The MapleMoney Show » Financial Literacy

Understanding the Levels of Financial Freedom, with Rob Berger

Presented by Borrowell

Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of Maple Money, where I’ve been writing about all things related to personal finance since 2009.

People in the early retirement community tend to use the 4% rule, or saving 25x your annual expenses, as the benchmark for financial freedom. But according to my guest this week, that definition doesn’t paint a complete picture.

In his upcoming book, Retire Before Mom and Dad, Rob Berger explains why financial freedom is something that is experienced almost immediately as you begin to build wealth. The Forbes editor, and former attorney, views financial independence as a journey rather than a destination, and details seven different levels in his book.

Rob and I discuss the impact that car payments, or that daily latte (always a touchy subject) can have on our retirement plans, and Rob shares ways to save money without requiring a lifestyle change. For example, he says that people should do an audit of their fixed expenses at least once a year, to find additional savings.

Our sponsor this week, Borrowell, is on a mission is to help Canadians feel great about their credit. To help, they’ve taken a product that was once $23/month, and made it completely free. To get a copy of your free credit score, credit report, as well as ongoing monitoring, visit Borrowell today!

Episode Summary

  • Seven different levels of financial freedom
  • Why doing the financial math allows for informed decision making
  • How your car payment is affecting your financial freedom journey
  • Ways to save money without changing your lifestyle
  • Why you should do a money audit
  • The 3-fund portfolio explained
  • The benefits, and drawbacks, of investing with a robo-advisor
Read transcript

How do you feel when you look at your investment statements? Will you ever experience financial freedom? How about retirement? Does it seem like nothing more than a pipe dream? My guest this week is Rob Berger, a personal finance editor for Forbes and author of the book, Retire Before Mom and Dad. According to Rob, financial freedom is a journey, not a destination, and he shows us ways that we can get started right away.

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Our sponsor, Borrowell, is on a mission to help Canadians feel great about their credit. To do that they’ve taken a product that was once $23 a month and made it completely free. To get a copy of your free credit score, credit report as well as ongoing monitoring every month, head over to today. Now it’s time to discuss financial freedom with Rob…

Tom: Hi Rob, welcome to the Maple Money Show.

Rob: Hey Tom, it’s a pleasure to be here.

Tom: I wanted to have you on because you’ve got a new book coming out that I found very interesting. There are a lot of FIRE movement books that have been popping up lately and they’re great but you’re outside of that yet tackling a similar subject. Can we kind of go into this a little bit? I noticed the subtitle is, Simple Numbers Behind a Lifetime of Financial Freedom. What is financial freedom to you?

Rob: Well that’s a great question. I’m still trying to figure that out. To me, mathematically, it’s having enough money so you don’t have to work. People use 25 times your annual expenses, borrowing on the 4-percent rule meaning you can take out 4 percent of your investments in year one in retirement as the benchmark for financial freedom. I think that’s a reasonable approach. It’s an approach I use it in my book. It doesn’t paint a complete picture because, for starters, it makes financial freedom look like something that happens 20, 30, 40 years from now. The reality is, as you’re moving towards that goal and building wealth you start to see the impact of financial freedom much earlier. I can share a story with you as an example if that’s okay?

Tom: That would be perfect.

Rob: Before I even thought about financial freedom this way and before there was ever a FIRE movement, I changed jobs and I had taken a $100,000 pay cut to take this new job. I was in a meeting with the boss’s, boss’s, boss and he was on a phone call just ripping into someone. Completely out of line. In the middle of all that all I could think about was I haven’t achieved ultimate financial freedom yet, but I’m on my way. I can walk out that door. I don’t need this job. Now, I’d have to go find another one. I wasn’t ready to retire. But I wasn’t stuck. It was then that I realized there is an ultimate financial freedom but I’m realizing the benefits of it long before I reach the ultimate goal. In fact, I left that job shortly thereafter.

Tom: I like that idea you can leave your job. But yes, you would have needed another one at that point. I assume then you just reached that point where you weren’t living paycheck-to-paycheck and you had some money saved up. It just takes the pressure off. You don’t feel as trapped.

