Lessons on the Road to Financial Independence - Softcover

Finkle, H Michael

Softcover

ISBN 10: 1462083560 ISBN 13: 9781462083565

Publisher: iUniverse, 2012

Synopsis

Pursuing financial independence is one of the few ways you can attempt to control your own destiny; it provides freedom from so many of the world's forces over which you have absolutely no control. In Lessons on the Road to Financial Independence, financial advisor and author H. Michael Finkle addresses the goal of seeking personal financial independence by sharing his own background and story as well as his investment experiences, values, and advice. In this guide, Finkle takes a chronological journey through his life and career. He shares some of the key life experiences that shaped his values and worldviews and how they helped determine both his life and investment career. Lessons on the Road to Financial Independence presents big-picture observations of the investment world and provides insights into the decision-making process on the journey to major financial and life rewards. Lessons on the Road to Financial Independence shows that through perseverance, planning, discipline, and dedication to the journey, financial independence can be attained. Pursued correctly, seeking financial independence can lead to a life more fully lived and can open doors to an even more rewarding life experience.

About this title

Excerpt. © Reprinted by permission. All rights reserved.

LESSONS on the Road to Financial Independence

By H. Michael Finkle

iUniverse, Inc.

Copyright © 2012 H. Michael Finkle
All right reserved.
ISBN: 978-1-4620-8356-5

Contents

Preface.......................................................................................ixIntroduction..................................................................................xiChapter 1 Financial Independence: Beginnings..................................................1Chapter 2 Money as a Tool.....................................................................4Chapter 3 You Are the Product and Your Most Valuable Asset....................................9Chapter 4 Does Seeking Financial Independence Mean Seeking to Retire?.........................13Chapter 5 Exploiting Long-Wave Opportunities..................................................15Chapter 6 Debt Is a Four-Letter Word..........................................................24Chapter 7 Globalization and You...............................................................31Chapter 8 Building Your Personal Financial Structure the Traditional Way......................34Chapter 9 Managing Your Personal Financial Structure—A Way Forward......................43Chapter 10 Investing More Like an Institution and Less Like an Individual.....................56Chapter 11 Allocating Investments for Today's Bifurcated Worldview............................64Chapter 12 What Role Does Life Insurance Play in Your Game Plan?..............................73Chapter 13 Other Estate and Financial Planning Techniques.....................................77Chapter 14 Gifting............................................................................82Epilogue: Investment Market Reflections and Conclusions.......................................87Reference Notes...............................................................................91Appendix and Disclosures by the Author........................................................101

Chapter One

Financial Independence: Beginnings

I was fortunate to be born into a hardworking, ambitious family right at the beginning of World War II. My parents had their individual challenges and burdens to bear, but they were smart and self-sufficient.

As a child, my father lived in an apartment above the general store that his parents owned and operated. He grew up in a small town in Iowa, to which his family had migrated from Chicago. However, I always viewed his existence as similar to that of a kid living in a large, urban ethnic neighborhood where everyone on the block knew everyone else, and all struggled to scrape out an existence. Behind his house was an alley that separated his yard from a junkyard. My father sometimes regaled my brother and me with stories of selling junk metal to the junkyard owner, often for pennies. Over the years, he used the money he accumulated from this and other entrepreneurial activities to buy fireworks to sell at his annual Fourth of July fireworks stand. Apparently this entrepreneur ran a very profitable stand, for he eventually accumulated enough money to build a new home for himself and his bride in 1940, spending the enormous sum of $4,000 on the endeavor. His own father thought he was absolutely crazy to put his life savings into a home and told him so, but my father was determined to provide a life for his family away from the downtown flat he knew growing up.

At a very early age, I learned directly from my father the virtues of hard work and thrift. He was an interesting blend of prudent businessman and speculator. He was basically very conservative when it came to personal finances, but at the same time willing to take what for him were very large gambles on new ventures. As an ambitious kid who could sell anything, he, like others of his generation, escaped the Depression era through a combination of intelligence, diligence, ambition, and the willingness to risk greatly, but only after careful consideration of all the potential outcomes. He also had great intuition when it came to reading other people.

My mother, on the other hand, had a much tougher childhood. Her father was a brick mason who ran his own masonry company but had a weakness for spirits, and that nearly ruined their lives. A hardworking German immigrant, he knew the life of hard labor and just rewards. However, his drinking drove him to abandon his family, and my mother, who was only thirteen or fourteen at the time, became the "mother" of her family, overseeing her three siblings while her own mother went to work as a seamstress to support them. Forced to move in with their widowed grandfather, my mother bore the psychological scars of her father's rejection all of her life and was willing to make any sacrifice to see that her own children never faced life without the support and encouragement of two functioning parents in the home.

