Find Financial Freedom

I’m quite different from most property investors, well most people for that matter, as I get excited when property prices fall, because, to me, falling property prices is great news. Many people find that odd, after all I own a few properties - surely I’ll be losing a lot of money? Well yes you could argue I’ve lost money when the property prices fall, but my personal financial philosophy is that a house is a business/asset (in that it is capable of producing a cash flow) and as such that I plan never to sell a house - at least not one that is capable of producing a positive cash flow, which should be all of them if I’ve done my due diligence before buying.

My “never sell a house” approach applies to my own homes too, when buying a house (as a home) I consider not just it’s suitability for my family, but also the potential to rent it out in future/when we move on. Again the reasons are relatively simple, if we sell the house we’ll almost certainly end up doing so through an agent (we don’t have time to sell privately) which will cost between 1% and 2% of the price achieved, we’ll also probably have to pay a fee to close the mortgage (probably a couple of hundred pounds). In return we’ll get a pot of capital (our equity) to invest elsewhere, or to use as a deposit on the next house.

If instead however we kept the house (assuming we’d brought with consideration to the rental possibilities) we could rent it out and receive an income from the property. Admittedly the income is likely to be relatively small initially, but it will grow over time as rents rise and in the long term property prices are also likely to rise, so any capital gain is likely to increase. In short if you don’t need the deposit for your next home, then I believe you should never sell your house. Instead rent it out.

With 2009 just around the corner, I thought it was time to start thinking about new years resolutions. Now, I don’t smoke, am actually in quite good shape, eat a fairly healthy diet and don’t drink that often – in short, all the obvious resolutions to make, like “quit smoking, drink less, lose weight etc” are all non-starters. So this got me thinking, what other areas of my life can I look for improvements in?

I decided to review my financial goals and my spending habits to see what differences I could make in the coming year that would have a positive effect on my finances and move me close to my financial goals.

My financial goals are quite simple – financial freedom – but what is my definition of financial freedom?

• Own your own home without any mortgage
• Have passive income from a stable source that enables a reasonable standard of living
• Pay off all other debts, including car loans, credit cards, student loans etc

If you can achieve those three targets in life, you will be financially free. Admittedly, if your passive income is at the subsistence level, you might as well keep on working to build this up until it’s at a level that allows you to experience life to the full. Likewise, if you have massive passive income, but a huge mortgage and other debts that swallow up the income, then you need to work on decreasing the liabilities and maintaining or even growing the passive income.

So by reviewing my goals, I came to the conclusion that I needed to give myself a serious talking to, and get myself back on track, financially speaking!

I currently don’t own my own home, I rent, but I do have an investment property. I have debt, and a small amount of passive income. In short, I need to work on all three areas of my financial goals this year.

This is how I will prioritise my goals:

• Increase my earnings from my business
• Reduce the level of consumer debts that I have
• Save up a deposit to buy my own home

The first priority is clearly to increase my income, as this enables the other two goals to be achieved quicker. The other goals, are most likely goals that will take longer than a year to achieve, so I can start them in 2009, but will have to pursue them into 2010 as well.

By looking at where I am now, and reviewing against where I want to be, I’ve been able to clarify my thinking and determine my focus for the coming year. If you don’t do this from time to time, you can simply drift, and this is not good as it can lead to a build up of low level stress that will over time lead to bigger problems. So the best financial new years resolution is to spend time reviewing your situation and setting goals for the coming year and beyond.

How did I manage this?

Like I said it was easy – I just lived long enough to draw a good company pension that had been accruing since 1969.

A lot of readers will now be rocking back on their heels and doubtless saying to themselves “ smug old bastard “ what does he know about the world today and the problems we face trying to make our way.

Absolutely right in many aspects – the world today is a completely different place from the one I grew up in. In the nearly forty years of my working life we seem to have thrown out an awful lot of bathwater with babies.

What do I mean by this?

Above all the idea we take responsibility for our future financial wellbeing.

What is all that about?

I was lucky I didn’t have any choice – if I didn’t join the company pension scheme I didn’t work, no ifs, no buts, that was it.

Today the same company pension schemes have become too expensive for many companies to sustain on their balance sheet.

That shouldn’t stop you making some provision, by yourself if need be, better if your employer helps along the way, but one thing that can be guaranteed – hit your sixties and start to think about stopping work without an adequate pension and life will be far from a bed of roses.

