Find Financial Freedom

Our lives today seem driven by desires for new cars, TVs, clothes, iPods and whatever the latest consumer gadget is. So much so that we rarely stop to ask ourselves.

Do I really need it?

If we did, more often than not I suspect the answer would be no.

Do I really need a new car? No the current one is only a few years old.

Do I really need an iPod Touch? No that old IPod classic plays the same music.

Do I really need a 42″ TV? No the current 3X” one is probably already too big for you living room.

So next time you’re thinking about buying something, take a breath and ask yourself:

Do I really need it?

Better yet put off the purchase for 24 hours while you think about it. I bet that in most cases the answer is no, in which case you’ve saved yourself some money and moved nearer to achieving financial freedom.

I was just having a chat with a friend of mine who has a 2nd property which they rent out. They have no mortgage on this property, and at some point would like to access the capital in the propety, but don’t wish to pay the capital gains tax.

I suggested that there are two ways to do so, one would be to mortgage a portion of the property, the other would be to sell a portion of the property.

There are advantages and disadvantages to both, however, if you have sold rather than mortgaged a portion of the property, you will have realised a capital gain.

However, if you only sell a portion of the property that is less than the capital gains tax yearly allowance (currently £9,600 for an individual) there will be no capital gains tax to be paid, and because you have sold that portion rather than mortgaged it, there is no interest to pay. If you repeat this every year until you have sold the proportion of the property that was indeed a capital gain, then you will have realised capital gains without paying any capital gains tax.

You’re probably wondering how you could achieve this. By changing the ownership of the property into tennants in common rather than joint tennants, you will be able to split the ownership of the property up into fractions.

The inspiration for this idea came from the World 16 who do fractional property ownership schemes for investors.

Don’t buy a Starbucks coffee on the way to work
If you wait until you get to work to have your morning coffee, you will no doubt find it is much cheaper or free to get a coffee at work and you will most likely save yourself about £2.50 a day. Also, you will save time too as you won’t have to wait in line for ten minutes while they make you your coffee.
Monthly saving:20 days @ £2.50 / day = £50 per month

Make your own lunch for work
If you buy a sandwich or a salad everyday at work for your lunch, you will no doubt be spending £2-£4 a day on your lunch, especially if you have a packet of crisps, chocolate bar and a drink with your food. With a little bit of planning you can make your own lunch the night before and it take it to work with you.
Monthly saving:20 days @ £3 / day = £60 per month

Don’t buy a newspaper everyday to read on your lunch break
If you bought a newspaper everyday, that’s 50p, not a lot of money but it does mount up over the course of a month. Instead you could read a book, or if your office get’s their own newspapers, read them. In certain cities, the Metro is readily available for free, admittedly it’s not as good a read in my opinion, but if all you’re doing is giving yourself something to read for 30 minutes while you’re on a lunch break, does it really matter that much?
Monthly saving:20 days @ 50p / day = £10 per month

Wash your car yourself rather than take it to the car wash
To put a car through the car wash costs anywhere between £3 and £6 depending on wether you go for a basic wash or a super deluxe with wax wash. You can wash your own car with a bucket, some soapy water and a sponge - all it will cost is 30 minutes of your time.
Monthly saving:Once a week @ £4.50 each time = £18 per month

Don’t buy brand name consumer goods at the supermarket
If you look at what it costs to buy a tube of toothpast made by colgate, versus the own brand equivalent, you’ll probably find that you can save 50% or more. If you take this attitude to all of your normal purchases in the weekly shop, you will see a massive difference in the size of your weekly shopping bill. The best one I’ve come across is squash, you can buy Robinson’s for about £1 a litre, or you can get own brand squah from Sainsbury’s for 18p a litre. Take this attitude to things like washing up liquid, washing powder, fabric conditioner, dishwasher tablets, baked beans, bread, margarine, milk, cereal and many other products and you will see the savings mount up.
Monthly saving:£10 saving per person per week = £40 a month

Total savings achievable
Coffee saving = £50
Lunch saving = £60
Newspaper saving = £10
Car wash saving = £18
Grocery saving = £40
Total = £178 / month

I noticed that we recently had a post from a chap at World 16, who offer fractional property ownership clubs. I had a look at their website and contacted them to find out more.