I share this story of my parents' lives for one reason. It seemed to me that my parents lived the creed that being poor or struggling was an advantage, not a handicap. I was never sure that they really believed that, but in many ways they communicated that belief to me as I was growing up and even after reaching adulthood. I have always believed that knowing where you come from and who you are can be a source of inner strength and ambition. And the world I heard about and knew as a boy was not exactly rosy.

When you listen to your forebears talk about the world of the 1930s Depression and eking out a hand-to-mouth living, you vicariously live parts of their lives and come to realize that you are truly on your own economically. That stark reality shaped my life on several levels. I did not lose my small savings in the bank failures of 1932 like my paternal grandfather, but I might as well have after listening to several soft-spoken conversations between my father and his father.

The central point here is that I was overtly and covertly taught that you and I are adrift in the economic seas. Through the focused application of all of our various personal resources, we have the opportunity and yes, the need, to chart our own course seeking financial independence at whatever level we can reach, in this onetime-only crapshoot called life. That does not mean money is our only life goal—far from it. Material wealth will not necessarily make us happy, but neither will poverty. If we view money as a tool to help us achieve something better, both materially and spiritually, then we may have found one key to successfully navigating life.

Remember that money is a tool and only a tool. How we use it is the question at hand. In the following pages, we will together explore my perspective on how to manage this tool successfully.

Before we leave this discussion, I want to share one final thought about the benefits of adversity. As young college students, my fraternity brothers and I often attended services at the First Methodist Church, as the minister was one of the best public speakers I had ever heard. To this day, I rank Frank Nessler as among the best. The following statement from one of his Sunday sermons was seared into my brain forever: "Remember, the same flame that melts butter, hardens steel." Needless to say, I got it and believe it with all my heart, then and today.

Lessons for your road to financial independence:

  Adversities—real, imagined, or inherited—can be an inspiration and a source of strength.

  The search for financial independence requires real work and determination.

Chapter Two

Money as a Tool

We begin our discussion of money as a tool by asking you to drop the belief that simply making more money can lead you to financial independence. It won't. If it were that simple, every high-salaried professional athlete in the world would finish his career financially independent. Trust me, too often that is not the case. In fact, many of yesterday's multimillion-dollar athletes are financially destitute. It is frequently the same story for lottery winners or those who receive large legal settlements. They are likely to end up broke or nearly so.

Why is it that earning more money does not result in achieving financial independence? In my experience, the answer begins with lack of discipline and not having a plan or system.

Think of your income as a pie. It is yours to slice anyway you wish, but simply earning more or having a larger pie will not get you there. Of course, the size of your income pie matters, but it is only the first consideration.

It is my contention that there are only three things you can do with your income pie: you can spend, you can save or invest, or you can pay taxes. We cannot alter the size of any of these slices without proportionately changing the size of another. So, if we choose to spend more, we would have less to save and invest, and conversely, if we elect to invest more, we must reduce spending or taxes or both.

To achieve financial independence, we must not only seek a larger income pie, but we also have to exercise as much control as possible over the three major slices.

This simple concept is an important key to your journey toward financial independence. It is really that simple, and it is really that stark. I would argue that living in the greatest consumptive society the world has ever known can be both a blessing and a curse. Just trust me when I say that in America today, you can spend whatever you make regardless of the amount. We have taken personal consumption to a new level, having long ago far surpassed what had previously been considered an adequate standard of living. A cynical economist might express this by claiming that consumption always rises to match the amount of money available to be consumed.

Of course, the desire to improve our living standards has driven mankind for centuries. The yearning to escape the grinding poverty of rural China or India today is not unlike the driving force that early generations of Americans endured on the road to a better material life, and so be it. While that natural drive for more and better is basic to all mankind, our focus here is on the goal of accumulating sufficient financial resources to support ourselves when we are no longer able to earn a living, or earlier in life if we can create that outcome.

Because of the world we live in, this pursuit is not only noble but necessary. Over the years, it has been my privilege to speak to various service, educational, or financial audiences. Beginning in the early 1980s, almost every one of those presentations has begun with the following statement: "You and I are in competition every day with everyone else in the world, for everything. If you do not believe that, I do not know what planet you are living on." Today, most Americans would have no problem understanding this statement immediately, but that was not the case thirty years ago.

If you have adopted this worldview, you understand why seeking financial independence is a personal imperative. For the most part, the days of finding meaningful and financially rewarding work for those who have little formal education have ended in advanced Western countries. The experience of going to work for a company and staying in that company until retirement is now the exception, not the rule. And very few members of today's workforce expect to receive a defined benefit pension. Rather, our typical retirement plan is a defined contribution plan, and we accumulate what we contribute financially, not what a benevolent employer bestows upon us at the end of our careers.

I discovered years ago that some people are totally turned off by what I call "the saving thing." You know the lingo as well as I do: "You only live once." "There are no guarantees in life." "I want to live while I can still enjoy life." Each of these statements has some ring of truth, but I come back to the reality that financially, you and I are on our own—period. If the terms saving or investing do not resonate with you, could I soften it by suggesting that you use the phrase "deferred consumption" instead? That's right. Saving and investing can be described simply as deferring consumption of that particular piece of your financial pie until later.

