’s a seductive message.

Sadly, it’s also completely false! If we learned one thing from the Grinch by way of Dr. Seuss, it is this: happiness doesn’t come from the store!

Your Dreams Won’t Fund Themselves

So I say it again – it’s okay to keep your money! Put a portion of it away in an investment account so you can fund those years when your paycheque goes away. Create a few dream accounts! These are the accounts where you save up for those things that make your heart dance with joy. Maybe that’s a fancy cooking class. Perhaps it’s a trip to Greece. It might even be a fancy cooking class in Greece! You alone know what your truest desires are.

Yet, you won’t be able to fund those dreams and desires if you consistently spend every penny as fast as you can. The Hair & Teeth of Marketing aren’t going to help you achieve your goals. Their only objective is to persuade you to open your wallet. You have to believe me when I tell you that it’s okay to save your money for the things that you really want.

To be very clear, I’m not talking about people who have to devote their entire paycheques to rent and food. If you’re keeping it all together on a shoestring, then more power to you! The ones I’m talking about are those who have disposable income. They have some slack. If they had to take a pay-cut at work, they’d be able to stay in their current home and eat what they currently eat. Maybe they’d have to give up a few subscriptions, annual travel, and their plans to replace a 3-year old vehicle. Bottom line is that they would still have enough money to meet the survival expenses of food, shelter, and basic clothing.

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Weekly Tip: The 2019 RRSP contribution deadline is March 2, 2020. Make sure that you contribute something to your RRSP so that you have some cushion for your retirement years. Do not get trapped in analysis-paralysis. Make an RRSP contribution, preferably in an exchange-traded fund. Then leave the money alone for a long-time. While your RRSP-money is growing & compounding, your duty to Future You is to continue learning about investment options by reading books, blogs, magazines, websites, forums, stickies, and post-it’s. Learn as much as you can about this because it’s very, very important. Save-invest-learn-repeat.

What If…

When I talk about financial independence and wanting to retire early, many people look at me as if I’d sprouted a second head right in front of them.

“I love my job!” they say. “I don’t want to retire!”

Great! Wonderful! You’re being paid to do what you love – that makes you one of the Lucky Ones!

Take a moment and consider what it’s like for those of us who aren’t so blessed as to love our livelihoods, those of us who dream of a day when we can do what we want with all of our precious, precious time. Most of us work because we have to, not because we love what we do. And a good number of workers don’t actively hate their jobs. They simply don’t love them and would rather be paid to do something that they enjoyed.

And if you’re wondering why we don’t just find jobs that we love and do those instead, please gently hit yourself in the head with a hammer. Take it on good authority that we have tried to find jobs that we love as much as you love yours. There just aren’t as many of those ideal positions going around so not all of us are going to get one.

Instead, I’m going to ask you Lucky Ones to put yourselves in the shoes of the rest of us. That way, you might gain some insight into why some of us are working so hard to achieve financial independence and, possibly, early retirement.

Lucky Ones, ask yourselves the following: What if you didn’t love your job? And what if the job you love today turns into one that you don’t love tomorrow?

What if any of the following things happen?

The boss you love retires…and the new boss isn’t to your liking.
Your best work buddies move away.
You have to take on duties that make you stressed and irritable.
You’re passed over for a promotion that you know you earned.
Others are laid off, which means your workload goes up.
Harassment, sexual or otherwise, creeps into your daily workday.

There are many, many things that can happen in one hot minute to turn a job-you-love into a job-you-hate. Spend an hour or two at Ask-A-Manager to see what I mean. If half of the people writing to Alison had built up enough money to leave their jobs when they wished, then she’d have so much less to write about!

Or maybe your job never causes you to shed a tear, yet you lose it anyway. For example, your company is bought by another one, or there’s some kind of re-organization. For whatever reason, your job is eliminated. It happens to a lot of people. Those who don’t have a financial cushion are the ones who will be stressed and desperate to find something else. People who’ve been working towards financial independence have the luxury of taking some time to figure out what the next steps are going to be.

What if you had enough money to walk away from your job when it stops making you happy? Or what if you had a great, big cushion of money to land on if you were kicked to the curb due to downsizing or ageism?

That’s the beauty and power of financial independence. When your job stops being one that brings you joy, being financially independent gives you the choice to walk away.