It’s an interesting concept. They get together a group of investors who want to invest in property, but either don’t have enough money to put down a deposit or simply want to limit their exposure by only investing a small amount.

How they achieve this is by setting up a company that buys and holds the property, with each investor owning an equal share in the company and World 16 acting as the company secretary and management of the company.

Typically they get sixteen investors together, take £3,000 from each investor, subtract their management fees, and then invest the remainder into a good investment property, with the company taking on a mortgage to pay for the rest of the purchase.

I think it’s a great idea. It opens up property investment to a much wider market, as the entry price is the same as a cash ISA.

The real benefit they have however, is that unlike a cash ISA, they have the power of leverage, and a typical £3,000 investment could double within a few short years, unlike a cash ISA which would just about keep pace with inflation.

I don’t know if there are any more companies out there that do this, I’m betting that it’s going to become more popular, since mortgages are harder to get hold of, unless you can find a 25% deposit. I suspect it will become very popular for the “armchair” investors, who simply want to write a cheque and see a return in two, five or even seven years.

The mortgage marketplace is a tricky place. There are so many different lenders, and each lender has so many different products to choose from, it can be daunting trying to pick the right deal.

Not to mention, that each month it seems that the lenders change their product range. One month a certain lender may have the best deals in town, but the next month they don’t have any good deals.

So how do you pick the right mortgage for you? Simply put, you need to work out who you are. I’m going to generalise a little bit here, and say that there are four types of potential mortgage buyer:

• Risk averse, low income
• Risk averse, high income
• Risk taker, low income
• Risk taker, high income

I will at this point define what I mean by low and high income. Someone who is low income is defined as someone who’s mortgage (and other debts) equates to more than 25% of their household disposable income, and high income is defined as someone who’s mortgage (and other debts) is less than 25% of their household disposable income. I use percentage of disposable income because I have met many people who earn very little money but are high income and many who earn lots of money but spend a large proportion of it on their debt repayments.

Risk averse and low income

These kind of buyers should buy a long term fixed rate deal, anywhere between 3-5 year fixed rate deals will give them certainty of payments for the medium to long term. This means they know what they will be paying each month on their mortgage, and they don’t have to worry about what the base rate is doing.

Risk averse and high income

Should go for a long term capped rate deal, so that they know that their mortgage will never get more expensive than the level of the cap. Also, because they have more disposable income, they are in a position to take a small chance on the base rate, which occasionally will move in their favour, thus resulting in a small decrease in their mortgage payments. The difference could of course be used to overpay the capital or saved for times when the base rate rises above the initial rate.

High risk and low income

A low income buyer should not be completely reckless with their finances, even if they are risk takers, so I suggest they go for a short to medium term capped rate, this will limit their exposure to rising interest rates and allow them to take advantage of any reductions in interest rates.

High risk and high income

These buyers should go for a long term tracker rate. The reason for this is that as the mortgage does not represent a huge proportion of the disposable income, you should be able to deal with any rises in interest rates without too much trouble, with the upside being that you get to take advantage of any reductions in interest rates.

Of course, this is only a guide, and any decision will of course need to take account of the various fees associated with a mortgage, not just the rate of interest. The main thing to look at in any decision on a tracker or capped rate will be the margin over or under the base rate. There are usually some really cheap tracker rates that come with 2-2.5% arrangement fees, which usually swallow up any potential savings made on the cheaper rate.

The last thing that any potential buyer should look carefully for is the penalties for extricating yourself from the mortgage contract. I would always look at products that had either no penalties or only had penalties for the duration of the discount period.

I’ve been reading Rich Dad Poor Dad this week, it’s a book I’ve read before, back in 2004, so I’m re-reading it this week as I’ve been in need of some inspiration.

What I’ve taken from re-reading RDPD is that idea of reducing your liabilities and living costs, and always paying yourself first. I fully understood the idea of passive income, and the various ways of achieving passive income, however, I had fallen into the trap of thinking that I needed to earn more money to be able create spare cash that could be invested.

