Find Financial Freedom

I was thinking about expensive cars and how they are in real terms a bit of a waste of money and I came across a post on ListServe. Undoubtedly all the cars on the list are very nice cars, but of them all, I wonder which of them would go on to become a good investment.

In tenth place was the Maybach 57, which is in my opinion a German copy of a Rolls Royce, high end luxury, uncompromising on its quality without regard to the cost. I think a certain Simon Cowell has one of these, or perhaps he has the other model. With a list price of over £290,000, it’s a very expensive car, but I seem to recall an episode of Top Gear where they discussed it’s depreciation in a less than positive light. Not surprising, you only need to thumb through a copy of Auto Trader and you can pick up a 25 year old Rolls Royce for Mondeo money.

In ninth place was another Maybach, the Maybach 62, a slightly more expensive version of the 57. Again its value will probably fall sharply once driven off the forecourt, so not a good investment.

In eighth place is the Porsche Carrera GT, this is actually a very nice looking car and quite rare. If it were not a Porsche, it would probably hold its value rather well, but unfortunately, in my mind, Porsche have become a victim of their own success, and although this is a very exclusive car, it’s not an exclusive marquee anymore. A better investment than a Maybach no doubt, but not the best.

In seventh is the Mclaren-Mercedes SLR, which to me looks like a regular Mercedes SL on steroids! It looks the business, but it’s no Mclaren F1, which was its predecessor, before Mclaren jumped into bed with Mercedes. I don’t think the SLR will be as fondly looked back upon as the Mclaren F1 was and still is. The F1 had supercar status, it had a normally aspirated V12 pumping out over 600bhp, whereas the Mercedes engine uses a supercharged V8 to give it a similar number of ponies. I think it will hold its value reasonably well, but again like the Porsche, Mercedes is no longer an exclusive marquee.

In sixth place is the Koenigsegg CCR, costing over half a million US dollars, it’s a lot of money, but it is a lot of car! It was reviewed on Top Gear and I think Clarkson almost wet himself with excitement at how good it was as a car. So it’s got some guts, it’s a beautiful looking car and it will be very rare, as they are only building a handful a year, and unlike other supercars manufacturers, Koenigsegg only build supercars. I think this car would hold its value well.

I will complete the top five in another post, in the meantime I don’t think any of these cars will be worth more than they are currently worth now in ten years time. However, in the long term, in twenty five or more years from now they could appreciate in value, assuming they are kept in mint condition. Given inflation, it’s possible that the value could rise to more than it is currently. Being completely hard nosed about it, taking into account cost of servicing, cost of capital tied up in the cars, they would really need to appreciate by a huge amount for any of them to outperform property or stocks/shares as an investment, but if you have the money spare then why not enjoy it!

If your debts are at a point where you think they are somewhat out of control, there are a number of things that can be done to help alleviate the problem.

Firstly, don’t fool yourself into thinking that something magical will happen to relieve the stresses on your finances, as that’s denying the existence of a problem. Unless you choose to do something about spiralling debts, then they will simply continue to get out of hand.

Negotiate with creditors

The first step is to negotiate with your creditors. If you simply cannot afford to make the payments, then you need to communicate that to your creditors. If you can give a reason why things are difficult (drop in earnings, loss of job, illness/injury etc), show them what your income is each month, and show a reasonable amount for each of the necessary outgoings (utilities, food, petrol etc), then you should be able to get your creditors to agree to reduce the amount you are have to pay them each month to a figure that is affordable.

Full and final settlement

If things do not improve, then there are other ways that you can reduce the cost of your debts. If you have some capital, you can use that as a payment to pay off a portion of the debt, and negotiate with your creditors to “write off” the remainder. This is called “Full and final settlement”.

Individual Voluntary Arrangement

If you don’t have any capital to use as a full and final settlement, you could do an IVA (individual voluntary arrangement). This is a formal arrangement with your creditors over a period of five years, whereby each year they asses your in an effort to see if you could afford to pay more back. By freezing interest, the majority of the money being repaid is used to repay the capital (some of the money may be used to pay for the insolvency practitioner). By entering into an IVA, you will adversely affect your credit rating for up to six years from the end of the agreement.

