Retirement is Not the Goal: A look at the vicious cycle of debt-driven decision-making

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All too often our debt levels cause us to postpone “the good life” until retirement… but it doesn’t have to be this way

I recently finished reading The 4-Hour Workweek written by author, Tim Ferriss. Despite the infomercial-style book title, it truly is a thought provoking read front to back. The main focus of the book is productivity, so whether you’re an aspiring globe-trotting entrepreneur who has been bitten by the travel bug or an employee who loves their work but wishes there was more time to spend with the family, there is something in this book for you.

What really intrigued me in this book is when Tim referred to retirement as “worst-case-scenario insurance”[i].

That got me thinking.

Key Takeaways

  1. We face a vicious debt cycle in today’s society that influences our major life decisions
  2. Due to high debt levels we post-pone “the good life” until retirement as this is the time when we have the greatest financial freedom
  3. In order to put a stop to this cycle we need to eliminate the excess expenses that drive our debt levels
  4. We also need to start owning assets and generating multiple streams of income
  5. Automated income can also compliment our portfolio of assets
  6. Once out of the debt cycle we are financial free to live life on our terms

The Vicious Cycle

It has become a social norm to postpone many of our dreams until retirement. But this isn’t necessarily a matter of choice, rather a matter of circumstance:

  • We go to post-secondary school in hopes of studying and eventually doing what we love, racking up the student-debt along the way
  • We graduate and usually do one of two things:
    • Head right to work, potentially settling for a job, in order to payback student debt
    • Travel, travel, travel, because we realize that eventually we’ll have to consume our days with work in order to fully repay our student-debt
  • Then we buy a house (mortgage debt) and take a promotion in a career that maybe we didn’t dream of in order to repay our debt
  • We have kids and become partner at a firm in career that we convince ourselves we need in order to pay for our children’s tuition and enjoy our retirement
  • Our children go to school, incur debt, and repeat the cycle
  • We load up our credit cards along the way, filling up space with materials possessions that probably don’t all bring value to our lives

This is the viscous debt cycle that we are faced with today, and as such, our major decisions in life are heavily influence by debt. Now, obviously this is a drastic generalization and of course everyone has different experiences, aspirations, and circumstances, but our debt-levels today do account for something.

According to the Canadian University Survey Consortium, in 2015 “the average debt-ridden student owed $26,819”[ii]. Furthermore, Canadian household debt is now larger than our Nation’s GDP for the first time[iii].

It is therefore not surprising that we tend to postpone “the good life” until retirement, as at that point our debt-levels have decreased (hopefully) and we no longer have dependents (again… hopefully).

Personalize Your Finances

One aspect of The 4-Hour Workweek that may help prevent us from postponing the things we want to do is the idea of “relative income”. Relative income refers to your income relative to your time spent working. Thus the idea is to maximize your relative income, but only work as much as you need in order to live your dream. That dream does not have to be riding a motorcycle across South America (although it could), it could again be having more time to spend with your family or enough time to start a new hobby. There are a few ways to accomplish this in which The 4-Hour Workweek discusses in-depth. The idea is that what you may think needs to be postponed until retirement, may be more feasible and affordable than you think.

Personal finance is exactly that… personal. This means that although you should be contributing to long-term savings goals, you should also have short-term financial goals that add value to your life. These are the experiences that you may have thought would have to wait until retirement.

Yes, yes, this all sounds great but how can this be accomplished while household debt is rising?

First, we need take an introspective look at what things or expenses bring value to our lives and which are filling space, adding stress and adding debt. Some of these expenses may be viewed as “keeping up with the Joneses”. If it does not add value to our lives we should eliminate that stress and debt. Now, this is not to be confused with frugality (a sports car would add tremendous value to my life). I’m talking about the monthly subscriptions that are not used or the material items that go unused and take up space both physically and mentally. Every time we make a purchase, the opportunity cost of that purchase includes those experiences that we may be postponing until retirement.

Another way to think of the opportunity cost of purchases is to consider the implications of compound interest. Warren Buffett was said to have treated $10 haircuts as if they cost $300,000[iv]. This seems outrageous but it’s actually a conservative estimate if you consider the compounding potential of $10 over lifetime at a moderate return. Actually, Buffett earned an average annual return of approximately 22% while running the Buffett Partnerships[v]. Thus, if that $10 were theoretically compounded at 22% since 1956 (61 years) it would be worth over $1.85 Million today. That’s an unrealistic return to expect without a doubt, but nonetheless, never under estimate the opportunity cost of compound interest.

In general, we should ask ourselves where our money is going and what is causing debt. From there we can eliminate unnecessary expenses and align our savings goals with what we truly want to do with our lives. The things you may think are not possible until retirement, or until that promotion, or until you graduate, may be more affordable than you think.

Automated Income

Now, it’s great that we are eliminating expenses but income also obviously plays a substantial role in reducing debt. There is much to say on this topic which will require a follow up post, however, as is suggested by author of Rich Dad Poor Dad, Robert T. Kiyosaki, in general we need to shift our focus from working for money to having money work for us[vi].