I must insert here that my life's work—advising others how to plan for their future and invest their money—has led me to conclude that there are really only two types of people in the world—spenders and savers. I have also noticed that savers often marry spenders, but that is a discussion for another day. An economist might say that individuals have either a propensity to save or a propensity to spend. The point here is that we need to understand and manage whatever our personal inclination might be. I confess to being a disproportionate saver and always have been, with no memory of ever spending all that I earned in any given year—ever. That I am not alone has been well documented by academics like Dr. Thomas Stanley, author of The Millionaire Next Door, and others who document that saving leads to success.

Let's recap. To achieve financial independence, we need to earn more over time; to save and invest as much as we can, balancing today's needs with tomorrow's financial realities; and to pay as little in taxes as legally possible.

At a minimum, I strongly urge anyone with the opportunity to participate in an employer-sponsored retirement plan, such as a 401(k) plan, to contribute as much as possible. You will defer taxes on money that otherwise would be currently taxed and can invest what would have been tax money until you begin withdrawals later in life. This is a great example of changing the size of the slices in your income pie as you save more by paying less in current taxes.

Controlling current taxes can also be accomplished by using federally tax-exempt municipal bonds and tax-deferred annuities for those who are aggressively saving and investing after-tax money. Municipal bonds can eliminate current taxes on income while annuities defer taxes. I have used both approaches with great success over many years—for my own investing and for many clients.

In summary, money is your tool for achieving your goal. If you want financial self-sufficiency, aggressively saving and investing over time is critical to reaching your destination. Remember that financial independence can be achieved on many different levels and individuals can determine their own level. For further insights on this, I strongly recommend that you get a copy of the book, The Number, by Lee Eisenberg. This is a great read by a very accomplished writer who shares with the reader his own search for the magic number that most would define simply as, "How much money do I need to support myself?" We are not talking about rich here as that word is so relative as to be meaningless in this discussion. What we are talking about is defining the standard of living you are targeting, followed by a quantitative analysis of how much capital it might take to support that standard and then applying a range of potential outcomes and time frames to the number. This explanation is oversimplified, but you get the word picture I'm sure and have formed at least a broad general sense of the analytic process that should underlie your financial plan. It will help immensely to earn a great deal of money, but we reiterate that is not the key to your goal. What you do with that income is just as important or even more important.

Finally, let the time value of money work for you. The more you save early in the game, the better your chances for success. I will go so far as to say that how much you save and how early you do so is more important than the rate of return you earn on that money. I am in the investment business and have successfully invested my own and my clients' money for decades, but I am acutely aware that I cannot find an investment with a high enough rate of return to make up for the lack of commitment to "the saving thing" early in life. Just as a cardiologist has no pill to quickly offset years of poor diet and lack of exercise, you will have no more than what you are able to save and invest over a lifetime. While good genes can play a role in physical health, I don't think they make a difference in our financial health.

Lessons for your road to financial independence:

  A substantial income does not automatically result in a high net worth.

  Financial self-control and personal dedication to saving and investing are keys to success.

  Learning to save and invest early in life is critical to long-term success for most of us.

Chapter Three

You Are the Product and Your Most Valuable Asset

If you, like the vast majority of us, are destined to live a lifetime of working either for yourself or someone else, how do you view yourself in that role?

Today organizations of all types are focused on finding employees who can work effectively in teams, and many will hire only those they perceive to be team players. Business teams can be beneficial not just for the organization or employer but also for the employees themselves.

Having first decided to adopt this structure for my own business many years ago, I can testify to the effectiveness of well-constructed business teams. My experience has also taught me that team-building is one of the most difficult challenges facing businesses today. There are numerous examples of success in this endeavor among Japanese companies, and it may be that Japan is a more fertile cultural environment for this approach to business. But there are also many domestic examples of organizations which operate very effectively using teams. As I have seen in my own business, a key component to successful team-building is bringing together people with complementary, not duplicative skills.

However valuable teams may be, I want to encourage you to think about your own personal and financial goals and how best to achieve them. How important is it for you to have options in your life and achieve some degree of financial independence? We are not talking about lip service to these goals but a real commitment to achieving them. If you embrace financial independence as your primary goal, I believe you also have to commit to independent thinking and acting. This does not mean that you cannot be an effective member of a successful business unit or team, but it does mean that in the end, if forced to make a choice, you will probably select serving your own goals rather than the team's goals.

(Continues...)

Excerpted from LESSONS on the Road to Financial Independenceby H. Michael Finkle Copyright © 2012 by H. Michael Finkle. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Edition details

• Publisher: iUniverse
• Publication date: 2012
• Language: English
• ISBN 10: 1462083560
• ISBN 13: 9781462083565
• Binding: Paperback
• Number of pages: 120