Find Financial Freedom

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.

I read with interest, John’s article entitles The Four Pillars Of Financial Freedom. In particular I picked up on what the article said about minimising monthly outgoings, because it reminded me of some figures I worked out recently. In this article I’m going to talk about the monthly cost of running a car. Sorry, I’m not going to show you any kind of magic formula that will suddenly reduce your monthly outgoings, but I think understanding where the money goes is an important first step in cutting it down. The figures I’m going to present appertain (mainly) to me and my car and my circumstances (note, in passing, that I am in England, UK), so of course other peoples’ will be different - especially if you are in another country. However, I fear that many people - like me before I went into the figures and worked them all out - do not realise how much they really do spend on their cars! This article is not intended to show exactly how much a car costs to run, rather, it is intended as an eye-opener. I think many will be surprised.

The cost of running a car is divided into three main areas:

• Standing costs (road tax, insurance, Servicing and MOT)
• The ongoing cost of fuel
• The cost of the car

Note that although I have breakdown cover, it is possible to run a car without it and so I will not include it.

Road tax costs £185/year for my 1.8 litre car. My last insurance bill was £577/year (this will vary a lot depending on where you live and how many miles/year you drive). Servicing and MOT come to about £250/year typically. Note, I am currently a relatively low mileage driver, and this is a significant factor in the cost of servicing and insurance. All this totals £1012/year, or (rounded) £84 month.

Another highly variable cost is that of fuel. I spend about £40/fortnight, i.e. about £87/month. Note that it is wrong to base a month on four weeks, because over a year you will loose a whole week! There are actually four and one third (4.33) weeks/month!

Finally we come to the cost of the car. Naturally this will go down the longer you keep each car. Also, the costing model I use here assumes that you - as I do - pay cash for the car and run it as long as it is viable to do so. I paid £6000 for my car, and I’ve now had it for nearly five years. Therefore, the car itself has so far cost me £1200/year, or £100/month.

That leaves us with the following monthly costs:

• Standing costs of £84
• Fuel costs of £87
• Car costing £100

These all add up to £271/month! Note that it still comes to £171/month pure running costs even if you don’t factor in the actual cost of the car in the first place!

How scary is that!

Remember, my calculations have taken onto account only the money you absolutely have to pay out - that is, I haven’t taken into account the cost of things such as breakdown cover, which many people would not want to run a car without.

If you live within your means (your monthly outgoings are less than your income) you can use the excess cash flow to increase your savings, make investments or start a business. All of which will move you further towards the goal of being financially free.

On the other hand if you live beyond your means (your income is less than you monthly outgoings) you’re either spending your savings or worse still increasing your debts. Both of which will have a detrimental effect on your financial health.

It should therefore be obvious that your goal is to ensure that your income exceeds your cost of living. There’s two ways to achieve this:

1. Earn more money - get a better paid job, get a second job, start a part time business or grow your full time business.
2. Become more frugal - take a long hard look at what you spend your money on each month and try to cut down on what you spend.

Until you can manage to live within your means, you’re not going to be able to achieve financial freedom and believe me anyone can manage to live within their means.

One of the keys to financial freedom is reducing your outgoing cash flow by spending less. That doesn’t always mean you have to forego a purchase though. Instead you could ask for a discount on the purchases you are making.

Friends often tell me that it’s hard to get a discount, or that they’re not good negotiators and wouldn’t know how to drive a hard bargain. In reality that doesn’t matter though as the simplest way to get a discount is to ASK!

Yes, it really is that simple, next time you make a purchase just try asking one of the following:

Is that the best price you can do me?

What deals are you offering at the moment?

If I commit today can you do me a deal?

Then just be quiet and wait. Alternatively if you don’t feel happy outright asking for a discount just make a statement along the lines of:

I really would like to buy, but it’s just outside my budget.

It’s perfect, if I had a little more money to spend I’d take it off your hands today.

Then be quiet and wait. In some cases you’re going to be disappointed, but surprisingly often the mere act of asking for a discount will get you one. In many cases staff aren’t allowed to offer discounts on high value items, but can off free accessories so using:

Unfortunately I also need to buy and X and Y to go with it and at this price I couldn’t afford them all.

Can sometimes work well. Finally if you’re not happy with any of these approaches you can always just stand there silently for a minute or two - sometimes a sales person will be overeager to make the sale and will enter into a unilateral negotiation and start dropping the price thinking they’re going to lose your sale - the longer you keep quiet the more it’ll drop.

In short you’ll be surprised how easy it is to get a discount on major purchases when you just ask and the worst reply you’ll get is “no”.

This approach can work anywhere, by doing so I’ve successfully gotten discounts on anything from fresh fruit and vegetables to a new house. For the best chance of success make sure you’re asking someone who has the authority to negotiate for the vendor - the checkout assistant at your local supermarket almost certainly does not.

So try to make a habit of asking for a discount wherever you go - you’ll be saving money without having to buy less.

In response to my post on types of debt Maria asks:

…which category would ‘buying a house’ fall into?

If you’re a devotee of Robert Kiyosaki (Rich Dad, Poor Dad) then you’ll know that he considers a house to be a liability and would therefore classify the mortgage as a "bad" debt. However I don’t think it’s that simple, after all you have to live somewhere and that somewhere is going to cost you money whether you own it or are renting it.

In my opinion mortgage debt is wasteful debt if you’re living in a house that exceeds your needs, i.e. a married couple using only one bedroom in a five bedroom house.

If on the other hand the mortgage is to purchase a home that meets your needs and it costs (in terms of the interest) roughly the same as or less than it would to rent a similar property then I would consider that to be an enabling debt as you would have had the negative cash flow anyway. But by owning your home you have a more stable family lifestyle, are able to add value to it and over the medium to long term it should rise in value giving you a return via the capital growth.

I do not however advocate buying your home in the hope of a capital return. Instead focus on it’s effect on your cash flow. Equally if you already own your own home I’m not keen on the "sell to rent" concept.

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.

If you read just about any book, blog or article on personal finance or financial freedom you’ll come across the concept of debt being either ‘good’ or ‘bad’. I disagree with this philosophy - there is no such thing as a good debt as taking on debt involves taking on risk (and as a entrepreneur bad debt implies someone has failed to pay me, which I never let happen). Instead I prefer to think in terms of:

• Wasteful debt;
• Enabling debt.

So what do I mean by these terms?

Wasteful Debt

Wasteful debt is debt incurred buying products or services that:

• You do not need (or do not need such a premium version of);
• Result in a negative cash flow;
• Lose their value immediately/are impossible to resell.

A good example would be buying a top of the range executive car, you probably don’t need such an expensive car: a cheaper one would get you where you are going just as well, even if you never use it the car costs you money in tax and insurance and finally new cars lose a lot of their value as soon as you drive them off the forecourt - so if you sold it a week later you’d not be able to clear the debt.

Wasteful debts should be avoided as they waste your cash, reducing the cash flow you have available.

Enabling Debt

Enabling debt is debt that is incurred to enable you to create an income in excess of the cost of servicing the debt.

If the previously mentioned executive car costs £1,000 per month for the next three years but enables you to operate a executive taxi/chauffeur service that will turnover £4,000 and create a profit of £2,000 after costs (including any payments against the debt) then that debt has enabled you to create a positive cash flow of £2,000 per month.

In my opinion enabling debts are acceptable, wasteful debts should be avoided but no debt is ever good!

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.