Find Financial Freedom

When I worked as a mortgage broker, I made a substantial portion of my income from remortgaging my clients properties, mostly just helping out those rate tarts that wanted a cheaper deal for the next 2,3 or 5 years, but sometimes I would do a remortgage as part of a debt-restructuring exercise, rolling up much more expensive loans and credit cards into a cheaper rate on the new mortgage.

Now when the base rate was between for instance 5%, this pretty much always made sense, as the reversionary rate on my clients’ mortgages was usually between 1.75% and 2.25% over base, so best case 6.75% would be the standard variable rate, which I would always be able to beat, even when all costs were taken into account.

Nowadays, things are slightly different thanks to the credit crunch and the Bank of England’s decisions over the past nine months to reduce the base rate to 0.5% and maintain this unprecedented low level for the last three months.

Any mortgage holder now just about to come off a fixed rate deal will be rubbing their hands with glee at the though of potentially paying as little as 2.25% on their mortgage, assuming a similar margin over base from earlier.

It really doesn’t make much sense to consider swapping your mortgage to a new fixed rate deal when you will save considerably more money on your mortgage by simply sticking with the standard variable rate, or am I missing something? It strikes me that fixed rates should have come down significantly over the last six months, but they still seem to be hovering around the 4-5% mark. If you could find a three or five year deal at around 3%, then it would make sense to remortgage onto that, such that when the base rate does start to rise, you will have locked in cheap money for 3-5 years.

Clearly, this all hinges on the Bank of England and what they decide to do with the base rate, though, as I wrote in an article earlier in the week, it seems that at least one big high street bank thinks that the base rate won’t rise until late 2010.

I’m in the lucky position that my mortgage reverted to SVR just as the Bank of England started drastically reducing the base rate late in 2008, such that I’m paying about £600 less each month than I thought I would be once the mortgage had reverted to SVR, which saved me needing to remortgage. Although, with everything that has happened in the last year, the lesson I’ve learnt is that our society is so burdoned with debt that even if you stuck on a variable rate mortgage and didn’t go shopping around for a good fixed rate deal every 2-3 years, you will be better off.

The reason for this is simple – too many people with too much debt will stop the Bank of England from raising rates too high, most likely by causing another credit crunch / recession just as it looks like inflation requires a period of sustained high interest rates.

When I worked as a mortgage broker I dealt with a broad cross section of society on a daily basis, some professionals, some civil servants and teachers and quite a few tradesmen.

Now you would think that the more educated the clients were the better they would be with their personal finances, not so. What I discovered whilst dealing with the various clients I dealt with was that some people just seem to have a natural instinct for personal finances, and others seemed to need a helping hand.

The lesson I tried to instil in all of my clients that fell into this latter category was the importance of budgeting. This seemed quite alien to some of them, and it was only when I went through their monthly income and outgoings, to create a monthly budget for them that they realised why they were so often getting into debt.

By preparing a family budget, where you know exactly what your necessary outgoings (mortgage/rent, utilities, insurance, food, petrol/diesel) are each month allows you to then see what you have left over each month to spend and save.

If you only vaguely know how much you have on a week-by-week or monthly basis to spend, then it’s very easy to overspend, or worse if you have overestimated, get into debt on a credit card or overdraft.

If you can work out your family budget well for the month, and know exactly how much money you have to spend, then you can avoid going into debt, and it’s this that is the key to budgeting. I helped many clients realise that the reason they were getting into debt each month was that they were overspending on unnecessary items, such as expensive mobile phone contracts, over priced insurance, expensive utilities, expensive sky tv or cable, and generally spending a lot of money shopping at the supermarket.

By helping these people to understand their budget, they were able to make cuts that saved them money each month which they could then spend guilt free, knowing that they were now not getting into debt because they had made a family budget, and most importantly were sticking to it!

In my quest for financial freedom, I have chosen to achieve this by being an entrepreneur and starting my own business. This is nothing new to me having been involved in a successful internet business during 2004/2005 and then running my own mortgage brokerage business from 2006-2008.

However, I’m sure there are many out there that have always had jobs, and though they may have no desire to run their own business, if their ultimate goal is financial freedom, then I would suggest that this could be achieved quicker by setting up and running your own business.

Before you do though, take a bit of time to evaluate a potential business opportunity to see if it is right for you, as well as evaluating the business to ensure that it is actually a business and not just self-employment – a mistake I was guilty of making with my mortgage brokerage!