Bankruptcy

If you are not eligible for any of the other options, then filing for bankruptcy is an option. When you are declared bankrupt, all of the debts are written off. If you have any assets, they can be seized to help reduce the amount being written off by the creditors. Once a bankrupt, you will have that on your credit record for six years, however, there are many lenders out there that will lend to discharged bankrupts. A discharged bankrupt is someone who was declared bankrupt over twelve months previously, although in some instances it is less than twelve months. Again, bankruptcy is a formal arrangement with your creditors and will realistically in the current financial climate adversely affect your credit rating for up to five years after you have been discharged.

Some useful resources include:

http://www.debtdr.co.uk/ - Debt Doctors independent debt advisors
http://www.cccs.co.uk/ - Consumer Credit Counselling Service
http://www.citizensadvice.org.uk/ - Citizens Advice Bureau
http://www.bba.org.uk/ – British Bankers Association debt help factsheet

With the BBC reporting that thousands are facing negative equity, the number of house sold per estate agency dropping to just 17.4 in the three months to May the housing market is not looking good.

The BBC spoke to a representative of the Department of Communities and Local Government who pointed out that:

The long-term demand for housing remains high and the fundamentals of the economy are sound with low unemployment and historically low interest rates.

That I think is a key point, yes the market is in a mess at the moment, but it’s largely being caused by the difficulty in arranging mortgages, not because the demand has disappeared.

On the other hand if the economy doesn’t improve soon demand may start dropping, especially if we do enter a recession. While I hope we don’t, I do believe we are in for an economic slowdown which could be bumpy for some.

So would I buy a house now?

Yes, I would. While I believe the market will continue to fall for at least another six months I don’t think I’m smart enough to predict the bottom of the market. So I won’t even try, instead I’ll judge a purchase on it’s merits at the time.

If it’s a home for me and my family I’ll consider these questions:

• Can I afford to buy the house (making sure I’ve factored in all the costs)?
• Will I still be able to afford it if interest rates went up by 50%?
• Is the interest on the mortgage less that or roughly the same as what it would cost me to rent an equivalent property (I ignore the costs of the repayments in the mortgage/endowments/ISAs because they are not a direct cost of the mortgage)?
• If property prices fall would I be happy staying living in the house, or can I rent the house out and will the rent cover the interest payments on the mortgage?

If the answer to all these questions is yes, then I’d buy, no matter what the market is doing. If I’m considering the property as buy-to-let then I’d consider these questions:

• Is there a demand for such rental properties?
• Is there anything that might impact upon this demand in the near future (i.e. a glut of new builds)?
• What is likely the rent?
• After subtracting the cost of the interest payments on the mortgage and other running costs (insurance, maintenance and agents fees) does the property generate a positive cash flow (profit)?

If the answer to all of these is yes, then I’d consider buying the property as an buy-to-let. Unlike many property “investors” (arguably they are speculators) I believe in buying for cash flow not capital growth (which I view as a nice bonus if it happens). After all cash flow is passive income and passive income is vital to becoming financially free.

I come across lots of people who are in debt, and they are usually looking for me to give them ideas on how to get out of debt.

So if you do have debt, how do you get out of debt? It’s not easy, for most people, the reason they have got into debt is because they have over-spent. This is usually because they have not properly budgeted each month.

How do you budget? You create yourself a spreadsheet, at the top you put in your after tax monthly income, then beneath it, you put in a description of every known monthly cost you have (mortgage, utilities, debts, food, petrol etc), with the amount next to it. At the bottom, you need a subtotal for all of your monthly expenditure. Lastly, you need to have a line called disposable income, which is remainder of the after tax income with the outgoings subtotal subtracted from it.

