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!

We regularly write about how to achieve financial freedom and ways to earn extra money in your spare time and other related subjects on this website, but we don’t always focus on some of the more humdrum stuff, like how to protect your assets once you’ve acquired some. This article should be a useful guide to either self employed or employed people looking to secure their assets and thus their financial future.

Income Protection

It doesn’t matter if you are employed or self employed, you can still buy insurance to protect your income from accident or long term sickness. However, if you are employed, you can also buy unemployment insurance, which can be used to provide you with an income in case you get made redundant – it won’t payout if you get fired though!

Debt Insurance

If you own your own home with a mortgage, it is very important to take out life insurance, though really in this instance it should be called debt insurance, as it is taken out to repay the debt in the case of your or your spouse’s death. Like all protection insurance, it is cheapest when you are younger, so if you anticipate trading up the property ladder, buy more life insurance than you need now or simply buy on a level basis.

Life Insurance

You should protect your and your spouse’s income in the event that either of you died before pension age. To do this, purchase life insurance in a lump sum equal to your income, less the cost of mortgage (assuming you have debt insurance), divided by a realistic rate of return on safe investments (5% - 10%). This will provide yourself and your spouse with enough money to maintain the existing standard of living should either of you die before retirement age. You can do this with a whole of life policy but it can be much more expensive and you are committed to paying for it for the rest of your life.

Critical Illness

You may become ill at some point, but not die from the illness, in which case all the other insurances so far would not cover you. In this instance, it’s worthwhile taking out critical illness insurance, such that you will receive a lump sum to help with mortgage payments, hospital bills or changes to your accommodation should you be wheelchair bound for instance.

As this insurance is very expensive, it’s usually prohibitive to take out enough to cover your entire mortgage liability, so just take out what you can afford or think of a figure that would be useful to have to help with a life changing illness (£25k - £50K is fairly typical).

I’ve been reading a very interesting book recently, called The Millionaire Next Door, and it’s all a digestion of various studies and surveys taken by a couple of guys on American millionaires, to try and understand how they made their millions.

I thought it would be an interesting read, full of inspirational stories about how ordinary people like you and I overcame great adversity to start a business and then build it up from scratch to be worth millions. However, it is sadly not like this at all. It is in fact almost the opposite of inspirational, though it is still very insightful and has really made me understand a few issues that I never understood from my childhood.

You see, I had a best friend from school who’s dad was (and still is) a self made man. He built up his nursing home business and eventually sold it about ten years ago for over £1million. I always thought his ways were a bit strange, he was always frugal and never seemed to get carried away with his success. I always thought that this was simply his way of dealing with it, but it seems from reading this book, that his behaviour is not uncommon amongst the self made millionaires.

You see, most people in life strive to have a large income, but never really understand the benefits of having a large income, almost assuming that your outgoings must automatically increase in line with your income otherwise you’re not playing the game fair.

It doesn’t have to be this way, and the book’s findings share this view. The lesson I’ve picked up from reading the book is that the vast majority of millionaires live frugal lives, consuming only what is necessary to live and perform their everyday tasks, and using whatever is left to invest.

So to achieve financial freedom, live like a millionaire and follow these easy steps:

• Control your (and your spouse’s) consumption, don’t spend up to or beyond your income level
• Buy a modest house, with a modest mortgage (no more than two times yearly income) and work to pay it down as quickly as possible
• Don’t get into debt, if you are already in debt, get out of debt as quick as possible, here are some useful articles (how to get out of debt quick and how to repay credit card debt examined)
• Buy a 2nd hand car, with cash - don’t get sucked into buying an expensive luxury car (BMW/Audi/Merc/Porsche etc) on credit or worse still, hire purchase, it’s just not smart
• Don’t buy expensive “label” clothing, it’s the same as cheap clothing, all made in sweatshops in the far east, so why pay more?
• Buy a cheap watch for £10 ($20) and replace every few years, don’t waste four/five figures on an expensive Breitling/Omega/Rolex or any other expensive make, all they do is tell you what time it is
• Don’t go on expensive holidays, yet…do it when you’ve achieved financial freedom, in fact, when you’ve achieved financial freedom, the rest of your life is a holiday!
• Have a budget for your everyday life, work out how much you need each month for groceries, utilities, insurances etc and stick to this budget. You should even budget for little luxuries every now and then, which is ok, as long as it’s been budgetted for!
• Don’t waste money eating out every other night, you can easily spend a week’s shopping budget for two on a meal in a restaurant for two, so it’s just not financially smart to waste so much money on eating out, keep it as a treat, once a week at the most.
• Don’t waste money on expensive club memberships, like golf club or country club memberships. If you need a gym membership (which I do), then make sure you get value for money, in fact here’s a great idea about how to Reduce Your Monthly Outgoings By Going Down The Gym
• Don’t waste money on keeping up with the Jones’s, this is the key thing to remember, most other people who seem to be wealthy are usually only a few months from bankruptcy because all their income (and more) is used to keep up this pretence of wealth, when in fact they are slaves to their debts and high consumption livestyle.