I want to be explicitly clear – you don’t have to retire early just because you’re financially independent. Money = choices. Having money doesn’t remove your choice to keep working. It simply gives you the choice to do something else when your current position stops bringing you happiness.

So make hay while the sun shines! Get in touch with your inner squirrel and start gathering that sweet, sweet cash for the day when you’ve simply had enough. You won’t regret having the options that only money can buy when the time comes.

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Weekly Tip: Pick one day a week to be the day that you don’t spend any money. Most of us spend a little something every single day. Did you know that it only takes $27.40 per day to spend $10,000 in one year? Challenge yourself to keep your money in your pocket atleast one day out of every 7.

All Hail the Octopus!

This week, I had the pleasure of reading a fantastic article about saving for financial independence and early retirement that was written by Mr. Tako of www.mrtakoescapes.com***. In this magnificent article, Mr. Tako discusses his surprise that anyone would view his choices as “hardcore” on his pursuit to financial freedom. By following his own plan, Mr. Tako was able to retire on his own terms. What some may view as hardcore, others may view as tweaks. It’s all in the eye of the beholder!

While I loved his article, my take-away was slightly different. I was simply happy to know that every small step makes a difference. Sometimes, it feels like saving and investing is a treadmill that’s going nowhere. The destination is so far away, and why can’t I just win the lottery and be done with it already?!?!?! However, articles like Mr. Tako’s remind me that there is an endpoint and that every little step I take gets me closer and closer to it.

Unlike Mr. Tako, I haven’t had many bad jobs nor many bad bosses. For the most part, my career has a many great attributes. I work with very smart people. My work is mentally challenging. I have autonomy over how my tasks get accomplished. I have a nice office filled with natural light. My office plant is big and beautiful, healthy and happy. I’m even happy with my salary since, without debt, my paycheque is more than sufficient to meet my needs.

Still…

At the end of the day, I want to retire and the sooner, the better. When I’m not at work, I’m much, much happier. It’s as simple as that. I have a great circle of friends – I love my family – I’m a bit of a homebody when I’m not travelling. Working gets in the way of that, despite all of the really great facets of my job. When I work, I’m on someone else’s schedule. I’m doing things that mean little or nothing to me. I’m attending meetings that have little palpable purpose. Despite all of the good things that I listed earlier, working means that I have to sell my time to someone else in order to survive financially. If I can find a way to retire early, then I get my time back.

Much like Mr. Tako, I’ve taken steps over the years to find ways to save on daily costs so that I can retire sooner.

At this point, I’d like to fully acknowledge that there is no one plan that will work for every single person. Each of us has to figure out what we’re willing to do in order to achieve the financial freedom that we want for ourselves.

The first big step in the right direction was my decision to take transit. I gave up the daily drive to work way back in 2001. I’m not a huge environmentalist, nor am I troubled by rush-hour traffic. The commute is the same whether I’m behind the wheel or a passenger on the bus. No – my main reason for choosing transit was so I could save on my commuting costs in order to invest money for early retirement. I’m fortunate to live in a location that has excellent transit service for commuters. For nearly two decades, I’ve driven to the park-n-ride, shown my bus-driver my pass, and have happily ridden in safety back and forth to work.

This one small decision 18 years ago has saved me thousands of dollars because I don’t pay hundreds of dollars each month for parking. I fill my tank every 10-12 days. My insurance premiums are lower, and the wear-and-tear on my car is less that it would’ve been with a daily round-trip drive to work.

The second step in my march to financial freedom arose due to a health concern. A sensitivity to caffeine required me to cut down on coffee during my work breaks. Many years back, I went to my doctor and complained of a racing heart. She asked how much coffee I drank. I told her that I had coffee with breakfast, at my mid-morning break, and during my afternoon break. She told me to cut back to one coffee a day and see how I felt. My doctor’s a miracle worker! Within a week, my heart had stopped racing. The upshot was that I was also saving money to be re-directed to my retirement.

Step #3… In 2016, I took the big plunge and cancelled my cable subscription. Again, this wasn’t a strictly financial decision. It wasn’t a money decision at all! I simply got tired of paying for garbage, so I decided to stop. But whatever would I do with the additional money each month that wasn’t going to the cable company? You guessed it – I funnelled the extra money into my investments!