Once you have your monthly disposable income worked out, you need to work out how much that is each week, and then make sure that you don’t spend more than that each week. If you can be disciplined and live within the amount you have budgeted for, then you will be able to get yourself out of debt.

If you don’t have any disposable income, perhaps the debts and all your other monthly outgoings are greater than your income, you need to consider some fairly drastic action as a deficit each month will just exacerbate the problem.

I will post another article tomorrow on some solutions to debt problems that are spiralling out of control.

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.

John’s article House Prices Really Are Falling got me thinking, and I posted a comment about the effect this would have on re-mortgaging, particularly with buy-to-let investors in mind. In the search for financial freedom, buy-to-let investments are well known as an instrument for creating passive income, and/or increasing the value of capital (by utilising the appreciation of the value of property). With this in mind this article highlights one of the (less obvious?) risk in the buy-to-let investment market. I will start with a short summary of how how mortgaging and re-mortgaging is used as an instrument in this kind of investment. I will then go on to give some sample figures illustrating how things can go wrong and what the damage might be.

Typically, mortgages can be obtained with a reduced rate for the first two years, and this is something investors rely on in as part of their business model. Also, with the reduced rate comes with a heavy financial penalty for redeeming the mortgage early. After the two years has elapsed, the interest rate goes up significantly. Therefore it is normal - and normally necessary - to re-mortgage every two years. Further, it is prohibitive - because of the heavy financial penalty - to re-mortgage before the two years is up.

Therefore, the expiry of the two year fixed rate is a point of risk in the business model of the typical buy-to-let investor. The point is this: because BTL mortgages are almost always interest only, the investor needs the new mortgage to pay off the capital on the old one. Also, how much you can borrow is directly linked to the value of the property. That is to say, when you re-mortgage, the amount you can borrow is a percentage of the new (fallen) value of the property.

What I’m going to do now is present an illustration that assumes the following:

• The value of the property when originally purchased was £200,000
• After two years the property value has fallen (by 8%) to £184,000.
• When re-mortgaging, the investor can borrow a maximum of £156,400 (that is, eighty-five percent of the fallen property value)

I have fixed the amount that can be borrowed when re-mortgaging, in order to show how the shortfall varies depending on what percentage of the original purchase price was actually borrowed. Also, I am assuming that eighty-five percent of the property value can be borrowed when re-mortgaging, and I have ignored arrangement fees.

• Amount borrowed for purchase (90%): £180,000 => £23,600 shortfall
• Amount borrowed for purchase (85%): £170,000 => £13,600 shortfall
• Amount borrowed for purchase (80%): £160,000 => £3,600 shortfall
• Amount borrowed for purchase (75%): £150,000 => £6,400 excess

Therefore the prudent investor who only borrowed seventy-five percent of the property price when the market was buoyant can withstand the eight percent drop in the property value. This investor will be left in the clear by £6,400! Note in passing, that this investor could actually withstand a fall of just under twelve percent in the property value and still break even.

Sadly not all BTL investors have had the prudence to allow for a fall in prices. I suspect that, sadly, there were many investors who bought into the by-to-let market without even realising they were exposed to the risk I have illustrated in this article.

First of all, I think monthly outgoings should be defined as any necessary (or sometimes frivolous) cost that you as an individual have to bear to support your household.

I’m structuring this article around my own life and costs that I have in keeping a three bedroom house going. I am married, so I have a wife that contributes to the cost of the household, so some of the outgoings will not apply to single people.

According to my own spreadsheets, in my household we have the following list of monthly outgoings:

• Mortgage
• Life insurance
• Home insurance
• Gas
• Electric
• Water
• Sky TV
• Telephone
• Broadband
• Mobiles
• Council tax
• Food

It’s quite a lot really!!!

So how can you reduce any or all of these monthly outgoings?

The mortgage is not that simple. You may be tied into a deal that has penalties to exit, so unless your mortgage has no penalties to exit and you can find a cheaper product with another lender, there really is not a lot you can do to reduce the monthly cost of your mortgage.

