Find Financial Freedom

I read with interest in The Times over the weekend that the Chancellor is considering another bailout package for Britains Banks. When will the government learn, the banks in this country are taking their money and running with it!

The evidence is clear in the amount of lending being done during the last quarter of 2008 that despite the governments best efforts to get credit flowing freely again, the banks are simply not playing ball. I wonder why this is though?

Is this simply a case of banks trying to take the government for a ride? One minute saying

“yes, we’ll start lending money willy nilly as long as you (the govt) bail us out”

And then as soon as the deal is done, deciding to renege on their promises to the government, and simply stashing the money away and building up their capital reserves, at the expense of Jonny Taxpayer and a naive government no less.

Or is it simply that as a nation, there is now not enough “good credit risk” customers out there, only swathes of “poor credit risk” customers, whom the banks no longer wish to lend to anymore? I suspect it’s a bit of both, banks probably do want to stash money away, build up their reserves, and lend at higher margins than previously, whilst the government would like the banks to start lending freely (as this would potentially boost spending in the wider economy), the banks can’t comply if in doing so, they end up repeating the same mistakes which caused the credit crunch in the first place.

There has been talk of the government starting a new, nationalised bank, that would buy up all the other banks’ bad debt, thus cleansing the financial system of all the toxic debt that has been causing so many problems for the past eighteen months or so. Even this may not help the situation, if the real problem comes down to there being a lack of credit worthy individuals or businesses to lend to.

So perhaps the reality of 2009 is that we will all have to improve our credit ratings, which will allow the banks to lend to us again, thus resolving the current financial crisis. Doesn’t bode well for the government - who seem to think that bankrupting the country, by borrowing heavily to fund spending on public works and job creation schemes is the way to stave off a serious recession - if the banks will only lend to those with excellent credit records (who generally don’t need to borrow money).

With Christmas just around the corner and having not quite finished my Christmas shopping, I went out yesterday to get the final few gifts that I needed. Granted, I’m having a cheap xmas this year thanks to the credit crunch, so I wasn’t going to be going on spending binge myself, but it seemed to me that plenty of others were!

Given that every day we hear about job losses and a very bleak financial future for this country (and in fact the world), there seemed to be no shortage of shoppers indulging in some last minute Christmas shopping. The shop I was in was so busy that I had to queue find a parking space, queue to use the toilet and queue to checkout, in fact it took over an hour to buy four items!

So why was this shop so busy, when so say nobody has any money this Christmas? I can only guess that there are a lot of people who are simply in denial of the fact that their jobs are unsafe and the economy is in poor health, and thus spending without any thought for the consequences. Probably putting the Christmas shopping on credit, thinking they’ll worry about it in the New Year, deceiving themselves that January is always a cheap month, so they can pay off the xmas excesses then (but in fact will have forgotten this promise to themselves as soon as they see the bargains available in the “January Sales”).

I’ve always thought the best way to get through Christmas is to start saving a bit of money each month so you have a nice fund with which to pay for Christmas presents and parties over December, I’ve only ever managed it once, and it did make a difference – January came round and I didn’t feel worried about how much I’d spent, because I’d budgeted for xmas it in the previous few months.

No doubt there will be a surge in bankruptcies and such in the new year as people’s Christmas spending, on top of already record levels of debt, catches up with them. Perhaps there’s a lesson for us all in this – don’t get sucked in by all the festive advertising, stick to your budget and remember, Christmas is supposed to be a religious festival, to celebrate the birth of Jesus Christ, not just an excuse to go on a spending spree!

I was speaking with a friend earlier who has decided to get involved with a company that write off unsecured debts. They are not an insolvency company, so they are not putting in place an IVA or bankruptcy, they are taking creditors to court. In doing so, they are winning compensation for their clients on contracts that are not in line with the Consumer Credit Act, as far as I understand it.

I can’t make my mind up on whether this is a brilliant idea or just a little bit immoral, as from what I can make out, the spirit of the contracts are fair, but they seem to be winning the compensation largely on technicalities, but isn’t it always that way when dealing with anything legal…

Granted, I did write a post recently on how to get out of debt quick, (which was a bit of a rant about how greedy bankers and lenders have got us into this current predicament, and therefore we shouldn’t feel too bad about using IVA’s or bankruptcy as a way of writing off debts) which would suggest that I would be all in favour of using recent changes in legislation to deem credit contracts unenforceable and thereby claim compensation to get the debts written off, however, this method seems too good to be true, what’s the catch?

The way I see it, if you are going to use an IVA or bankruptcy to get your debts written off, it comes at a price, namely a ruined credit record for at least three years, but more probably six years (until such time that it will be wiped from your credit file). By simply suing the creditors and getting the contracts judged to be unenforceable, and winning compensation to get the debts written off, it strikes me that there’s no pain for those that have their debts written off, and therefore, a large chance that they will not learn a lesson from the experience, and thus get themselves into a similar mess a few years down the line.