Finally, in 2018, I made another commitment to myself which has positive financial results. I decided to start taking my lunch to work more often than not. Again, it wasn’t really a money decision. Fast food and restaurant food doesn’t taste as good to me as my own cooking. It suddenly struck me one day that I was paying for food that I didn’t enjoy. Taking my lunch to work earns me a double-whammy: good food to eat and more money saved for financial independence.

Like Mr. Tako says in his article, these small steps don’t feel extreme. They feel normal. I didn’t try to do everything all at once. Knowing myself as I do, that’s a challenge that I would have failed. Instead, I added these changes gradually until I reached my satisfaction point.

How about you? What steps have you taken in pursuit of funding your own dreams?

(***Update 2024 – sadly, this website is no longer available.)

A Simple Truth

“You can’t become financially independent with someone else’s money.” – Farnoosh Torabi of the So Money Podcast

The frankness of this statement amazed me.

While being interviewed by Jamila Souffrant at Journey to Launch, Ms. Torabi spoke of the need for women to control their own money. She posited that a woman without her own money could not truly be independent of someone else for her financial security.

I’ve been thinking about this idea for a while now, and I believe it wholeheartedly. A woman without her own money will always be dependent on someone else for her financial security – a parent, a spouse, the state. It’s not a great way to live, yet for millions of us it is a reality that we accept as easily as we accept that the sun rises in the east every morning.

Women who control their own money aren’t as rare as they once were but they’re not as common as they should be either. One of my friends was married to a very good-looking man who decided to stray. She decided that she wouldn’t tolerate that particular decision and they divorced. One of the reasons why she could make that decision was because she holds a professional degree. Her education allowed her to secure her own financial future – she could pay the mortgage, the nanny, the divorce lawyer, and all the costs associated with being a single mother raising babies. From a financial perspective, my friend was very okay because she was and continues to be financially independent. She doesn’t have to depend on anyone else’s money to live the life she wants to live.

Full disclosure – I’m a Singleton. While I hear about the debate between married people who share all of their money and the married people who keep things separate, it’s an academic discussion to me. I’ve never had to seriously consider whether I would share my money with another person.

Additional disclosure – the idea of sharing my money makes my stomach turn. And when I’ve considered why I’m so against the idea of co-mingling my money, it’s because I view that decision as increasing my risk instead of increasing my security. If I were a Singleton living paycheque-to-paycheque, or living in debt, then the idea of sharing another person’s wealth might be quite attractive. Similarly, if I could be certain that a partner’s views of money were compatible with my own and that he had also built up a nice-sized war chest while a Singleton, then the concept of a joint bank account wouldn’t cause so much anxiety for me.

Even without hearing it articulated, I’ve always known that having control of my money has meant that I retained the power to make independent choices about how to live my life. Since leaving my parents’ home, I’ve never had to ask for permission to spend a single dollar. I’ve never had to discuss a purchase with another person because the money was mine. I’ve never had to compromise with anyone about how to invest my money.

You see, I’ve always understood that having control of my money meant having more control over my future financial well-being. Even if I was married to the kindest, gentlest, most wonderful human being on the planet who took care of my every financial need, there’s no guarantee from anyone or anything that my Wonderful Human would be there forever. People die – people leave – people get kidnapped – people get sick – employment disappears – businesses fail – etc, etc, etc… If any of those things were to happen to my Wonderful Human, I would not want to be in a position where I had to worry about money while also dealing with the emotional grief that would inevitably accompany that loss.

By the same token, I always knew that I didn’t want to be forced to stay in a relationship just because of money. I didn’t want to be financially dependent on someone who was abusive to me, or who didn’t treat me kindly. I wanted to have the ability to walk away from any relationship that didn’t work anymore, or that wasn’t giving me what I needed. I never wanted to be financially dependent on anyone else because that would mean that they controlled my financial future. If they had the power to make the financial decisions for my life, then I would forever have to wonder when, or if, they would take away their financial largesse and give it to someone else.

I accept that there are no guarantees in life. However, I also accept that women can take steps with their money to build a solid financial foundation for themselves and that they should not look to others for financial security. Having money of her own means that a woman can make choices for her own best interests without worrying about how to accommodate the wishes of someone else. A woman with money can leave a bad situation, a bad job, a bad relationship without worrying how to feed, shelter, clothe herself. Money gives women the option to finance the basic necessities that they need without requiring them to depend on anyone else.