Life insurance is sold in large quantities because the advisor that sells it receives a decent commission for selling it. Simply put, the level of commission can vary massively depending on who sells you the policy. Life insurance companies have a “standard rate”, which they offer to any advisor. What you probably don’t know is that many estate agents and banks that offer life insurance actually sell the same products as everyone else, with inflated premiums (above the standard rates), so that they receive a larger commission.

If you bought your life insurance through your estate agent when you bought your house or through the bank/lender when you last refinanced, chances are you could save money by shopping around. There are plenty of internet brokers who will sell you the policy at a discount off the standard rate – they achieve this by sacrificing some of their commission. You may even be able to go to you financial advisor and ask them to sacrifice all of the commission and pay them a fee for arranging the policy.

Home insurance premiums vary massively across the multitude of providers out there. Usually the reason for the variation in premiums is the level of cover offered. Most insurers that are price competitive will offer the basic cover to ensure that your property is protected, but fail to offer cover for legal expenses, accidental damage and cover for your belongings outside of your property. The best thing to do is make sure you are comparing like with like, and only when you are sure that the policies you are comparing all offer the same features and cover, choose the cheapest.

You’ve probably seen lots of adverts for companies offering comparisons of the various different utility companies, claiming that they are able to save you money on your monthly bills, I certainly have. I must confess, I’ve not looked into switching my gas and electricity recently, as I moved to Utility Warehouse last May and have been happy with the price and service I’ve received to date. It is an area I will look into more at some point in the future however.

I’ve not looked into moving water suppliers so I will decline to write much about this at this juncture, I will however, post an article about saving money on all utilities at some point in the future, as it’s something that I will be looking into myself in the near future.

I used to pay over £50 a month for my sky tv bill. That’s quite a lot really, so I decided that as the football season was over, I would ring them up and reduce the amount of channels I subscribed to, and find out how little I could actually get my bill down to. As it turns out, once you’ve been with sky for a year, you can reduce your subscription down to the “free to air” channels, thereby reducing your bill to £0 a month. I’m not sure if this would be applicable to cable tv, but I imagine it’s not too dissimilar. Alternatively, if you don’t already have sky or cable, you could buy a free to air set top box and have access to the same channels, there is of course a cost in buying he set top box.

I will finish this article off tomorrow as it is now time for me to go to the gym and do some exercise…

I take a keen interest in the Bank of England base rate, and the information that is used by the Bank to make their monthly decisions on what level to set the Bank of England Base Rate (BOEBR). This is because firstly, my mortgage is a tracker mortgage, but secondly, as a mortgage advisor, I’m always keen to know what trend the rates are going in so that I can give advice to my clients about what sort of product is right for them in the current and future financial climate.

According to the BOE website and their most recent inflation report for May 2008, they state that the rate of inflation for March 2008 is 2.5%, which is 0.75% higher than six months ago.

I tend to think that the real inflation level is much higher. This is because the figures used by the BOE are largely manipulated by what they use to assess the cost of living. For instance, the figures take into account the costs of white goods, TV’s, stereo’s, and many other goods that a typical person would probably only purchase every few years.

What about the things that people pay for every month, like petrol, gas, electricity, water, food. The cost of all of these has been steadily (in some cases quickly) rising over the past few months.

I’ve been having a look at the reason why the price of these everyday purchases has been rising, by looking at the wholesale prices of commodities on the Financial Times website. It makes for interesting reading.

On the 4/6/2008, the annual price rise for Brent Crude Oil, which directly affects the price of our petrol, had risen by 75.12%. Has the price of petrol risen by 75% this year though? Nope, according to various newspapers articles that I’ve read recently, the rate of inflation on petrol has been around 20% this year. Why is there such a difference? I suspect that some of the price rises have been swallowed by the petrol companies, or possibly the inflation figures are slightly out.

What about other products that we buy on regular basis? Bread for instance. The price of wheat has increased 42.14% in 2008. No surprise that a loaf of bread now costs over a £1 in most stores.

