THE sub-title, The real secrets to becoming financially independent, captures the theme of the book more effectively than the title.
Chapter 12 ‘Getting help from Financial Professionals,’ indicates that Ingram does not think it prudent to take charge of your finances unaided by a professional.
The importance of financial independence and freedom is irrefutable. Financial freedom is the ability to meet all your financial commitments from the income you receive from your assets. This applies to the months when you have no income as you search for a new job, and the years you spend in retirement.
The road to financial free should begin with one’s first salary payment. The accumulation of assets is long-term project best begun early.
There are two reasons for this. The first is that compounding – the receipt of interest on interest – grows money relatively fast. ‘Fast’ in this context is measured in years, not months.
The second is that the accumulation of wealth is a function of practices best started young so that they become habits throughout your life. These are budgeting, staying debt-free, and building your investment portfolio.
There is a full chapter devoted to budgeting, its importance, and the method. The common denominator among financially independent people is that they budget. Budgeting is little more than taking charge of your financial life.
It is knowing where you stand, and what you can and cannot afford. It is the opposite of leaving your finances to guesswork, or worse still, hoping debt will ‘go away’.
Many of the books available on financial planning do not differentiate between life stages as clearly as this one. There is a chapter devoted to building towards your financial freedom when you are starting your career.
There is a chapter addressing the stage when you are raising your family. There is a chapter on the stage when you have fewer obligations, and one on retirement from formal work.
This is important because telling a single person to invest 15% of their net income is quite different from telling a parent to do so. Where is the 15% supposed to come from when you want the best schooling you can afford for your children? You are paying off your bond, your car, and a host of other expenses that seem unavoidable.
The title of the chapter dealing with this stage is “Building up and balancing out.” The key to getting a grip on the problem of having money to invest, even at this stage, is prioritising your family goals.
“One of the major causes for divorce is financial stress, and most often children are the real victims,” writes Ingram.
The advice here is to set realistic goals for your family. Can you afford private education? Can you afford private education and a late model car? Can you afford a late model car and a family vacation?
The affordability question must be set against the imperative to spend less than you earn at every stage of your life.
You are compromising your financial freedom if you spend more than you earn even with the intention of catching up. If you succeed in catching up, which few people ever do, you have lost time, and when investing for financial freedom, time is money.
Throughout the book, Ingram chants the mantra “spend less than you earn and avoid debt”.
Ingram identifies three types of debt – bad debt, neutral debt, and good debt.
‘Bad debt’ is debt incurred for products and services that have no lasting value. Taking on debt to fund your wardrobe is bad debt. Last season’s clothing has no financial value, nor does your now second-hand furniture. You must save for these sorts of items, and purchase them with cash.
In the age of immediate gratification, saving for anything may sound like an anachronism. Store credit and bank credit is so easily available. However, viewed objectively bad debt is expensive and an impediment to long lasting financial freedom.
The financially freedom you feel as you hand over the credit card is an expensive delusion.
An important milestone on the path to financial freedom is paying off bad debt and not incurring it ever again.
Then there is neutral debt. To get to work you require a car, and the purchase of a model you can comfortably pay off on your budget is neutral debt.
Good debt is debt incurred in the production of wealth. You cede assets to the bank to borrow money to invest in other assets that will produce much more than cost of the debt.
Misinformation about investments abounds and Ingram debunks some popular misconceptions.
Is owning your home a good investment? Most people would answer “yes” with confidence. Ingram shows that renting a home is often more prudent because the cost of ownership is significantly higher than the cost of rental. With the difference between buying and renting saved each month, you will be financially better off in the long term.
Research shows that over the decades you will own your home, property does not grow as fast as shares. Add to that the constant repairs and maintenance required and the high cost of purchasing a home with agent’s fees and bond costs. Investment in shares does not come with a high entry cost.
There is a strong similarity between healthy living and financial freedom. You cannot eat badly, smoke, never exercise, and be fit and healthy. Eating, drinking and smoking might feel great at the time, but it takes its toll. You will pay a heavy price when you are least able to deal with it – as you get older.
You cannot ignore budgeting, saying no to bad debt, and living on less than you earn and have financial freedom. Spending more than you earn may feel great at the time, but it takes toll and you will pay a heavy price when you are least able to deal with it – as you get older.
This book is valuable and you should be read it two reasons. First, it contains many interesting and insightful pieces of information. Second, it is a stern warning that we all probably need to hear again, and perhaps again.
Not taking these messages seriously will come back to hurt you when you are least capable of doing anything about it.
Readability: Light ---+- Serious
Insights: High -+--- Low
Practical: High ---+- Low
* Ian Mann of Gateways consults internationally on leadership and strategy. Views expressed are his own.