Another thing that has caught my attention whilst reading the book again, is that concept of people being pushed around by life, with the mark of a true winner being someone who will push back. It strikes me that a lot of people who have been pushed around, find it hard to push back, through lack of confidence or self-esteem issues, and invariably turn to things like alcohol and cigarettes to help them deal with the daily struggles.

And of course, if you go to the pub on a daily basis to have a few pints it will cost you - a lot of money. For example, I went to the pub the other night, had three pints and that came to almost a tenner. If I smoked, I would probably be getting through a pack of twenty a day, which is another £5 a day. So without being an alcoholic or a heavy smoker, you can easily spend £15 a day on unwinding and dealing with stress, which is £105 a week or £472.50 a month.

If you didn’t go to the pub every night, and smoke 20 a day, you could put that money into savings/investments.

It’s this lack of self discipline that can cause financial ruin. It’s no surprise that in RDPD, Robert Kiyosaki states that as a key differentiator between the rich and the poor, the self discipline to pay yourself first and pay your bills last, only spending the income that you’ve generated from your assets.

The more I think about this, the more profound it becomes. Everyone I’ve met who has been wealthy has been a very strong willed person, and everyone who I’ve met who is poor has been almost a polar opposite, always blaming someone/something else for why they have no money.

I can say with all honesty that I’ve been like that, when I was a student, I was always skint. That’s because I didn’t earn much money (I was studying after all), and I went out to the pub or the student union almost every night. And I smoked…

My advice to anyone struggling with their finances is to go cold turkey on cigarettes and alcohol. By not spending money everyday on cigarettes and alcohol, mentally you will feel like you are more in control of your finances. Do some excercise, and do it regularly. I read somewhere that to stay healthy, both physically and mentally, you should walk your dog every day, even if you don’t have a dog.

Lastly, be prepared to push back whenever life pushes you, if you don’t, you will be weakened by each successive knock-back, until you eventually give up.

I recently read an interesting article on Debt Avalanche? Correct?, this article was an examination of which method is best for repaying credit card debt. It examines two distinct methods; the debt avalance method and the debt showball method.

What I found from reading the article and both methods is that it doesn’t take into account interest, so I thought I would do a more in depth look at this situation using some real numbers, and also take into account the effect that minimum payments have on your strategy.

I’ve taken the numbers used on the BeatingBroke example, however I’ve slightly modified the minimum payment for one of the cards, as in his example the minimum payment was less than the monthly interest, which is not possible with a credit card – or if it is allowed in the states, then that does explain the credit crisis…

So we’ll start with Joe Bloggs, who is in my example a twenty something who’s started to take his finances seriously and decided to pay off his credit cards. He has decided that each month has an extra £300 that he could “overpay” his credit card balances. He has the following cards with the following balances, interest rates and minimum payment amounts.

Method 1 – Debt avalanche

This method states that you should arrange your debts in order of highest interest rate and repay the highest rate off first and descend through to the lowest rate.

Method 2 – Debt snowball

This method states that you should pay off the smallest balance first, so as to get a sense of achievement early on, then work your way up ascending through to the largest balance last.

I’m a bit of a numbers guy so I have used a spreadsheet to work out in our example which method is the best. I’ve assumed that for each card, the initial minimum payment is made regardless of what the minimum payment would be as specified by the card provider.

I have found that when interest is included, the debt avalanche method pays the cards off one month quicker than the debt snowball method. There really is not a great deal to choose between the two methods.

I wonder what would happen if the figures were different though. What would happen if the balances were significantly higher for a couple of the cards? What would happen if the minimum payments were different for each card?

There is also another method to use to repay the debt, which is simply putting all the cards onto their minimum payment each month, and using the excess that would have been spent on a fixed minimum payment to overpay the card that is being targeted.

What I will do, is using the figures from the initial example, build a model that tests both the snowball method and the avalanche method to see which model works best, when combined with my method, which I’m going to call the single focus method.