So how does that impact your weekly shopping budget? In my house, we get through on average, one loaf of bread each week. So if I am now paying roughly £1.20 for a loaf of bread, which would have cost roughly 85p at the start of the year, each month I’m speding an extra £1.40 a month just on bread!

More importantly, it is the impact that the price of wheat and corn has on other food products that we buy, as they are fed on foodstuffs derived from corn or wheat.

The only commodity that has decreased in value this year is orange juice. Scant conciliation, if you can now no longer afford to buy juice because the price of everything else has risen…

Having read John’s article – The four pillars of financial freedom – I thought I would make write about one aspect that he touched on very briefly in the section entitled Making regular savings and investments.

John quite rightly points out that nearly 50% of UK households have savings that are less than or equivalent to one months income. Now, I haven’t researched the relevant statistics for this claim, so I cannot possible agree or disagree with the accuracy of the figures.

However, in my experience as a mortgage advisor, I would agree that a large proportion of the UK population have little or no savings, living each month from hand to mouth. In most cases, the reason they have got into financial difficulties in the past is through having a period of time without any income through unemployment, illness or injury.

In many cases, they could have avoided this situation by taking out various protection products, which are designed to protect against adverse circumstances, like loss of life, loss of job or loss of ability to work and therefore earn money. These products are useful for those that have no savings, as they can provide a safety net where there is none. They are also just as valuable to those that do have significant savings, as they can minimise the need to dip into those savings, should they suffer any interruptions to their income.

At this junction I should probably explain what products I am talking about, and how they can be used.

• Life insurance, which can be used to repay a mortgage (or any liability) in the event of death.
• Family income benefit, which can be used to provide an income to your surviving family in the event of death.
• Critical illness cover, which can also be used to repay a mortgage (or any liability) in the event of diagnosis of a specified critical illness.
• Income protection, which can be used to protect your income in the event of illness or injury.
• Unemployment protection, which can be used to protect against loss of job through no fault of your own, it won’t usually protect you in the event of being sacked.

There is of course a price to be paid for each of the policies that you take out; the price will largely depend on your age, medical history, smoker status and occupation. The key to saving money on these products is to shop around, get good advice on what products to take out and take them out when you are young, as they will increase significantly with age.

If you read any of the property investment forums or the ‘house price crash’ forums that have sprung up in recent years you’ll be familiar with the idea of Sell To Rent (STR).  The basic idea is that at the end of a rapid rise or (more likely) at the beginning of a fall in house prices you sell your home and rent a property.

The theory being that you can then invest the equity from your home in a different asset class until house prices pick up again. The argument being that when house prices drop, stock markets (and other asset classes) tend to rise, so you’ll receive a better return by investing in them.

Which is all reasonable enough, but I still don’t believe it’s a good idea for everyone. For a start your home (especially if you have a family) is more than just an financial asset to be maximised, it’s a place full of memories, it’s a haven from the stresses of day to day life and your family may well have ties to the area: the school the kids go to, local friends and family and your jobs. Is the emotional upset worth the possible financial gain?

It might actually be more expensive to rent an equivalent home in the area and the increase in your cost of living may well consume any returns you receive from the alternative investments. Alternatively you may have to rent a smaller home and compromise your families standard of living.

Most proponents of Sell To Rent also neglect to consider the tax implications, whist there is no capital gains tax on your primary residence you will pay capital gains tax on any gains made on the stock market as well as income tax on dividends received. All of which erodes any gains made. In contrast if you keep your home you can rent a room out and under the Rent A Room scheme up to £4,250 a year tax-free.

Perhaps most important of all - there is no guarantee that the assets that you invest in will out perform the housing market, in fact they could do worse. Add to that the costs of selling a house and you might even end up considerably worse off.

Conversely of course if you do time both the housing market and the market for your alternative asset class right you could beat both the markets and do well out if it, the trouble is that in reality, few people - even the professional traders - beat the market.

Sell To Rent can work for some, but make sure you go into it for the right reasons with a good understanding of the choice you are making.