Evaluation criteria for a business opportunity

1. Is the opportunity you are considering something you have an interest in? If not, it may be best to steer clear of it, as you will be putting in the hours for this, so it better be something that you have some passion for.

2. Do you have something unique to offer the marketplace? If the answer is no, then it will be harder to make it a success – essentially you will be just another player in a crowded marketplace with little to make you stand out from the crowd, and don’t think that your pricing strategy is enough to make you unique – it isn’t!

3. Is there sufficient demand in the marketplace to sustain your new business? Especially important if it is already a mature marketplace with existing businesses already thriving, even more so if the market is not growing rapidly. Essentially, if you are entering a market that is mature and not growing, then to make your business a success, you will have to steal the customers from other businesses, and you can be sure that your competitors will not like this and most likely take action to counter this. This makes customer acquisition and retention much more costly.

4. What demographic trends are going to help your business? Clearly starting a pie shop in a wealthy, health conscious marketplace will probably not do that well. However, starting an organic farm shop will probably thrive, firstly because of the demographic trend on your side, and secondly because organic products are premium products, which makes them less price sensitive and theoretically higher margins.

5. What risks are there that are totally out of your control? I speak from experience, I have seen my ability to trade wiped out because I didn’t understand the risks that were inherent in being a middle man or a broker in the mortgage intermediary market – the lenders control the market by way of the products they make available to brokers, if they decide to sell their own products cheaper than brokers can, it undermines ones ability to trade. This is pretty much what put me out of business as a mortgage broker, and is a lesson I will never forget. Take great care in evaluating any business idea to ensure that have as much control as possible, don’t rely on another business(es) being able to continue to supply you with anything.

As well as these five points that will help you to evaluate a business opportunity, I would also advise you to think about these other factors:

1. Are you willing to do what it takes to become a successful business person? It may involve taking drastic measures, like selling your home, living in a caravan, living on a tiny amount of money while you get the business going, doing without nice holidays, cars or even designer labels! If you want to continue to live a high consumption lifestyle while trying to get a business of the ground, I can tell you that this will make it almost impossible, so it’s better to change your way of thinking (and spending) before starting your business.

2. Are you willing to deal with all the negativity and scorn that others, sometimes those closest you, will deal you? You’d be amazed at how closed minded people are when it comes to entrepreneurs, although in my experience this is only when you are starting out. Once you start showing a profit, suddenly everyone becomes a believer! This is simply a result of the fact that most people do not have the imagination to think “outside the box”, and therefore cannot comprehend starting a business. Most people need to see to believe, to be a successful entrepreneur, you need to believe before you see – can you do this? Do you have the ability to visualize your future, a future where you are running a successful business? Does the thought of making more money than you ever did as an employee excite, rather than intimidate you? If you answered yes to these questions, then you probably have what it takes to be a success, if you answered no, then don’t bother, you will fail and lots of people who said “I told you so” will be smug that they knew better.

3. Are you in a stable relationship, with a partner that supports your dreams and is prepared to stand by you come thick and thin? If not, then be prepared to walk away from them should they not be supportive or be prepared to fail in your endeavour because having an unsupportive partner will do nothing other than undermine your efforts, most likely resulting in your business not succeeding.

I know this is quite blunt and to the point, but it has to be. Starting your own business is not something to be taken lightly, you need nerves of steel, determination and most of all, the ability to learn, quickly. In addition there are probably a bunch of other critical attributes that are needed that I will go into in another post.

I was in my local branch of Natwest Bank today, I won’t bore  you with the mudanity of what I was doing – opening a business savings account if you must know – but I had a very interesting chat with the business adviser in the branch who deals with all aspects of their products, savings, investments, mortgages and so on.

He informed me that he had received an internal memo recently from Natwests’ in house economic forecasters stating that they felt the current low interest rates which most of us borrowers are benefitting from should last until the end of 2010.

I was quite shocked, but very pleasantly surprised by this, as I had predicted that interest rates would rise during 2010. If we do see the current 0.5% BoE base rate until the end of next year, then my predictions will be completely wrong – not that I mind, I have a mortgage and am quite enjoying paying just over 2% on my mortgage.

This will mean misery for the hundreds of thousands of pensioners who have significant savings in their savings accounts, and in fact, while I was in Natwest sorting out a savings account for my corporation tax, I was rather amazed to find out that I will be getting a whopping 1.25% interest on my savings – hardly seems worth it really!

I have many friends who are employed, mostly it seems by large corporates or the government, through jobs in teaching, the health service or other government departments. They all seem fairly happy with their lot, most of them don’t earn huge amounts of money, but seem happy with the (perceived) job security, paid holidays and pension scheme.