Rob: Even when you’re just starting out and you save just that one month’s worth of expenses which is what I define as the “level one” of financial freedom, it’s a great feeling. Are you rich? No, not by probably any definition. But you know you’ve got some cushion. You’re going to keep going, keep building, but you’re not paycheck-to-paycheck. And even that small step is a wonderful feeling.

Tom: For sure. I’ve seen a lot of people who don’t like their job and feel like they can’t make a change. I won’t be able to quote it but there was a study out there that says when you hit a certain financial success, you no longer make these bad decisions that are tied to poor finances. Once you have a little leeway, even though you might still be working, you feel more free to go explore that new career instead of just staying with the status quo.

Rob: You do. In fact, when I left that job I took another pay cut. I was going in reverse. But that’s okay. It worked out.

Tom: You were working your way down the corporate ladder?

Rob: I was working my way down the ladder, that’s right.

Tom: In your book, obviously, you cover financial freedom. Can you kind of go through the different levels of that?

Rob: The way I set it up was I identified seven levels of financial freedom. They’re all based on your expenses. It’s got nothing to do with your income. Of course, income matters but it’s all based on expenses. And so level one (as I mentioned) is one month’s worth of expenses. Level two is three months. Level three is six months and it goes all the way up to level seven which is 25 years. I did that for a couple of reasons. One was it allows folks to monitor their progress rather than just some number in their bank account or brokerage account. They can translate it into a level of financial freedom that’s based on their actual expenses. The second thing you can do is start to evaluate your daily decisions in a different way. For example, you’ve heard of the “latte factor.” People love to hate the “latte factor,” and I get that. But one way to look at it is to say, “Well, if I give up something…” And it doesn’t have to be a latte but, “If I give up something and save $25 a month, how does that affect my journey to level seven financial freedom? How much time does that shave off my working years?” That puts the whole decision in a different frame of reference. By the way, you may do the math and decide to keep drinking your lattes. That’s okay. But now you’ve made an informed decision. You said, “Okay, whatever this expense is, it’s important to me and I know I’m going to work two years longer.” And sometimes that’s what it is for a seemingly small expense. Five or $10 a day can easily add one, two or three years to your working years. But that’s a decision you ultimately make. We all have to make our own decisions about what’s important to us. But at least we can now make an informed one. The seven levels help you do that.

Tom: I like the idea of doing the math and making an informed decision. Not that I’m drinking a latte everyday but if I looked at it as working two extra years, I’d probably switch to coffee and a thermos.

Rob: Well I applied it. I just got rid of my car. My wife has a car so we’re down to one car. And that’s a much bigger expense, of course, so when you apply it to that kind of decision, you really see the numbers change. Of course, not everyone can go without a car. I get that. But it’s not just lattes that matter. So when you apply it to bigger expenses the numbers get huge, quickly. Then again, you can apply it to what’s important to you and what your life plans are.

Tom: We went down to one car when we had our kids. We got rid of the second car because yes, it’s a hassle right now. Sometimes we have competing things we need to do and having the one car isn’t always perfect, but it sure saved us a lot of money over time.

Rob: Yeah, my wife is not convinced that I’ll survive without a car. She could be right. That’s part of the other thing I mentioned in the book—running experiments. This is an experiment and it may fail but that’s okay because I’ll learn something in the process.

Tom: Robert Farrington at the College Investor got rid of his car and just Ubers everywhere. He did the math and it’s slightly cheaper. Not massively cheaper, but slightly cheaper. Obviously, the less you need it, the better off you are.

Rob: That’s the thing today with Uber and other technologies like Zipcar (at least in Washington D.C.) It makes it somewhat more feasible to do that than it was even five years ago.

Tom: Yeah, exactly. So many more people are able to do things like telecommute anyways if they’re working from home for their job. Now a car is not as important as it used to be.

Rob: Right. Right.

Tom: I do have to say though, at some point soon we’re going to have to get a second car. Our kids are in the teen stages so they’re not far away from where different competing activities are going to become a problem.

Rob: Well, our kids are grown so we’re sort of past that. But I remember it well and I don’t think we would have been able to survive without a second car.

Tom: Speaking of the car, you do mention car payments as being one of the biggest issues towards reaching this financial freedom.