In order to do this, you need to first think about saving and eliminating expenses as discussed in the previous section. Next, we can think allocating those savings into the five major asset classes, namely:

  • Stocks
  • Bonds
  • Real Estate
  • Commodities
  • Currency and Cash Equivalents

The last two on the list are not wealth creating assets, but rather they store value over time. Thus, they can act as insurance if one of the value creating asset classes experiences a downturn. The first three are all great ways to diversify your investments and build up your portfolio of value creating assets, provided that you are not supporting these investments through excess debt. When you own these assets they generate an income for you. Stocks allow you to hold a stake in the returns of a business and you will hopefully be compensated through dividends. Bonds also provide you with a coupon, meanwhile real-estate can produce income in a number of different ways.

These asset classes are important in a wealth generating portfolio, and they will be discussed immensely throughout the blog, but I would like to highlight a somewhat less frequently discussed concept. Tim Ferriss discusses, in the 4-Hour Workweek, the idea of automated income and how it can open up your schedule and also provide you with the financial freedom to pursue those dreams that you may have saved for retirement[vii].

This is an underutilized concept given how interconnected our society is today. Again, this is a dense concept and deserves its own post but I hope to outline a few things that may spark some brainstorming.

One it is easier than ever in today’s society to bring a product to market. Shopify is one platform that is changing the game when it comes to e-commerce. Combining their services with a dropshipping manufacturer eliminates any costs related with inventory. All you need is a product idea and a market and you have yourself an automated stream of income.

Yes, yes, it may be easier said than done. Okay, it is definitely easier said than done but don’t be discouraged. There are many things that frustrate people, and the chances are a product could solve that problem. In terms of contacting a manufacturer there are many resources found online as well as in the 4-Hour Workweek.

But what if you are in the service industry? The chances are you probably know a lot about that topic or subject, or maybe you have a niche hobby. If so, maybe there is an ebook you could write, a video you could put together, or an educational app you could produce[viii]. Knowledge is power, and in today’s world there are endless ways to share your knowledge.

Branding and marketing is another thing that has become immensely easier in today’s society. Thanks to services such as YouTube, WordPress, MailChimp, among others along with all the social media platforms it has become increasingly more feasible to reach a large audience with your product, knowledge, or services.

Finally, another way to potentially generate an automated stream of income is through a mobile app. Even if you are not tech savvy, chances are you have someone in your network or a friend’s network who is willing to help. Again, thanks to the Apple App Store and the Google Play Store, it is not hard to have your product reach a large audience.

“But I’m not an entrepreneur”

This is not about quitting your job or dropping out of school to build a company. These are just methods that could be implemented in a short amount of time, even if you work full-time. Adding an automated income stream to the 5-asset portfolio mentioned above will increase the rate at which you eliminate debt and start chipping away at your savings goals.

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Debt-Driven Decision Making

We all too often base the major decisions in our life on debt. Whether it be the jobs we take, the places we live, the things we choose not to do, debt has a significant influence in our decision making. It doesn’t have to be this way.

By eliminate excess expenditures, committing to a savings plan, building up a portfolio of assets, and even generating extra income on the side, we can walk away from this mindset. Retirement is not the goal here. We post-pone many experiences until then because that is the time in which we feel we will have the most freedom, both in our schedules and in our finances.

Alternatively, by owning assets and having money work for us we can change the tide and create that financial freedom sooner rather than later. Will it happen overnight? No, but with incremental adjustments in our saving, consumption, and investing we can ensure that our decisions in life are not dependent on debt.

 

by Brandon Belding

Breaking the Trend

Additional Resources

 

References

[i] Ferriss, Timothy. (2007). The 4-Hour Workweek. New York City: Crown Archetype.

[ii] Sagan, A. (2016, 05 30). As student debt climbs to an average past $25K, schools invest in battling the mental-health issues it causes. Retrieved from National Post: http://news.nationalpost.com/news/canada/as-student-debt-climbs-to-an-average-past-25k-schools-invest-in-battling-the-mental-health-issues-it-causesSagan, Aleksandra, The Canadian Press, National Post “As student debt climbs to an average past $25K, schools invest in battling the mental-health issues it causes”, 2016-05-30, < http://news.nationalpost.com/news/canada/as-student-debt-climbs-to-an-average-past-25k-schools-invest-in-battling-the-mental-health-issues-it-causes>

[iii] Isfeld, G. (2016, 09 15). Canada’s household debt is now bigger than its GDP, for the first time. Retrieved from Financial Post: http://business.financialpost.com/news/economy/canadas-household-debt-is-now-bigger-than-its-gdp-for-the-first-time

[iv] Miller, J. C. (2016). Warren Buffett’s Ground Rules. New York, NY: Harper Business.

[v] IBID

[vi] Kiyosaki, R. T. (2012). Rich Dad Poor Dad. Scottsdale, AZ: Plata Publishing, LLC.

[vii] Ferriss, Timothy. (2007). The 4-Hour Workweek. New York City: Crown Archetype.

[viii] IBID

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