I have first hand experience of going through a business failure and seeing how it affects one’s personal finances, not to mention one’s private life! It’s because of this experience that I have been through that I am able to see beyond the immediate reality of job security and see that actually, most people’s jobs or business’s (if self employed) are not that secure.

What strikes me is that so many people seem to get lulled into a false sense of security simply because they have money flowing into their bank account each month in the form of wages. If they were to think a bit more about the process of having a job and getting paid each month and just how delicately balanced their finances are upon this (perceived) constant, they might come to the conclusion that in reality, having a job allows them to remain just over broke, in so much that they have enough money each month to pay all their bills, have a bit of money and save a small amount.

I certainly won’t take credit for Just Over Broke, this is a well known acronym used by many enlightened people to describe the futility of having a job, I think I first read it in a Robert Kiyosaki book, Rich Dad, Poor Dad.

If I were to go and get a job, I would spend my whole time worrying about money, because I would know that the money I was earning could potentially run out at any point, of course I would have one month’s notice, but it would still be a worry for me.

The only thing that would stop me from worrying if I had a job would be the knowledge that I had paid off my mortgage, but that’s a long way off from happening…So what is the answer then? In my opinion, the answer is to shun the perception of job security and accept a much higher (perceived) level of risk and start your own business. This is what I am pursuing, and so far I’ve had 7 years of trials and tribulations, some great times along the way and some downright awful times as well.

It has been a steep learning curve, but as I embark on what is my third business startup, I can reflect back on the previous two businesses dispassionately and avoid the mistakes made and identify risks that went unnoticed in the previous attempts at financial freedom.

I remember earlier in the year reading an article in the paper (I think it was The Times) about house prices and how they would plumment about 25% during 2009-2010. This seems not to be the case now, as there was a story in the news last week that house prices were rising again.

I suspect that this rise is simply the result of some good marketing/selling by the estate agents of this country, and also the result of the efforts being made by the govt to get the banks lending again. I however, expect this optimism to be short-lived.

You see, house prices are over-priced, fact. I can’t afford to buy a fairly typical three bedroom house in my home town - prices are currently hovering around the £180k mark. This is more than three times my income and I’m earning more than the UK average. So how does everyone else afford to buy then?

Some people have saved up large deposits, or because there are two earners in the household, they can afford a much bigger mortgage than I could on my own. In some cases, the parents may help out, in fact, a friend of mine had his parents help him and his wife buy their first home. In this case, the parents “lent” them the deposit (about 20%), but then when they sold the property after four years, they took 20% of the sale proceeds, which netted them a nice little earner, and still left the children with a hefty deposit on their next house.

My feeling is that with the recession that we are all feeling, these generous parents may be less than willing to help out their children, and it’s this lack of funds for deposits that will lead to a sharp decrease in property prices, as the purchasers realise they need to raise the deposits themselves and with the credit markets (banks/building societies) being much less generous (requiring at least 10% deposit, sometimes 20%), people will simply have to hold off buying for a long time until they have saved up a deposit.

Until prices come back down to a level where an ordinary couple can save up a deposit in a relatively short period of time (1-2 years), then buying a house will remain out of reach of many and it’s this lack of demand that will pull prices down.

By taking a quick look at the Big Mac Index courtesy of The Economist, it would seem that Thailand is the cheapest place to retire to. Of course, some people’s tastes may have graduated beyond that of a Big Mac and fries by the time they reach retirement age, so with this in mind, what other factors should one look at when searching for a cheap place to retire to?

Cost of property

I’m sure some people from over in Scandinavia may well look at the Big Mac Index and think that retiring to the UK would be cheaper, given how much cheaper the Big Mac is over here than over in say Sweden. But if they did this without considering the cost of housing, then they would be in for a nasty shock, as the UK has some of the most expensive housing in the world. If you want to retire abroad, to somewhere cheaper, then do some research into the price of property. You may well be pleasantly surprised to find that you can sell your fairly average four bedroom detached house in the UK and buy a lovely five or six bedroom palace with a swimming pool in a country with a nice sunny climate!

Cost of living

Clearly the Big Mac Index is not sufficient to make a proper decision on, to do this you will need to consider what the local costs are for groceries, utilities, taxes, petrol (assuming you will run a car), insurance and health care. As well as this, you will need to consider the impact of flying back to the UK every six months or so to visit relatives and/or friends.