Rob: It’s huge. My approach to it in the book is not to simply say get rid of your car because that’s just not helpful. It’s really the same approach I took with the seven levels of financial freedom. It’s to show you the math. I went through a number of scenarios; you buy a car, keep it for five years and then sell it and get a new one. Maybe you keep it for 10 years. I go through that math. Then I assume you keep it for 15 years and so on. The numbers are huge. Even if you’re talking about a relatively modest car… I think I assumed a $20,000 car in one scenario and a $15,000 car and another. But over a lifetime, assuming an average return, you’re talking about over three million dollars in lost opportunity costs. Again, that doesn’t mean that everyone can go out and sell their car but now you can at least make an informed decision. And maybe you can get rid of your car. Or as you’ve done (and we’ve done at least for now) maybe even go down from two cars to one car. But the numbers are huge when you factor in the cost of the car. And I wasn’t even looking at insurance, maintenance, gas and all of the other expenses. I was just focused on the price the car. And you’re talking three million or almost four million depending on the numbers over a lifetime. It’s a huge expense.

Tom: Again, just like the lattes, is if you start looking ahead in lifetime numbers I think these decisions become a lot easier.

Rob: You see, that’s the thing—those folks that retire early look at it that way. They don’t look at it just day-to-day. They look at it over, maybe not a lifetime, but certainly over decades. Sometimes that’s hard to do. You get that immediate gratification from a latte so sometimes it’s hard to look past that. But those that retire early or achieve some level of financial independence at a relatively young age tend to look at things over much longer periods of time. That was one of the goals of the book was to kind of get folks to see things in a different way.

Tom: Speaking of retiring early, what’s your definition retirement? I see a lot of this coming out where they say, “Oh, that person is not retired because they’ve got a side-hustle or they’ve written a book.” To me, I think these are just smarts layers of income. I don’t see it as any different. But what are your thoughts on that?

Rob: I have a mathematical answer to it and then I have more of a behavioral science kind of answer to it. I define retirement as that period when you’re relying on your investments to live on. When you think about the four 4-percent rule and how much you need to save that’s all assuming that you’re pulling from your investment accounts to pay for your living expenses. But as you’ve pointed out, a lot of people have what you might call “lifestyle” businesses; you’re a blogger, or you’re a podcaster. You write a book or you have some sort of side business. You love it. It’s a tremendous amount of independence and freedom. You don’t commute every day. You don’t answer to anyone and it generates enough income to live on. I’m not sure exactly what you call that. You and I have both lived it. To me, it feels like retirement. But it’s certainly not a 1970s or 1980s view of retirement. I don’t know that there’s a right answer. Certainly, if you can get that side-income doing something you love then my view is to call it whatever you want. I call it success. That’s how I think of it. I do see retirement from a mathematical perspective though. That’s when you’re literally living off of your investments and maybe a pension. Or, in the United States, your Social Security, that sort of thing.

Tom: Here in Canada we have the CPP which is the Canada Pension Plan. I don’t know if it’s similar or not but it’s probably in the ballpark. It seems like retirement and financial freedom are kind of the same thing. I’ve heard of people who are retired and sure, they could be fine money-wise but they still want to be a greeter at Wal-Mart or something like that just because they want some sort of social interaction. They work one day a week at Home Depot because they want to talk tools with people. Just because you’re making an income doesn’t mean you have to. Sometimes people just want something to do and why not have a hobby that makes money?

Rob: Yeah. And actually J.D. on Get Rich Slowly has an excellent article. I think he calls it something like the five different types of retirement. It’s an excellent article. I was just reading it this week. It may be an older one. I’m not sure when he wrote it but it talks about that very thing. If you can generate side-income doing anything… whether it’s your own business or in a job, if you love it and enjoy doing it, it takes a lot of pressure off your nest egg and allows you to “retire” a lot earlier than you would in a more traditional sense.

Tom: And to me personally, it just feels like another form of diversification. Why not have another stream of income coming in so that you don’t have to religiously depend on that 4-percent rule?

Rob: Yeah, particularly on days like today when the last time I checked the markets were falling very quickly.

Tom: For someone younger (like me) it might be a good time to invest.

Rob: If you’re still accumulating, you want a bear market. A bear market is your friend.

Tom: Yeah, exactly. I benefited a bit in 2009, 2010. But I’d still like another do-over at that again.