Given that the economy of the UK and most countries around the world is not in good shape, it’s no surprise that governments worldwide are lowering interest rates in an effort to increase the flow of money in the economy.

You see in economics, there are two theories about how government can control the flow of money in an economy:

• Fiscal policy - control of taxes
• Monetary policy - control of interest rates

When I studied economics at school, I had no “real world” experience, so found this subject incredibly dull. It’s only now as an adult that I find it fascinating, especially as the effects of monetary policy and fiscal policy can be seen in real time on the UK economy.

The Bank of England have been using monetary policy to steadily lower the base rate in an effort to increase the amount of disposable income that UK consumers and businesses have.

But how does this work?

Simply put, if you were a typical UK homeowner, who had borrowed £100,000 on a tracker mortgage, you will now be paying £4,000 a year, or £333 a month, less in interest than this time six months ago. The theory goes that most borrowers will see this as a windfall and go out and spend the extra money they have in their pocket.

I would strongly advise not to do this. Not because I’m a doom-monger who only wants to see the UK economy worsen. Simply because when interest rates revert to a more normal level (somewhere between 4% and 5%), those people that had gotten used to having this “extra” disposable income as “normal” will suddenly feel the pinch.

If you use the extra money that you have to either pay off some of your mortgage early, or invest for the future, you will be far better placed to deal with the inevitable interest rate rises in the future.

The same goes for any businesses that are suddenly feeling an easing in their interest payments. Use the extra money to build up reserves, or pay off the capital on the loans, mortgages and/or overdrafts.

By following a frugal strategy whilst interest rates are low will no doubt lengthen the recession by not playing into the hands of the policy makers in the Bank of England and the government, but from your own perspective as UK consumers and businesses, you will be better placed to strive once the UK economy does recover.

This is a somewhat amusing story that I was told today by a colleague who has recently moved offices. The chap in question had gone to look at some potential new office space to let, along with a fellow director of the business.

The landlord’s representative in the matter happened to be a very young man who happened to be the landlord’s son. When the office had been shown to the prospective buyers, the rep asked them what they thought.

The prospective tennants responded in a positive manner, but happened to mention that with the credit crunch and economic downturn, it must be harder to let offices at the moment. The rep responded by agreeing with them, and then proceeded to tell them that the building was fairly empty and that they would be glad of having any new tennants at the moment.

This then led onto a discussion about the rent for the offices, which as you can probably imagine was a little one-sided, given how much information the naive rep had let on to the prospective tennants.

From what my friend tells me, the rep initially stated that the rent was £2,500 a month. One of the directors was about to jump in and accept, when the other one (the guy I spoke with) interjected and simply stated that it was a bit pricey.

The rep at this point caved in completely and immediately lowered his price to £2,000 a month. Again, one director was almost about to accept this until the other (somewhat canny) director stopped him and reiterated to the rep that it was still a lot of money, and they had seen similar offices going for less.

Eventually, after a bit more negotiation, my friend was able to get the rep to agree to let them the rooms for £1,300 a month, with free telephone line rental thrown in for free, and the rent capped at that rate for three full years.

It just goes to show how useful a bit of information is, and why you should always play your cards close to your chest.

This is a good question - it should be a fairly straightforward answer, however in the current financial climate, the answer will depend on a number of important questions:

• Do you have adequate equity?
• Do you have adequate income?
• Is your credit rating acceptable?
• Will a remortgage actually save any money?