Maybe I’m being old fashioned in my thinking, however I can’t help but think that when someone commits a crime and is found guilty, they have to serve a sentence. By using this method to get debts written off, it’s like robbing a bank, getting caught, and then being let off on a technicality, we wouldn’t stand for it in those circumstances, would we?

I watched the film Wall Street again last night and found it fascinating. I think the first time I watched the film was when I was a teenager, and didn’t understand any of the financial jargon being used and how it effects the characters in the film. Now that I’m an adult and have learned about these things, I found the film even better!

What struck me as an interesting notion in the film is the way Charlie Sheen’s character, Bud Fox is trying to get ahead by studying charts and projections for various companies whereas Michael Douglas’s character, Gordon Gekko pretty much ignores this information and relies almost exclusively on “tips” or information that he acquires from “moles” within the companies he is targeting.

Now in real life, this would be deemed to be “insider trading”, and is in breach of stock market rules. This is because the notion of the stock market is that the companies are “public” companies and so all information that could affect the companies’ stock market price has to be announced publicly. By circumventing this rule, if you find out information that may positively or adversely affect the share price, you can make a play with your shares and take advantage of the situation.

The thing that struck me most with this, is that in private limited companies, the opposite is true – in fact all share dealing in private limited companies is in effect insider dealing as there is no public exchange for private limited companies.

So if insider dealing is outlawed in public stock exchanges, as it can give those who have access to inside information an unfair advantage, then why is it that this is the only way of dealing in private limited companies? And does it mean that if you want to make serious money, you should discount investing in large, public companies and instead opt for small, private companies, where you can get access to inside information and much more easily take control of the business?

I think it depends on your attitude to risk and your level of experience. As I said in my post about good investment ideas yesterday, the best investment you can make is in yourself and your understanding of business.

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 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.

Please see part 1 of this article for part 1…obvious really

I got as far as reducing the cost of TV, so I’ll now continue, starting with telephone costs. There seem to be a plethora of suppliers in this area. I don’t think it’s an easy area to compare who has the cheapest offering, because it’s not straightforward anymore.

It used to be that you had BT for your calls and internet, Sky or cable for your TV and that was about it. Now, you can get these services bundled, they all have a package which includes TV, Internet and Calls for £xxx a month. How do you choose which is best for you?

It’s not simply a decision that you can make on price, as there are differences in the packages offered. For instance, Virgin seem to have set their stall out to offer the fastest broadband ever, at the expense of some of the better channels that you can get on Sky.

BT offer TV, Broadband and Free evening and weekend calls, and a backup service so you don’t lose all your important files.

Sky have a bundled package that offers TV, Broadband and Free evening and weekend calls.

There are other providers, who seem to offer different levels of broadband speed. You can do some good comparisons on www.uswitch.com, just click on the TV, Internet, Phone Bundles link.

Whatever package you choose, firstly, make sure you are comparing (as much as is possible) apples with apples, and secondly make sure you’re not going to have to incur any extra expenses on installation, which may erode any cost savings you have made by switching.

Mobile phones are an extra expense each month that most people could go without. It was only really 10 years or so that they became so commonplace, but we all managed without them before, so why is there such a need for them now? Most people spend a fortune on their phone bills each month. My sister in law was telling me that she was spending £60 a month on a pay as you go. That’s clearly a waste of money, she could have saved about £30 a month by having it on a contract.

The best contracts seem to be the ones that offer unlimited text bundles and 100’s of cross network minutes for about £30. I’m pretty sure all the network’s will offer a contract similar to that, just pick the one that will provide you with more than enough minutes for the usage you have. If you’re not a big texter, trade off unlimited or a large amount of texts for a larger number of minutes.

Once you’ve got a good package, the trick to not spending lots of money on your mobile is to stick within the “free” minutes/texts - clearly they’re not free, they’re “pre-paid”, so if you can stick the cost of your contract into your monthly budget as a fixed cost, it makes it much easier to budget for other monthly outgoings if you know that your mobile will be, for example, £20 a month, every month.

So far, I’m pretty sure there is no comparison website for Council Tax bills, that’s because you can’t live in Bristol and pay for rates charged in Nottingham. So as for your council tax bill, there’s no way to reduce the cost of it, unless you happen to be living by yourself and not claiming the 25% reduction that you get for being a sole occupant. There is also a disability reduction scheme, which is available if someone in the household is significantly and permanently disabled. And finally, there is also council tax benefit for low income households, it’s means tested and only available if your household has savings of less than £16,000.

