Find Financial Freedom

There’s lots of gloomy news about the recession and rising unemployment, I read on a website that 600,000 Jobs To Go In 2009, which is on top of 150,000 that have already gone in 2008. As the article rightly puts it, that’s 1,600 people per day being made redundant, that’s a lot!

There’s some good advice in the article about cutting costs, saving some money for a rainy day, updating your CV and registering with job sites and recruitment consultants. I think this is all very good general advice, and will certainly help you get through this current recession. But is this just a sticking plaster, a solution to cure the sympton rather than tackling the root cause of the problem?

Certainly by following the advice put forward you will be better prepared to handle a redundancy. It certainly makes sense to cut your spending, especially things like utilities, food shopping, petrol etc - these everyday costs may as well be as trimmed as much as possible. Also, saving money for a rainy day is great advice in a booming economy just as it is in a bust economy.

But is clinging onto the false notion that job security exists a good idea? I know you can insure against redundancy, but this only protects employees who have been with their current employer for a minimum of twelve months, and it won’t protect you if you get fired. I have a friend who is an employment lawyer, and he tells me that employers will look at finding creative ways of getting rid of employees who would otherwise cost a fortune in a redundancy payment. So even if you have insurance, you’re not necessarily protected.

In my mind it makes sense to start a home based internet business, even if you don’t get made redundant, you can make some extra money in your spare time, and know that you have a safety net should you get made redundant in years to come. It could even become so successful that you quit your job and join the scores of new rich internet entrepreneurs.

I’ve read some really interesting books recently about this subject, both written by successful internet entrepreneurs, who far from thinking that the internet bubble has burst, they both think that things are still booming, and will be for years to come. In short, there are plenty of opportunities out there, some are bigger than others, but the underlying theme is that there are enough small opportunities that you can easily replace your existing employed income with a self-employed internet business income.

To read more about this, see Four Hour Work Week by Timothy Ferris and Internet Riches by Scott Fox. You should be able to buy the books from their website or from Amazon or any other online bookstore.

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.

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

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

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

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

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

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

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

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

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

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

With the ever increasing amount of attention being bestowed upon the environment and our carbon footprint it comes as a bit of a surprise that the govt has not started to offer incentives to property developers and investors who are doing their bit for the environment.

The govt are quite happy to add a tax on the aviation industry to offset the carbon footprint caused by all the cheap flights we go on, but they don’t seem to be offering tax breaks to property developers who go out of their way to build more energy efficient properties, and property investors who do their best to improve properties, such that they are more energy efficient.

Luckily for me, I rented my property out before the 1st October 2008, so I didn’t have to get an Energy Performance Certificate.

Now, assuming that for my next tenants I do have to get an EPC. If my property turns out to be very energy efficient, will I get any tax breaks? What if it’s not at all energy efficient? Will I get taxed more? The answer to both of these questions is no, so why should I care about the energy efficiency of my rental property?

However, if the govt offered me an incentive to reduce the carbon footprint of my property, I would of course be more inclined to take an interest in it. I notice that the govt are spending millions of pounds giving away more efficient boilers and such to poor people in the form of the govt’s Warm Front initiative, so why are they not able to offer any incentives to landlords such as myself?

There are many ways that passive income can be generated, through bonds, rental property, dividends from shares, royalties etc. Most of these require a significant amount of capital to generate a modest return of say 5%. If you’ve made the decision to get out of the rat race and become financially free, you’ll need to think about generating passive income, which is fine, but using conventional methods, this could take some time – are you happy deferring life for 10 or 20 years while you build up these assets?

Let’s take a look at a fairly typical example. Meet Steve, he’s works in sales, earning £50,000 a year. His wife works as a teacher, earning £30,000 a year. Together, after all their costs, each year they have £20,000 leftover. If they were to invest this £20,000 a year for 25 years, they would eventually have enough money invested at 5% to generate a passive income that could be used to replace their earned income.

But this plan means they have to defer life, make sacrifices with their money, and no doubt watch their friends move to better houses, take better holidays and drive nicer cars, while they scrimp and save and invest their money. Is this the best plan for them?

I would argue that it’s not. I would argue that the best thing for them to do would be to find ways of increasing the size of the capital that they have to invest each year.

Let me explain. If they could turn the £20,000 that they save each year into £60,000 within three years, and then invest that at 5%, they will achieve their desired passive income much quicker. If, after three years, each year they have £60,000 to invest for the long term, even if they simply put this money into a savings account that paid 5% interest, by tripling the amount invested, they will triple the passive income.