Practical measures?

Take a look at the pension contributions HMRC allow you to make and work out the most that you can afford to pay into a scheme – if you start at around five percent of gross income in your twenties you will simply be reflecting the amounts we used to pay into schemes in the sixties. Contribute more if you can – we also had a company contribution adding to the value of our fund.

Don’t leave it any later than you possibly can – a small salary “sacrifice” early in your career will make a huge difference at the end.

If you are in work, don’t tell me you can’t make this sort of sacrifice – it is exactly what it says “a sacrifice” but that has always meant giving up a little now in the hope of future gain. Its just that nowadays we give a small sum to a pension provider instead of a goat to the “gods”. My guess is that most pension providers would struggle with the idea of depositing a goat in your scheme plan.

Remember its nobody’s job but yours to make sure you live to a ripe old age, enjoying the fruits of your well earned retirement – and don’t moan that you will have to work longer than we did – you will still be able to enjoy the same time not working, if you start to make some provision now, simply because your life expectancy is greater than previous generations.

And what’s the really good news about all this? Well not only will you reach a contented old age, but that five percent gross will cost you less in real terms – because the government does not levy income tax on pension contributions.

Oh and another thing, pay your contributions monthly by standing order – don’t expect you will have the will power to save it all up for a year and sling it all in a lump sum – you won’t!

One last thing

If ever things get really bad and the wheels fall off your plan – your creditors cannot touch your pension scheme, whereas other savings and investments could be used to pay them back.

I guess I’ll just sit back now wait for you all to tell me what a bad thing pension schemes are!

I’m sure there are many books about “day trading” your way to financial freedom, however, I feel there are other ways of achieving financial freedom that don’t involve the stock market. Also, I don’t have any experience of “day trading” so am not qualified to write about it, so instead will write about what I do know about.

Trade to me means business - self employed people are often called “tradesmen” - so to trade your way to financial freedom to me means “build your business up until it can give you financial freedom”.

So how can you do that? Firstly, you can avoid making the mistakes that so many people make, that of allowing their spending to increase to the level of their income. If you have a successful business that is making a lot of money, ask yourself “If I wasn’t making all this money, what would I need each month to live off”. That figure should then be your “drawings” from the business. Any surplus profit can then be used to invest.

By following this simple change in your business you will be able to achieve financial freedom very easily. Let’s do some numbers.

If you had a business that made profits of £10,000 per calender month, it’s not unreasonable to think that you will have to pay the tax man £2,000. That leaves £8,000. If you pay yourself a reasonable salary out of that (preferably as a dividend for tax efficiency) of £2,000, it would leave £6,000 each month that could be invested.

But what would you invest in? That’s the million dollar question at the moment, if you believe the rubbish you read in the papers. I can’t believe how many times I’ve read recently that the wealthy are struggling just as much as the poor are right now because there are no safe places to put your money. Really? Well why not? If you’ve got money to invest right now, there are pots of money to be made in either the stock market or real property.

Clearly, if you buy, hold and pray that the price will go up, then yes, you are going to struggle to find safe investments at the moment. But if you can work out how to make money in the two other market trends that are seen (sideways trend and downward trend), then you would be rubbing your hands with glee!

The current global financial crisis is causing many families around the world a lot of heartache, thanks to the increased stress of either job loss / threat of job security or simply because of the lack of easy credit which many have become accustomed to. How could this have been avoided? How can future generations avoid this cycle of boom and bust? I believe, and I’m sure there are others out there that believe this could be avoided in the future by teaching children about money.

Most children learnt about money from their parents, and most parents don’t have a clue about money. Their beliefs are inherited in many cases or learnt through hard lessons, generally not from reading about how money works, how to save / invest money and how to live frugally.

The world would be different if we all learnt about money, the same way we learn about maths, history, geography, french and a host of other pointless subjects that are deemed more important by the educational establishment.

From the age of five, kids could be taught some very simple lessons on the following subjects:

• Saving Money
• Making Money
• Spending Money

Saving Money

Kids could be taught how to “pay themselves first”, save a fixed portion of their money each month for a rainy day. This could be demonstrated by getting parents to give the teachers their “spending” money for each week, and then deducting x% each week and putting it into a piggy bank. At the end of each month, the kids could see how much money they had saved, and get an understanding over time of the virtues of saving. This would work especially well if the kids were all encouraged to think of something they wanted to buy with their savings at the end of each term or academic year.