Let’s take a look at each of these questions.

Do you have adequate equity?
With the property market having already fallen by 16.2% according to this post, and with predictions of more falls to come this year, it is wrong to assume that your property is automatically worth more than your mortgage. Clearly, if you have a tiny mortgage compared to the value of your home, then this will not be an issue, but for those that bought a property recently with a fairly small deposit, chances are you are now in negative equity.

Do you have adequate income?
Gone are the days when lenders would lend four to five times your income. Income multiples have been reduced by most lenders. This mean that if you took out your mortgage a few years ago on, for example, four times income multiple, and your income has not altered significantly whilst simultaneously you haven’t made much of a dent in the size of your mortgage, you may well find that lenders will not consider you on the grounds that you cannot afford the mortgage.

From what I read, the self-certified market is suffering, which means if you have trouble proving your entire income, the lender may only take into account the portion of it that can be proved.

Is your credit rating acceptable?
Before the credit crunch, it was quite easy to find lenders willing to lend to people who had numerous County Court Judgements, defaults, arrears and even a bankruptcy (as long as they were discharged for three years). However, the way the market has changed means that it is now nowhere near as easy to obtain finance if you have not taken care of your credit rating. It may be that you will have to pay a much higher rate of interest, or simply not be able to obtain finance at all.

Will a remortgage actually save any money?
With the Bank of England base rate dropping again last week, there may be a huge number of borrowers who are now paying far less interest than they could ever hope to pay on a new mortgage if they switched. This is because new mortgages are being offered on interest rates that are typically 2% - 2.5% above the base rate, while if you are currently on a tracker or variable set at 1.5% - 1.75% above base rate (as many revert to after an initial discount period), it would be more expensive in terms of interest repayments - never mind the fees - to switch lender.

So if you have adequate equity, sufficient income, good credit and can find a deal that is better than your current variable rate or tracker, it should take you between two to three months to remortgage, however, I doubt there are many people that would be better served by remortgaging right now, better to wait a while and see if the base rate gets any lower (as I predicted here) than rush into things, this is going to be a long recession, so what’s the rush?

Finding spare cash to save (and invest) is quite a challenge for many people, unfortunately. However for many there’s an easy way to find an extra £20-£50 or even more per month to invest - pay your bills on time!

Simply put, paying your bills on time will reduce the level of late payment fees you pay. Given such late payment fees range from £10 to £50, that alone could be a significant saving on each bill. On top of that, the easiest way to make sure you’re not going to be late paying is to switch to direct debit payments and many companies, especially the utility providers, offer a discount if you pay by direct debit, which could save you another £10-£50 per month.

Additionally if you pay by direct debit you’ll usually know what you will be paying and when. You can then schedule your payments to ensure you don’t go overdrawn and incur interest charges on your bank account, or if you’re already overdrawn don’t exceed your overdraft limit and incur additional over-limit charges.

With the new year well and truly here, I’m sure there are many of us who have made new years resolutions such as:

Quit smoking, detox, lose weight, blah blah blah

The usual resolutions that in most cases won’t last until the end of January. If you are to make any new years resolutions, this year especially, it should be to manage your monthly outgoings, reducing them where possible, to ensure you are not overspening. What with the credit crunch affecting the availability of credit (though you should really ask yourself, is that such a bad thing?), and the economy in a worse state than Gazza on a night out, this year is going to be a tough one!

Now if you have a fairly stable job or business that provides you with a predictable income each month, then there is no reason why you can’t get through it. Yes, you will have to tighten your belts and watch what you spend your money on, but with a bit of careful consideration to your spending habits, there is no reason why it has to be a real struggle.

I have a monthly budget spreadsheet which I use to keep a track of my monthly outgoings. I find this useful, as it enables me to see how much disposable income I have each month to spend on whatever I like. Without knowing how much money is earmarked for important outgoings like rent, bills, debts, groceries etc, you can easily get into a mess with your finances.

If you make one new years resolution to stick to this year, commit to sorting your finances out, by monitoring your monthly outgoings, reviewing them to reduce them where possible and set your household budget so that you don’t overspend. If you do overspend, you may find things very difficult this year, as lenders are less and less willing to dish out easy credit, especially where the credit is to be used as a way of living beyond your means and overspending.