Rob: Were you able to stick to your plan and just keep investing through that ugly market?

Tom: Well, I did but I got really lucky. I cashed out a lot of my investments in early 2009. It might have been the end of 2008 because we were about to buy our first house. The way it works in Canada is when you pull money out of your RRSP through the homebuyers plan; it’s kind of a loan to yourself. No interest but you have to pay it back still. You have to pay back what you pulled out. I knew I was pulling this money out and then everything kind of dropped and then I had to put money back in. So, dumb luck. By all means, it wasn’t any guru move, but I did buy during that time.

Rob: Sometimes it’s better to be lucky than good. I lived through that and didn’t change anything. I kept investing. And you think, “Oh, I’ve got this investing thing figured out. I survived the 2008, 2009 debacle.” But what you realize is… fast forward 10 years and your situation is different. You’re 10 years older. You’ve got a lot more money to lose. You may have done great then, but it doesn’t necessarily mean it will be as easy the next time. I guess we’ll find out.

Tom: Yeah, I did have comparatively very little at the time.

Rob: Same here. Same here.

Tom: That’s a fair point. So far though, with the ups and the downs, I like the idea of treating it like a sale. Take groceries as an example. Sure you bought that box of cereal at full price one week, but if it’s on sale the next week, you’re going to buy more as long as you still like it. It’s no different with a business. If you still think that business is going to come back up then why not buy it when it’s cheaper?

Rob: Emotionally, that’s very hard to do. But I agree completely that’s the right approach.

Tom: That’s a good point too. I always have to caution people. And I think you’re probably the same way, we’re probably more numbers than emotion a lot of the time. And I realized with a lot of people that’s not the case.

Rob: When the market’s down two or three percent of the day I just don’t look. I really don’t. I just don’t check my numbers.

Tom: I rarely check. I’m a big fan of ETF indexing. Whether you’re buying ETFs or going through a robo-adviser it’s just a lot of hands-off. You just make your payments and don’t look at it. One thing I want to get into is— you have a great concept in your book called, the money audit. Can you go through how people use this to improve their personal finances?

Rob: A little background; when I first heard of blogging I was trying to think of ways to save money both for myself and to write an article. Some ways to save money hurt. Like the latte, if you’re a latte lover and you go without, that’s painful. Or eating out or whatever. I thought, “Are there other ways to save money that don’t change your lifestyle in any way?’ Let’s start with the easy stuff first… of course there are. I started making a list of them. Let’s give you an example; you shop around for a better car insurance and you save $25 a month. Or you shop around for better mobile phone service and you save $50 a month or whatever it might be. One thing I noticed about this type of saving as compared to not eating out or not buying a latte is, I only have to do something once—shop for the insurance, save the money and I’m done. I don’t have to keep doing anything. With the latte I’ve got to keep avoiding it every single day. It’s work. So anyway this idea of painless ways to save money and one-and-done kind of came together in the money audit. And it’s pretty simple, really. You map out all of your monthly bills. Everything from the car insurance to all your debt payments, your utilities, cell phone, your subscription services. Not your daily spending, just your monthly bills. Then you just go through them and you ask a couple of things; do I need this? Can I get rid of the gym membership I haven’t used in 10 months or not? Can I get rid of Hulu Plus because I forgot I even still had it and I’m paying $10 a month? That’s the first thing. Can you get rid of anything? And by the way, that applies to loans too. You might get rid of that car. You may not, but you might. If you’re going to keep it the question becomes, do you need exactly what you have? Can you get something a little different? Can you raise the deductible on my car insurance? Can I save money because I don’t really need a 500 channel cable package when 100 channels are just fine? And you do that for everything listed. And then once you’ve got that all figured out you go to the third step in all of this and execute on it. You do all the comparisons. You call up all your service providers to see if you can get a better deal and figure out what you can save. And then of course, once you’ve figured out what you’re able to save (and this is important) you want to automate those savings. If you end up saving $200 a month through this process you’ll have it automatically put into your retirement account each month, or automatically put in a savings account if you’re building up your emergency fund. If you don’t do that (at least in my experience) you’re just going to spend it. And you won’t know where you spent it. It’ll just be gone. You may have seen this in the book but I asked the Dough Roller Facebook group—my former site for examples of this; how people saved money. I listed a whole bunch in the book but it really was amazing. Folks were saving a ton. My first thought was, “Well, maybe it will only save $25 a month.” There were people saving hundreds of dollars a month following this. A lot of it was on cell phones, interestingly. Some of it was refinancing debt to lower interest rates. And again, it is a few minutes or a couple of hours of time and then you’re done. The savings just keep accruing. So that’s it. That’s the money audit. So now nobody has to by the book, by the way