However, if they stuck this money into property, they would not only achieve 5% rental return, but in the long term would achieve capital appreciation and rental appreciation too. Better yet, if they leverage their money by buying the property with a mortgage, they stand to make significant gains in the amount of capital invested in the medium to long term.

They won’t be able to invest in any retail investment products that will turn £20,000 into £60,000 within three years, so they will have to seek alternatives. What are their options?

• Property development / Speculation
• Shares / Derivatives
• Businesses
• Land

There are no guarantees, but with enough knowledge of how these opportunities work, and if you do your homework you should be able to achieve significantly better returns than 5% year on year.

The secret to generating passive income quickly is first learning to generate capital. Once you’ve generated significant capital, you can create significant passive income. You can always do it the slow way, but ask yourself this question – do I really want to wait 25+ years to be financially free?

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

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

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

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

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

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

I read a lot of information about different sorts of investments, ranging from savings accounts to ISAs, to pension plans, to stocks and shares and property – but which type of investment is the best?

Well that depends on you, your age, your risk profile, your goals and most importantly, your understanding of investments.

Let’s take for example a young couple starting out in life, they have 40+ years ahead of them before retirement, their goal is to pay off their mortgage, have a similar income to what they have now in retirement and they don’t want to take any risks. They also don’t know anything about investing, and simply want to hand over their money to professionals and let them take care of it.

In this example, it would be wrong to suggest they look at anything other than ISA’s, pension plans and savings accounts. These can all be handled by an independent financial advisor and are all relatively risk free. Clearly as they get nearer retirement age, they should look to move their money out of ISA and pension funds that invest in the stock market and look to put the money into cash funds, but a good IFA will advise them to do this.

What can they expect in terms of a return? They can probably expect to do between 5% - 10% return averaged over the life of their investments, which with the effect of compounding should see them able to achieve their dreams.

What about an older couple who don’t just want to pay off the mortgage and retire at sixty five? What about a couple that want to retire young, say forty five? Following the same advice as the previous couple would not necessarily work, unless they were willing to invest a much larger proportion of their income – which if we assume that both couples have the same income, is not an option.

For a couple like this, they need a better strategy, a strategy that can deliver higher returns, consistently. So how can they achieve this? There are many ways they can achieve this, however the best thing for them to do would be to invest some of their own time in learning more about investing. Most independent financial advisors will not be able to help this couple, because most IFA’s will not achieve this goal for themselves, so how are they going to achieve it for a client? They won’t, simple as that.

For this couple, they will need to learn about investments that are more complicated than simply paying a direct debit each month. They will need to learn how to spot good investments themselves, which in itself will require learning what is good and what is not good.

In short, the best investment is to invest in yourself, increase your understanding of different investment types and make your own decisions. Don’t be afraid to take advice from people that have achieved your dream and expect plenty of people to try and dissuade you from doing anything other than the norm, including your financial advisor!

In fact, if your financial advisor doesn’t like the ideas you have, then get a new advisor that understands what you want to achieve and understands the methods you want to use to achieve your goals and is happy to help you achieve your goals.

One of the reasons so few people ever manage to become financially free is their belief that they can not easily make any money outside their job. Fortunately that’s not the case, in fact it’s relatively easy to make money in your spare time, especially with the advent of the Internet. In fact as you are reading this, you almost certainly have everything you need to start an Internet business in your spare time (a computer and an Internet connection).

Starting An Internet Business

Starting an Internet business in your spare time is easy, the basic steps are:

1. Pick an idea;

2. Pick a business model;

3. Set up the business;

4. Market your business;

5. Refine, develop and grow the business.

You can learn more about each step by reading the post how to start an Internet business on my Business Opportunities and Ideas blog.

I’ve also written some more detailed articles on how to start a blogging business and how to start an ebook business. Two of the more common Internet business models, which anyone can do.

But What If You’re Not A Geek?

If an Internet business isn’t for you, then start thinking about services you can offer locally, for example cutting lawns, gardening, dog walking and so on. Almost anything that someone considers a chore is an opportunity for you to make some money in your spare time. The market for these services is going to grow too, as our population ages.

Just Do It!

The real secret to making some money in your spare time is to “just do it”, don’t spend ages thinking, talking or deliberating, just get out there and start doing something, if it doesn’t work, then try another idea and another idea until you find one that does.

Of course once you’re making some extra money make sure you save/invest it wisely.