The results of my spreadsheet are that by using the single focus method, you will pay off the debts one month earlier using the new method, however, you do pay more interest during the course of paying the debts off. Not a huge amount of extra interest, in fairness. I suppose it’s a trade off between paying more interest or paying the debts off quicker.

In reality though, you would have to be very anal to actually set this up, and it would be much easier to simply use the debt avalanche method as that requires much less mathematical/spreadsheet ability. Only if the debts were significantly larger would it be worth using this more complicated method, as the savings in interest would become more significant with a larger amount of debt.

I went to a presentation last night, for an opportunity in the growing health and wellbeing market. The presentation was to demonstrate how the business operates and how the opportunity can help to create either a nice extra income on a part-time basis or in some cases a decent income on a full time basis.

Like all network marketing businesses, they always demonstrate how it is easy to make a bit of extra money around your current job/business, but also show that if you are willing to work at it full-time, you can create, for most people a much better income/work life balance than you could achieve by having a job.

The reason I went to the presentation is that a friend of mine invited me, she’s been trying to get me to come along for a little while, and eventually myself and my wife had time to go to the presentation and see what was on offer.

I was a little surprised to learn what I did learn during the presentation. The income available, if you were prepared to work hard, was much greater than I ever imagined it would have been. I never realised there was such demand for health and wellbeing products, it is an industry that is set to become the next trillion dollar industry. The company already has turnover of over $2billion worldwide, and a pretty healthy £36million in the UK alone.

How do they make so much money without any advertising? By network marketing, using the power of a personal network (your family, friends, colleagues, etc) and a personal recommendation to spread the good word, so to speak. It’s not exactly re-inventing the wheel, many industries work on personal referrals/introduced business, and there are a plethora of network marketing opportunities, such as Utility Warehouse/Herbalife and many more.

Effectively, you have to sell to your personal contacts. This is difficult for many people. In fact the lady that I sat next to last night was telling me that she finds that the biggest obstacle to overcome. I simply told her that she had nothing to worry about; it’s natural for an inexperienced salesperson to find the idea of selling a struggle when they first start out.

I remember the first time I had to do sales work. I was at university and had taken on a job as a telesales agent for a company that sold mobile phone contracts. The work involved cold calling people from the phone book and asking them if they would be interested in speaking to someone about getting a mobile phone. I didn’t last long, and in fact the company didn’t last long either – it went under a few months after I left!

In reality, the products should sell themselves, and that’s what the company relies upon, as it knows that most people are not naturally gifted sales people, so the benefits of the products must be fairly obvious so that inexperienced salespeople (the everyday people that sign up as distributors) will have a fighting chance of shifting the products and therefore making some money.

Where these network marketing companies really work is when they sign up distributors who are actually good at selling. The people they sign up as distributors who are good at selling with invariably be able to take the proposition and quickly sell enough of the stock to make a decent amount of money, and then sell the idea of being a distributor onto someone else, effectively duplicating what they have done.

It’s this process of duplication which grows the team of distributors and provides the leverage – you benefit from the efforts of the people you sign up as distributors – that the real income opportunity is based on.

In any network marketing business there will be 9 people who poke it with a stick, sign up a few of their own customers and make a small amount of money each month from their purchases, and 1 who will sign up other distributors and make a nice income by leveraging the efforts of others in their team.

Some people think it’s wrong to make money off the back of other people’s efforts, but in reality, the successful distributors have put in much more effort in signing up a team than the team members who in turn only sign up retail customers.

In reality, it’s very easy to sell the products being offered here, it’s much harder to sell the proposition of becoming a distributor, so I say well done to those that do.

Why is it so much harder to sell the proposition of being a distributor? Mainly because the vast majority of people are resistant to change. If you have someone who is in a job, they are probably in their comfort zone, and becoming a distributor will most likely take them out of their comfort zone.

I would love to get involved with this business, I believe in wellness products, I would probably benefit from using some if not all of the products, however, I suspect I won’t.

