The Facts and the myths
The latest advertising buzzword and tag line you’re hearing from large FSPs is ‘Financial Freedom’ – in their case it usually means either taking out loads of credit so you can ‘live your dream’ aka living beyond your means, or investing with them on their mediocre high-fee platforms. What is true financial freedom?
No more debt: If you have debt your assets are under threat from the vagaries of the economy, your job and rising interest rates. Some debt, of course, is almost unavoidable, Mortgage bonds for example. This is also the ‘cheapest’ debt, unless of course car sales are down and inventories building, in which case those manufacturers will often lure you in with ultra-low interest rates – on new cars only of course (which devalue 25% the second you drive them off the forecourt). If you default on your mortgage you’re going to be royally scr*wed by the bank, whose only interest is getting back the value of their loan. Before you take out a loan, think through a couple of ‘what ifs’; What if interest rates go up 25%; What if one of us can’t work?; What if I/my spouse loses their job?; What if my business fails? A house is not an ‘investment’ in the traditional sense – it does two things – caps the ‘rent’ you pay which will rise and fall at the interest rate level not at 10% per annum. Secondly it ‘replaces’ the need to pay rent in your retirement years. In effect, it is part of your retirement plan. If you really want this ‘investment’ to work, buy once and live in it forever. If you absolutely must, move, sell the house yourself, it really is not rocket science and you’ll save tens, if not hundreds of thousands. Your investment is still going to be nastily eroded by transfer duty though so do the math before you move just because you’re bored or trying to make a ‘good impression’. If you look like you might get underwater on your bond, get ahead of the curve and sell before the bank gets hold of it.
Nest egg: One of the best ways to be financially free is to insulate yourself from the ups and downs of the economy and life by having ‘liquidity’. An emergency fund of at least 3 months family expenses is just the bare minimum. Until your retirement pot is full, you may need to take out some life/disability cover to create liquidity for your family in case you die or are disabled prematurely. Don’t go overboard on the ‘Life insurance’ to leave a legacy for your kids, that premium would be far better spent in investment, and leave them a legacy from investments, not life insurance. Don’t mix investment an life insurance (your premiums back if you don’t claim nonsense). If you’re married, make sure that both spouses have liquidity available, this also makes sense from a tax perspective.