There are a number of different websites that can be used to compare different car insurance providers and policies. What I’ve noticed when discussing this topic with friends and clients is that some people take the attitude that they may as well bend the truth to get the cheapest quote. I find this a bit strange really. Why say your car is parked in the garage overnight to get £50 off the quote and run the risk that if it’s stolen, the insurance company would not pay out as you wouldn’t be able to prove that the car was stolen from your garage? It doesn’t make sense. It may save you a few quid in the short run, but if the car was ever stolen, the price of having insurance that was not willing to pay out would be much greater than the savings made initially. Always check that you have all the details correct, be honest with the insurance company about where you keep the car and compare the market for the cheapest like for like quote.

To save money on food sometimes requires you to swallow your pride. I know it did with me. I used to always shop at Sainsbury’s, and did so because I felt it was a better quality of food and I had something of a brand loyalty toward Sainsbury’s.

I used to pay about £70-£80 a week for my weeekly shop. It’s quite a lot for two adults and two guinea pigs (they don’t eat much). But I kept on seeing the price of a shop getting more and more expensive and coming away with less stuff… So I made a conscious decision to reduce how much I spent on my weekly shop. First thing I did was to start looking at what we were buying and seeing if we could make some adjustments to what we bought.

First savings I found that were really easy to do were things like dishwasher tablets, washing powder and fabric conditioner. We used to buy Finish dishwasher tablets, Fairy washing powder and Lenor fabric conditioner. I now buy it all from the supermarket, and it costs about 1/3 of what it used to cost. Even little things like the salt that goes in your dishwasher and the rinse aid, you can save about £2 by choosing the supermarket’s own brand rather than Finish. It’s not like you can really notice a difference, can you?

The next area I looked at making savings was with things like squash, we used to buy Robinsons squash, we now buy the supermarkets own version and it’s about £1.50 cheaper per bottle, which is a significant saving considering we get through a couple of bottles in a week.

The supermarket’s own brands are nearly always the cheapest in the shop, and in many cases the difference in quality is negligible, so why not save that money? On occasion, when there is a multibuy offer on for the premium brand of a certain product, we will buy it. Most notably is when the supermarket has a 3 for 2 offer on Tropicana fresh orange, otherwise, it’s the supermarket’s own brand. Suffice to say, I now spend about £40-£50 a week on the shopping, which equates to about £100 or so saving over the course of a month.

To save money on petrol, the best thing to do is - stop driving your car - the price of petrol seems to rise on a daily basis. It seems only two weeks ago that I filled up my car at 108.9p a litre, last wekend, I filled it up for 115.9p a litre.

There is a really good website for comparing which filling station has the cheapest petrol in your area, www.petrolprices.com, you can sign up for an account and have them email you over the prices of the cheapest petrol stations in your area, and using Google maps, they even give you a helpful map of where the locations are.

I hope that has been helpful, it’s only really my thoughts on how I’ve approached saving money on monthly outgoings. There are probably more things you could do to save if you wanted to be really nit-picky, you could not watch TV, not use a mobile phone, turn the heating off on the 1st of March, not to be turned back on again until December 1st, however I’ve tried to keep it fairly realistic. I’d welcome any comments/feedback and your ideas for saving money on your monthly bills.

I saw via MoneyWatch that the Financial Services Authority (FSA) has launched a new website - What About Money? - aimed at helping young adults (16-24) with their finances.  According to the about page:

This site is aimed at 16-24 year olds, to help you better understand money issues. It is part of our National Strategy for Financial Capability, which aims to improve the financial capability of consumers in the UK.

It includes a series of ‘Life Stages Guides’ such as Getting on the road, Getting on the road and Going to university. Unfortunately however the advice seems rather thin consisting of a top 5 need to know and doesn’t actually seem to explain the financial instruments involved - which surely is where the FSA’s advice would be most useful. After that it just links out to a number of external sites, seeming to place more of an emphasis on rating them than providing guidance.

The site seems to have been designed to be as unpleasant on the eye as possible, so I couldn’t bring myself to read it all.

The BBC is reporting that the Land Registry has confirmed that property prices fell by 0.2% during April, taking the average house price down to £183,626.

As a result the annual rate of house price inflation fell again, from 3.6% to 2.7%. That’s the eight drop in a row though it’s not a sharp a drop as other surveys have - Nationwide for example recently claimed prices have dropped 2.5% during May bringing the average house price down to £173,583.

The Land Registry told the BBC that:

This latest movement continues to point towards a weakening housing market.

So what does this mean for those of us seeking financial freedom? Well it’s bad news if you absolutely have to sell your home, otherwise it’s not necessarily going to affect you.

It might even be good news if you’re looking to invest in property as the drop in house prices will help make more properties stack up as investment opportunities, meanwhile more and more people are looking to rent increasing demand for those rental properties. Think carefully before you invest though as prices are likely to keep dropping for a while yet.

Personally I’m keeping an eye on the local market and expecting to be able to pick up some good bargain investment properties in the next six to nine months.