“Why not?” I can almost hear people saying. Because, what interests me most in any network marketing business is always the product/service, and never the business. I sat through the presentation last night and couldn’t think of a single person I knew who would be interested in the business opportunity, but I could think of lots of areas that you could sell large volumes of the product.

You’re probably thinking, “why’s that a bad thing?”, well I suspect if you wanted to simply set yourself up as a distributor and not a team builder, the powers that be would not be that happy, and you would be under pressure from above to build a team that each did small volumes of business rather than building a business yourself that did large volumes without the help from a team. Perhaps I’m wrong.

I went to Devon and Cornwall a couple of weeks ago and stayed with a friend who has built up a very nice holiday cottage business for himself. As I’m always interested in how people have made themselves, we were soon chatting about how he got to where he is now.

He told me that he bought the first property, which was an old farm barn back in the late 1980’s, and decided to “extend” the property into what it currently is. It took him about five years, during which time he mainly lived in a caravan on the site, and did most of the work during his spare time when he wasn’t working on various building sites in Dorset.

By the time he actually finished the project, the boom of the late 1980’s had turned into the recession of the early 1990’s and the interest rate on his mortgage had gone up to 15.5%, needless to say that he could now no longer afford to live in what had become his dream home.

What did he do? He let the property as a holiday let, and has been doing so ever since. He even let my wife and I use it for the weekend and I can confirm that it is well worth the money that people pay - over £1,000 a week if all ten beds are used in high season.

As a business, it’s great, they have the place busy all year round thanks to the fact that, unlike many other holiday homes, they have an indoor swimming pool in the grounds of the property which means it’s an all weather holiday home, useful in Cornwall where the weather tends to be quite wet during the winter.

He even managed to buy the farm house next door when the owner moved on, and now has two very lovely holiday cottages which he rents out all year round.

I really admire this guy for what he’s done with his life. He’s not been reckless with his money, always watched the pennies. I doubt he’s ever earned large amounts of money, but through wise decisions and hard work, on paper he owns property worth over £1million pounds, which generate a very comfortable, almost passive income through the holiday business.

If you would like to know more about the holiday cottages mentioned, please check out www.cornwall-holidays.com.

I’ve been watching the series Deadliest Catch on Discovery Channelfor the past few weeks, and have really enjoyed it. I like the way the guys who work on all the boats are real characters, and the trials and tribulations they all face.

What I find most fascinating is the notion that these crab fishermen go out onto the Bering Sea and fish for a couple of weeks, and then come back in with a haul of, in some cases, over $1million worth of king crab. After the costs, the deckhand’s usually end up taking a cut of around $40,000 – not bad for a few weeks work, hell even for a whole month!

I wonder how many of the deckhands just blow their money as soon as they get onshore? I know that if that had been me in my early twenties, I would definitely be looking to have a good time with all that money.

What would I do with the money now? I would be looking for opportunities to invest some of the money made into providing an income for me all year round, as fishing is obviously a seasonal business.

What opportunities could you buy with $40,000? A whole range of things. You could use the money as a down payment on an investment property, though if the buy-to-let market in the states is as bad as it is in the UK, then it may well be worth holding off on that. Perhaps you could invest the money in another business, $40,000 won’t get you that far, but it may be enough to buy into a franchise business, which as long as it turns a profit each year could provide you an income when you’re not at sea.

Alternatively, you could buy income bonds, although a fixed income bond @8%, is only going to generate $3,200 a year in income, so you would need at least $400,000 worth of income bonds at that yield to generate a reasonable yearly income.

I think if I was a crab fisherman I would use some of the money I made after each season to clear some of my mortgage, put some money into savings, put some money into a personal pension plan, and live off the rest.

I really don’t know how often these guys go to sea, I would guess they fish for about 6-8 months of the year, so they may well be earning some decent money. In which case, if I were in their shoes, I would be looking to save/invest a lot of the money made, so that I could either take early retirement – from crab fishing at least – or move into another profession that didn’t carry with it the risk of dying in icy cold water! Perhaps I’m being too risk-averse, perhaps half the reason they do what they do is for the thrill of the chase, and the dangers it carries.