Tom: You’re getting it all right here. I love the idea going through this though because I save big on my house insurance and contents. One of the big reasons I saved wasn’t because one option was naturally cheaper than the other. It’s just a slight difference in their rules. One required certain riders for my wife’s wedding rings where the other had a larger allotment for jewelry. Just a slight difference in the rules, actually. I think it saved us probably towards $1,000 a year. It was just a slight difference in the rules. It wasn’t like they were the exact same insurance. They were written a little differently so it happened to work for us. But someone else might find the other option better. With insurance, I get the one-and-done. But in that case, it’s almost checking every couple of years maybe because lots of things can constantly change.

Rob: I kind of think you should go through it once a year. Or maybe once every other year. But the nice thing is it doesn’t take much time. We did that and saved probably $500 a year on our car insurance. It was the exact same coverage. It was the weirdest thing. I still don’t fully understand how they rate car insurance here in the United States. It’s bizarro. So yeah, even doing it once a year or once every other year can net some pretty good savings. But you got to automate it. You’ve got to make sure that money goes towards your freedom.

Tom: Yeah, and not just more money to have disappear.

Rob: Right. Or to pay down debt. Obviously, that’s a big challenge for folks so that might be good use of the money too.

Tom: You mentioned cell phones too. I haven’t noticed as much for myself, but it’s a real thing here in Canada that with a cable bill or internet bill, you’re worth a lot more to them when you aren’t their customer. You’re not likely to get much for being a current customer. There is not much of a loyalty discount. But if you are willing to keep hopping between a couple major players every year with whatever contract you might sign. Going back and forth and being able to go back and forth, it’s a little bit of a hassle for sure, but you can save a lot of money. The one thing I find keeps people stuck to their internet plans is because they’re using that provider’s email address. Just go get a gmail address. Then you’re a lot freer to bounce around.

Rob: We made that exact same mistake years ago. I told my wife we’re going to gmail because I don’t want to be wedded to an expensive internet company.

Tom: Yeah, exactly. You need to keep that same email address. I just said this to my in-laws recently, “If you’re thinking you want to move to a different plan then get that gmail address now. Don’t wait until the last second.”

Rob: You can tell how old someone is by their email address. If it’s or something you know they’re my age or older.

Tom: They’ve been using that email address for what? A couple of decades? The other thing I want to go through is your concept of autopilot investing. Can you kind of talk us through what that is?

Rob: Part of my goal in the book was to take someone who didn’t have any background in investing or just wasn’t a confident investor and get them to a point where they could not only invest but invest and know what they’re doing. And feel confident about what they were doing. It’s complicated. Half the battle is just understanding all the jargon. In the book I go through a couple of different ways you can auto pilot invest. And what I mean by autopilot is that it’s very easy to pick a few investments. Then, basically, you don’t have to do much. You might rebalance your investments once a year. Other than that you’re pretty much done. I talk about a couple of different approaches. One would be to use what’s called target date retirement fund. You have to be careful about those because some of them have really high fees. Some of them don’t. Schwab doesn’t. Vanguard doesn’t. But others do. Still, if you can find one that’s low-cost, put your money in one fund. They divide it up for you between stock and bonds in the US and between US and foreign and you’re done. Not only that, as you get closer and closer to retirement they will switch more of your investments into bonds for you. There’s really nothing to do after that. I know not everyone wants to take that approach. So in the book I also talk about what’s called the three fund portfolio which was popularized by the Bogle Heads. It’s just three mutual funds for US perspective, U.S. stock index fund like the S&P 500, an international fund and a bond fund. That’s it—three and you’re done.