Social cost

If you retire abroad, you may struggle with the language – especially if it’s somewhere exotic like Thailand – and it may be too difficult to learn. In addition to this, there may not be a large population of ex-pats, especially British ex-pats, so your social life may well take a hit. And unlike working abroad, you may not get the opportunities to meet lots of new people and therefore make new friends that easily.

Cheap Countries

I haven’t done much research into this, but if I were to, I would be looking at places that are still fairly backward compared to the UK. Think backpacking and gap years, as these places tend to be cheap enough that you can exist for less than £500 a month and still have a bloody good time.

For instance, South America, South East Asia, South Africa, Australia and New Zealand are all popular back-packing destinations, so why not consider these as an ideal cheap place to retire to.

Early retirement is still a concept in use today, primarily to describe the ability to retire before the standard retirement age of 65 in the UK, though these days people tend to talk more about financial freedom as opposed to saying they want to take early retirement.

If you are looking to achieve financial freedom or take early retirement, then you will need to do some planning, it won’t just happen otherwise. First thing that you need to do is set yourself a goal. When I used to work as a mortgage broker, I was lucky enough to receive some good advice from fellow financial advisors about how to help clients get the most out of their financial planning. The technique that was passed onto me is called “The Broad Concept”.

Apparently it is a strategy planning tool that was first conceived during the Vietname war by the Americans. The idea being that if you want to achieve a set of objectives, you must first follow these four simple steps:

1. Work out what objective you want to achieve, or work out your retirement goals.
2. Work out where you are now (with respect to achieving your stated goals).
3. Work out all the various different ways you can achieve your goals.
4. Lastly, analyse and decide upon the best way to achieve your goal by discounting each route in turn.

So how does this work in practice?

Well, the first thing to do is work out step 1. For example, let’s say your objective is to retire at age 50 with an income (in today’s terms) of £25,000 a year.

The next thing to do is work out step2, where you are now (in relation to achieving that goal). So for example, if you are 25 years old and you have no retirement planning, you have 25 years to acquire £500,000 (£25,000/5%) - I’ve assumed a fairly typical 5% return on investment. Clearly this example doesn’t take into account inflation, so to do this correctly, you would have to tweak to allow for the impact of inflation etc.

The third part is the bit where you can have a little bit of fun! Step 3 you need to work out the various different ways to achieve the stated goal of acquiring a pot of £500,000 in 25 years. You could work out that if you invested a few thousand pounds each year into a pension fund, you would achieve the goal. 

You could also look at investing some money into property, with the intention being that in 25 years, the capital appreciation, as well as the mortgage being paid off could provide you with the amount of capital required to retire on. Though, I would potentially just look at investing in property with the intention of holding onto it for the income that it would generate. Remember that with property, if you sell it to release the equity, you will pay capital gains, so it is sometimes better to hold onto it indefinitely.

Another option could be to start a business with the intention that over the next two and a half decades you will have built up something of value that could be sold. The proceeds of the business sale could then be invested in an annuity to provide you with the requisite income.

The safe option, in many eyes would be to find an employer who would provide you with a nice comfy “company final salary” pension scheme, and hope that by the time you get to retirement age, your salary is fairly high, thus affording you a decent retirement income.

There may even be a few other options, but I’m not going to go into them at this stage. Let’s move onto stage 4 which is the analyses of the various different options that can be taken to achieve your stated goal.

You may look at the option of starting a business with a view to selling it at retirement age and decide that’s not for you. That’s fine, at least you’ve explored the possibility. Similarly, if you’ve no interest in becoming a landlord, you may well discount that option too. And lastly if you don’t fancy being responsible for your own pension planning, it may be wise to discount that option and look to go and get a job with an employer that pays a nice final salary pension, and hope that the scheme will still be going when you come to retire.

Whatever you do with your retirement planning, you can be sure of one thing - you need to do some, and it won’t necessarily be the right type, but unfortunately, you won’t know until it’s too late. The most precious asset we all have is time, and no amount of money can buy any more, so it’s best to put some serious thought into what you will do about retirement when you are young, rather than just hoping that it will magically just work out all right in the end!

With the credit crunch having turned into a recession, I’m sure there are many out there that are wishing to cut down on everyday expenses, so here’s my tips for frugal living. However, don’t think that being more frugal is the only way to beat the recession - the optimum strategy to beat the recession is to play a good offence and a good defence. So cut your costs down by following my frugal living tips, but also look to increase your income by following these simple ways to make money online.

