Find Financial Freedom

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

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

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

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

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

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

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

Here’s the thing, there is no safe way of achieving financial freedom, every path that you can choose will always have some element of risk. Let’s take for example, the traditional route to financial freedom, the deferred life option, chosen by many baby boomers, many of whom are now retiring, after having worked for 40 years they have achieved a nice retirement income and a house without a mortgage.

You may argue that this path doesn’t sound risky, but I would beg to differ. In the modern economy, the chances of finding a safe secure job are pretty slim these days. So although the plan of working for 40 years and slowly paying off your mortgage and building up a decent retirement income will still work, there will be times of immense stress while you are unemployed (through redundancy). There is also the risk that you may not live to see your autumn years, and all that hard work will have been for nothing.

So what about a riskier strategy? Being your own boss will always be beneficial, though it does come with risks, just like having a job does. The real trick is to find ways to manage and mitigate the risks of being self-employed or running your own business. When you have a job, pretty much everything is taken care for you, all you have to worry about is doing your job. When you own your own job (self-employment) or run a business (provide jobs for others), you have to worry about everything, so it can be more stressful and risky, if you don’t find strategies to manage the risk and reduce the stress.

The safe strategy for finding financial freedom is to pick how you want to earn your money, be through a job, self employment or from running a business, then make sure that you work hard to keep your personal expenses low, and acquire assets that will provide passive income. The sooner you start doing this the better, even if they only provide £50 a month initially, once you have a few of these assets, you will have developed a passive income that will be of some use. Granted, you may need 20 just to generate £1000 a month passive income, but once you have that coming in, and assuming you’ve followed the advice about living frugally, you should be in a situation whereby should you lose your earned income, you will still be able to get by on your passive income.

But don’t stop acquiring assets, just keep on doing this over and over again whilst keeping your living expenses to a minimum. In time, you may get to the stage where you have more than enough income to live off from your passive income alone. It is at this stage that you will have achieved financial freedom, and it will have been achieved through a relatively safe strategy, however, as I said at the start, any strategy carries with it some risk.

As the world enters what will no doubt in years to come be known as a depression, perhaps not as bad as the 1930’s depression, but of a similar magnitude, there must be many people out there that have lost their jobs and are searching for answers.

Well, this is by no means the Holy Grail, but it is a nice guide to help shed some light on the elusive status of Financial Freedom.

Financial freedom is achieved when your regular monthly liabilities are exceeded by your regular monthly passive income. It’s a fairly easy definition, but so many people get hung up on this notion that they will not be financially free until they have paid off their mortgage and any other debt. This does not have to be the case.

If you could generate enough passive income from property (be it bricks and mortar, stocks and shares, intellectual or otherwise) to cover the cost of your mortgage, household bills, petrol (gasoline for our American readers), insurances, food and entertainment then you would be free.

Now before the clever ones at the back pipe up and say:

If you only make just enough money to pay the bills, how are you going to repay the capital on the mortgage?

Don’t worry, this is all in hand and is in fact part of the strategy. Hear me out.

Most people spend their lives worried about money. They worry that they don’t have enough to live off now, they worry that their income will come to an end one day (loss of job or retirement through old age, ill health) and they also worry that they won’t have enough in retirement.

This is futile. I know, I’ve been there. I spent two years running my business as a mortgage broker constantly worried about not having enough in the bank to pay the business expenses, pay myself and leave enough for the taxman. Thankfully I’m not doing that anymore and I’m no longer worried about not having enough money.

The reason people worry so much about not having enough money is because for the vast majority of us, the schooling system, parental views on money and our peers leads us all to believe that this is the norm. It’s called having a scarcity outlook.

And it is this same outlook that leads so many of us to not understand that financial freedom can be achieved without paying off the mortgage.

By changing your point of view so that you have an abundance outlook, we are able to see that the most important thing in life is to not have money worries. So to achieve this, we need to acquire or create some property that can create passive income at a level just above what we need each month to live off.

Once we have achieved this and feel confident that the income is stable, we can shift our thinking to much bigger ideas and dreams. This is only possible by reducing the negative effect that “worrying about lack of money” has on our mental state, thus releasing the creativity that resides in all of us to go and achieve whatever dreams we may have.

The creativity inside you will allow you to trade your way to financial freedom or invest your way to financial freedom, the choice will be yours to make. You won’t have to worry about playing it safe and scarcity any longer, instead you will choose to think in terms of abundance, just like the rich do.

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.