Ms. Torabi is right – you cannot become financially independent if you’re relying on someone else’s money.

Debt is Corrosive to the Creation of Intergenerational Wealth

Debt is a cancer to building intergenerational wealth. The phrase intergenerational wealth conjures up images of the very, very rich who are able to bestow entire empires upon their progeny. Truthfully, the concept doesn’t require anything quite that elaborate. My definition of intergenerational wealth is the ability to provide financial assistance to your offspring in order to help them get ahead as adults. It’s above and beyond that level of sustenance that is legally required of parents. Intergenerational wealth is what you use to assist your child in achieving a better life – financial or otherwise – than the one you’ve had. This type of wealth is created when you’ve acquired assets that can be utilized to fund the major purchases of your child’s life when the time comes.

A few weeks back, I read an article about how black women graduate with the highest amount of student loan debt. It got me thinking. How could these women build wealth for their families if they were saddled with big student loans which required years to repay? And what if they also had mortgages, car loans and credit card debt while carrying student loan burdens? How much money would they have to earn to both pay off all debt and save enough to invest in the family’s future? What kind of impact does debt – student loan or otherwise – have on a parent’s ability to build intergenerational wealth?

My ultimate conclusion was that all debt is an inhibitor to the creation and growth of intergenerational wealth, regardless of the demographic group to which the debtor belongs. Debt of any kind impedes the accumulation of wealth because you’re so preoccupied with paying someone else that you rarely get the opportunity to pay yourself first. Obviously, larger amounts of debt have a greater negative impact on the creation of wealth because it takes so much longer to pay it back. At the end of the day, debt is corrosive to the accumulation of wealth.

If you’re making payments on your student loan, your car loan, your credit cards, and your mortgage, then your money is not being put towards your family’s future. Whatever the size of the debt obligations, whether $500 per month or $5000 per month, the fact remains that you’ve committed to giving that amount of money to someone else in order to pay down your outstanding debt. You’ve agreed to give away the money that could have been used to build a foundation of wealth for yourself and your family.

Recently, I read an interview with a millionaire where a cycle of intergenerational wealth was put into place. The millionaire being interviewed was the daughter of parents who had worked very hard at regular jobs, while also running their own side hustles. Her parents had worked very hard to create wealth for their family. They taught their children the same principles, and the millionaire in turn taught those principles to her own two sons, the grandchildren. Over time, this family had created sufficient wealth that offspring who needed a mortgage did not have to go to the bank. Instead, mortgages were issued within the family from one generation to another. When the millionaires’s sons graduated from post-secondary schooling, each of them already had $200,000 in their investment portfolios. Their money had grown from cash gifts bestowed upon them by the grandparents. (Check out ESI Money if you want to read more millionaire interviews.)

Many parents want to pay for their children’s educations. This is a worthy goal and I have no quarrel with it. In today’s world, an education opens doors and provides opportunities that would otherwise not be available. An education is not a guarantee of success, but it is certainly an asset in the pursuit of success. Parents who save for their children’s educations are providing their children with a gift, i.e. starting their adult lives without student loans. They are gifting their children the opportunity to start with a clean slate. Once employed, their children will not be required to send a portion of their paycheques to the student loan people. Instead, if the children are wise, they will start using that portion of their money to invest for the future and to buy cash-flow positive assets…assuming, of course, that the children appreciate the opportunity provided by their parents’ gift of a debt-free post-secondary education.

The children who wisely take advantage of this opportunity are then in a position to do the same for the grandchildren, when they make their appearance. The children will have continued the tradition of ensuring that the next generation begins adulthood without debt. If the children were also fortunate enough to have invested in assets the grew over the years between their graduation and the start of the grandchildren’s post-secondary education, then those invested assets may still be available for the benefit of the grandchildren and the eventual great-grandchildren.