Frugal Living Tip # 1

Downgrade to a less expensive supermarket than you usually shop at. In the UK, the conventional wisdom is that the most expensive supermarkets are Waitrose and Marks & Spencer, with the cheapest being the Aldi’s and Lidl’s of this world. So to make a huge saving, stop shopping at M&S and start shopping at Aldi. If you want to make a modest saving and you usually shop at Sainsbury’s, try shopping at Asda or Morrisons for a few weeks - you’ll notice a difference in the price of your shopping and the quality is comparable, in my opinion.

Frugal Living Tip # 2

Take a keen interest in the prices of petrol/diesel at your local garages. The variation in petrol prices can be pretty big, especially if like me, you fill up with premium unleaded (104.9p/litre) by accident. This was a full 10p/litre more expensive at Texaco half a mile down the road than the local Morrisons regular unleaded, which is £4.80 on a 48 litre fill up! But even comparing like for like (ie, regular unleaded with regular unleaded), the variation in price between the supermarkets and other petrol stations, even within a small radius can be quite large. Clearly it’s not worth driving an extra 20 miles just to fill up, but if you’re passing nearby, a slight detour may be worth it if it will save you £2-£3 on a tank.

Frugal Living Tip # 3

Eat in, or if you really must go out for dinner/don’t have time to cook, then get a takeaway. If you order a takeaway, you don’t pay VAT, so immediately you’re saving that 15% that would have been added on, also if you are eating a takeaway, you can buy any booze to go with it cheaply from the supermarket, rather than paying expensive restaurant prices!

Frugal Living Tip # 4

Take sandwiches/packed lunch to work. I find that when I don’t prepare a lunch to go to work, I end up buying rubbish or spending more because I am shopping in more expensive shops than I would do my everyday grocery shopping at. If you make your own lunch each day, you could save £10 - £15 a week, which is a significant saving over the course of a month.

Frugal Living Tip # 5

Examine all your monthly direct debits to see firstly how much you are spending each month and secondly to identify which ones could be switched to cheaper suppliers. I did this recently and found that I was paying £35 a month for a mobile phone contract which supplied me with more texts/minutes than I ever used. I’ve now downgraded to a cheaper deal (with the same supplier) and am saving £15 a month.

I got rid of Sky TV and bought a free to air box, am saving £37 a month that I used to pay to Sky. Clearly if you are a big football fan then this will be painful, but it does give you more excuses to go to the pub - but make sure you only have a squash and don’t spend the money saved on Sky on beer instead!

I wear contact lenses, and couldn’t do without them (I’m as blind as a bat otherwise), so what I did was shop around and find a supplier on the internet that will supply my contact lenses and solutions for £15 a month, compared to my optician that was charging me £33.80 a month.

And of course, it goes without saying that you can switch your home insurance, gas, electricity, water, telephone, broadband - just make sure you are getting a better deal, this can only be calculated by reading the small print of each deal to ensure there will be no hidden surprises!

Lastly, as an ex-mortgage broker, I’m going to recommend that you don’t use your trusty mortgage broker when buying your life insurance or other protection products. Instead, get some quotes from them, this will ensure you get the correct amount of cover for your needs etc etc, but then go and buy from an online broker that strips out the commission (about 30-40% of the monthly premium) and instead charges a small fee (£30-£50) to set the policy up. A company I used was Cavendish Online and they were very efficient.

There are a host of ways to make money online, but many of them are not that simple, for instance, if you wanted to setup as a competitor to Expedia, it would be pretty difficult to do on a shoe string, actually it would be impossible.

However, if you have a love for travel and fancy yourself as a internet entrepreneur, then there are ways you can make money, hell, you can even get yourself signed up as a partner of Expedia and sell their products for a commission.

This is what is known in the industry as affiliate marketing, and it’s something I did for a few years, specifically in the travel industry. It’s quite simple really, all you need do is refer traffic to the merchant, and they will credit you for any sales that result from that traffic in the form of a nice commission cheque at the end of the month. That’s the simple part, you don’t need any specialist skills, just some basic web design skills will get you up and running.

The hard part is getting the traffic to come to your website in the first place. This can either be done by buying the traffic as part of a pay per click campaign or by optimising your website so that it appears high in the search engine rankings and therefore gets lots of targeted traffic.

An even simpler way to make money online is to become a published author, by publishing a blog. There are lots of free blogging software tools available, such as WordPress (in fact, this blog is written using WordPress) that are easy to install and use. Once you’ve installed it on your website, all you need to do is get the creative juices flowing and write lots of content that the search engines will love. This will eventually translate into traffic, and then you can monetise this traffic with adverts on your blog - simple!