Tom: here in Canada the common thing is to add one more quarter which is a Canadian index. We had a past episode with Noah Solomon here in Canada pointing out that it’s a little strange that we give a quarter of our portfolio to Canada just because we live here. Off the top of my head I think it was 3 percent international affect of Canada. But for some reason it’s common. Yeah, we do a quarter Canada and then roughly a quarter everything else.

Rob: So it’s a four-fund portfolio. It’s still pretty easy. And I understand that. You want to support your country and where you live. I don’t know about mathematically, but someone might say today you probably shouldn’t be in U.S. stocks because they’re so expensive. I wouldn’t agree with that but I know a lot of people make that point. I get it. You want to support your country and where you live and businesses in your country. So you have a four-fund portfolio. I mentioned robo-advisors like a Wealthfront or Betterment. They typically add 25 basis point; one quarter of 1 percent fee. And that’s another thing I cover. It’s easy to dismiss that. I mean, one quarter of 1 percent? How can that be? That gets us back to the seven stages of financial freedom. You should basically look at that as another year of work. That’s how big the 1 quarter, 1 percent is. That adds a year to your working years. You know the math so you can decide how important that is. But still, I think there’s still reasonable services to consider. They do the work for you not unlike a target date retirement fund. That’s it. It’s not complicated. The hard part, of course, is first doing it and then sticking to the plan. When we hit the next bear market, you’ve just got to keep plowing through.

Tom: I think robo advisors are a perfect choice for someone starting investing. It gets you past that initial hump of being unsure what you’re doing with it and how it all works. It’s a good jump into investing in a nice simple way. We don’t have Betterment or Wealthfront here. Wealthsimple would be number one in Canada. But yeah, it’s a great way to get started. I do get that extra fee is going to start to cause a bit of a drag when you’re into the six or seven figures of investments.

Rob: Wealthsimple is a good one. I think the key is just that people understand. If you’re just starting out I think they’re excellent options. Our son invests with Acorns. I don’t that’s available in Canada.

Tom: It’s not.

Rob: It’s a roundup app.

Tom: We have a similar one called Milo, here.

Rob: Yes, the same type of thing. Acorn has a fee too, but I think it’s terrific he’s doing that. I support that 100 percent.

Tom: That’s great. I’ll be quite happy as is my kids get older if they start saving on apps like that.

Rob: I wish she would save more.

Tom: Fair enough.

Rob: So, Robert, if you’re listening to this episode, please start saving more. I don’t know that that’s going to help. We’ll see.

Tom: Anything he does will help. I’ve said in this podcast before, I pretty much lost my 20s not investing and just letting that money disappear.

Rob: Yeah, I’d say I lost half my 20s. I don’t know why I started saving. I wasn’t taught anything about finance as a kid. My parents didn’t really save. But when I started working I thought, if I spend everything, what do I have to show? I did all this work and I’ve got nothing to show for it. It started to freak me out so I needed to save. That’s what I had to show for it.

Tom: It was the same for me. When you get into starting a proper career and marriage and kids and houses and stuff it smartened you up pretty quick I think.

Rob: Reality has a way of doing that.

Tom: Exactly. This has been great. Can you let everyone know more about the book and where they can find you online?

Rob: The book is available for preorder now and it goes on sale this month. You can get it at Amazon and Barnes and Noble. You can find me a couple of places. You can got to I’m also a deputy editor at Forbes. So, you can find me at Forbes. And I’m on Twitter and Facebook. I would love to chat with folks and I’m happy to entertain any questions folks have. I’m happy to hear from everybody.

Tom: Perfect. Thanks for being on the show.

Rob: Thanks Tom.

Thanks Rob for joining us ways to experience financial freedom earlier than we ever thought possible. To learn more about the different levels of financial freedom pick up Rob’s book, Retire Before Mom and Dad. You’ll find a free order link as well as show notes for this episode at I’m looking at topics you want to hear more about. Feel free to reach out via email at with any topic suggestions or guests that you think I should have on the show. Thank you for listening and I’ll see you next week when Lee Huffman joins us to chat about what to look for when booking a hotel.

People tend to use 25x annual expenses as the benchmark for financial freedom, but that doesn’t paint a complete picture...the reality is that as you’re building wealth, you start to see the impact of financial freedom much earlier. - Rob Berger Click to Tweet