The cycle of passing down intergenerational wealth cannot flourish if the parents or the children are required to send part of their income to creditors, year in and year out. Creating intergenerational wealth begins with the basic principle of paying yourself first. The accumulation of wealth comes from the act of setting money aside from your paycheque and investing it for a positive return. If your money from today’s paycheque is being used to pay for yesterday’s purchases, then you’re impeding your ability to invest money for your future and for your family’s future. In other words, today’s paycheque cannot be used to pay for tomorrow’s needs and opportunities. Once you’ve given your money away to pay off debt, then your money is gone forever and you must find a way to earn more. Money spent on repaying debt can never be used to change your family’s future.

I am not an expert in parenting, but I have observed families in my life who have established a positive cycle of investing in businesses and assets while also saving money for their offspring’s future. These families are ensuring that the financial lessons are passed down so that each successive generation has the money to live a comfortable life and to both grow and preserve their wealth. One of the other things I’ve observed about these families is that they do not have debt.

I’ve watched as the parents gifted down payments for homes to the children. I’ve seen the parents assist the children to buy businesses. I’ve observed the children purchase income-producing rental property where their parents did not have intergenerational wealth to pass down. Where the parents didn’t have money, they had worked in real estate and had advice to give to their children about how to assess investment properties. The children’s rental properties will become part of the intergenerational transfer of wealth to the grandchildren. Personally, my brother and I benefitted from such intergenerational transfers of wealth by having nearly all of our post-secondary education funded by our parents.

Please don’t get me wrong. Receiving a down payment didn’t eliminate the children’s obligation to pay the mortgage. However, the gift of a down payment meant that the children were able to start building equity in their homes sooner than their contemporaries who had to save up a down payment.

Even where the parents assisted a child to buy a business, there was still the need for a commercial business loan from the bank which had to be repaid. The parents’ transfer of wealth assisted the child to take advantage of the opportunity to buy a business that he understood intimately at a time in the child’s life when he did not have the money to buy the business himself. In that situation, the child received another form of intergenerational wealth – his parents worked at his business for free for the first couple of years until he got himself established enough to hire his own staff.

The children whose parents did not provide them with intergenerational transfers of wealth still took it upon themselves to start creating a strong financial foundation for their own future children. They purchased property, lived in it, and then rented it when they moved to the next home. Did they have to use mortgage debt? Yes, of course. Are they using the underlying asset to create positive cashflows in their lives? Yes, they are. The tenants pay the mortgage debt, and the cash flow from the properties is directed towards improving the families’ financial future.

I have also observed other families who seemed destined to live paycheque to paycheque. From what I can see, they make decisions with their money which will always require them to remain in debt servitude. From the outside, it looks like they actually love being in debt to someone. When a car breaks down, a brand-new car with a $700 per month payment is immediately purchased. There is no consideration given to the option of buying an adequate used car that fulfills the same purpose of safely going from point A to point B. Student loan debts are not aggressively paid down as soon as possible due to other priorities. Such loans last for ten or more years after the former student has graduated when sustained monetary effort could have eradicated the debt in three years or less. Mortgages are taken out when there is insufficient household income to handle the monthly payment, the utilities, the taxes and the other associated costs of running a home. Unfortunately, the mortgage-holders do not earn high incomes so they’ve essentially made themselves house-poor. They will be forced to live paycheque-to-paycheque until the mortgage debt is gone or until the bank forecloses on them for non-payment.

These families have purposely created situations for themselves where they are unable to create any wealth to pass on to the next generation. In fact, they cannot even create wealth for their own retirements. They purposely seek debt-burdens rather than debt-freedom, and I haven’t been able to figure out why. At the same time, these families want to live a life that they could actually afford if they didn’t have debt payments. They want the toys and the travel and the comforts that come with debt-free living yet they are not willing to do what needs to be done to rid themselves of debt.

Perhaps the distinction between the two families comes from the debt-free choosing a long-term view while the indebted choose a short-term view? I will continue to think about why some people get it and some people don’t, how some families are able to create a comfortable legacy while others are not. In the end, I guess the reason for the distinction doesn’t matter too, too much. The bottom line is that debt always inhibits the creation and the accumulation of intergenerational wealth. Debt prevents people from saving for their families’ future since it requires people to pay for their past purchases.

Just imagine what you could do for your family if you didn’t have to repay debt. How different would your life be? Is there something that you would be able to give to your children and your grandchildren that you can’t give them right now? How much could you change your family’s future if debt were not a part of your life?