Making Money

It would be very difficult in school to get the educational establishment to teach children about entrepreneurship at first, but it would be a good place to teach kids about getting a good education so that they would get a good job, so that they could earn more money, and therefore save more money.

The kids could also take part in some kind of group learning whereby they could all choose a different career, which could give them an income (pretend of course), and then show them how much more money they could save by having a better job.

It might be that entrepreneurship/building a business could be more of an advance subject, taught at the teachers discretion or with the parents permission. I personally believe that working hard all your life in a job is a little outmoded, but a good education is a necessity and certainly helps in running a business.

Spending Money

I don’t mean “teach kids to spend money”, moreover, teach them how to spend their money wisely, so that it goes further - the lesson of frugality! This is a lesson that was rammed down my throat so much as a youngster, adoloscent and young adult that I suspect I rebelled against it. I always thought it was simply my parents and grandparents worrying too much!

I expect there are many people who have heard all the same old sayings such as “watch the pence, and the pounds will watch themselves”, a favourite of mine. I always thought it was a little stupid worrying over a few pence, and as a result, I’ve always given any loose coppers to the charity box whenever I’m buying something. I wonder how much money I’ve given away over the years (probably less than £100!).

Now as an adult, I can appreciate the lesson that the saying attempts to teach. By not spending money you don’t need to, you will have more left over, thus making it easier to save larger sums of money. I went through financial difficulties earlier this year, and I found that by simply price checking everything I bought in the supermarket, watching where I bought my petrol from to ensure I bought the cheapest and making a few alterations on the monthly bills, including cancelling things like Sky TV, I was able to save well in excess of £100 a month, each month. Now that is a good way of watching the pennies and having your pounds watch themselves!

If kids were taught how to handle money from an early age, I’m sure when they grew up and become politicians, investment bankers and other captains of industry, they would have more of a clue how to avoid the mistakes that keep getting made by the “so called” leaders of our society.

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’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.

It is my belief that anyone wishing to achieve financial freedom needs to address four key areas of their personal finance.

• Getting out of debt;
• Minimising monthly outgoings;
• Making regular savings and investments;
• Making money.

These are what I refer to as the four pillars of financial freedom. The first two pillars are about minimising your monthly outgoings and the second are focused on maximising your passive income.

You’ve achieved financial freedom when your passive income exceeds your monthly outgoings. Which means that the route to financial freedom is to minimise your outgoings and maximise you passive income.

So what does each pillar mean?

Getting out of debt

I believe there are two types of debt, wasteful and enabling. Wasteful debts should be avoided. Enabling debts are acceptable but in an ideal world we would avoid them too.

To achieve financial freedom you need to get rid of all wasteful debt as soon as possible.

Minimising monthly outgoings

The less you spend each month, the less you need to earn to cover your expenses, therefore it makes sense to minimise your outgoings. You can then use any spare income to make savings and investments or to start a business and make money.

Making regular savings and investments

Nearly 50% of UK households have savings that are less than or equivalent to one months income. If anything happens that stops these households from earning they’ll be in financial difficulties almost immediately. To achieve financial freedom you need to start saving money, the more the better. Savings and investments should however only be considered AFTER wasteful debt has been repaid.

Making money

The more money you make, the more you have to repay wasteful debts and to invest. Making is therefore key to financial freedom. There are to aspects to this 1) maximise your earnings from your current employment - or switch employment to a better paid job and 2) starting a business, ideally one that has the potential to create passive income.

In future posts we’ll be expanding on the strategies and tactics you can use to build each of the four pillars required for you to achieve financial freedom.

What is financial freedom?

Financial freedom, in Tristan’s opinion, is the point at which you no longer have to service debt to keep a roof over your head and you have an income that you do not have to go out and earn – like a pension style income.

John believes financial freedom is having enough passive income to be able to maintain your standard of living without having to work.

Who can achieve financial freedom?

Anyone can, with the right attitude, motivation and determination to achieve it!

How can we help you achieve financial freedom?

We believe there are four pillars to financial freedom:

• Getting out of debt
• Reducing your monthly outgoings
• Savings and investments
• Making money

In this blog we’ll explain how we believe anyone can achieve financial freedom.