Find Financial Freedom

I recently read an article on The Independent website about living off £1 a day, which I thought was a stupid idea. Firstly because no one is that poor in this country that they will only have £1 a day to live off (state benefits are about £10 a day) and secondly because it’s such an extreme notion that all it does is prove a persons bloody mindedness rather than serve as a useful, practical tip for those wishing to improve their frugality.

If all you had to spend was £1 a day, you wouldn’t have enough money to buy healthy food, so what’s the point? You’d eventually become ill from self induced mal-nutrition – hardly something to aspire to is it?

Why not set a more realistic challenge, perhaps work out how much you usually spend on your weekly bills and see if you can shave 25% off, and do it consistently. You could even open a separate high interest savings account and put the savings that you make each week into that so you can see the effects of your frugality each month.

Here are some easy ways of spending less money on your weekly shop:

• Avoid brand name goods – shower gel, washing up liquid, cereal, toothpaste, tuna fish, bread, in fact almost everything in most supermarkets will have one or more “brand name” options and at least one “own brand” option, which will nearly always be cheaper. Here’s a badly kept secret – most of the own brand goods are actually made by the brand name companies!
• Check prices across different supermarkets – there is a website www.mysupermarket.co.uk that allows you to see the different prices for goods across the big supermarkets, you can even fill up your trolley and see which of your local supermarkets would be the cheapest place to shop. Here’s a tip: you may have to go to one supermarket for most of your shop and another one for a few other items that are noticeably cheaper – however, if you do this, factor in the extra cost of your petrol making two trips!
• Check out the discount shelves – these are the shelves that have stock that is nearing the end of it’s “sell by date” and so must be either sold off or thrown out if it’s past it’s sell by date. As long as you are prepared to prepare your weekly meals around what is on offer, this strategy can help you spend significantly less.
• Loyalty cards – all the major supermarkets have them, use them and get money off your shopping bill, or coupons in some supermarkets. Some people may get annoyed with you for “being cheap”, but if you can shave a few £££s off your food bill doing this it’s practically effortless.
• Shop after you’ve had dinner – studies have shown that when you go supermarket shopping straight after work and before dinner, you are more likely to spend more money on food than if you went after dinner. Why? Because you are hungry and so you end up buying food items that take your fancy rather than sticking to what you need or is on your shopping list. I don’t know if scientific studies have shown this, but it certainly works for me!

I have recently become a property investor – not entirely by design, my wife and I split, neither of us wanted to live in the marital home, so we have rented it out – and I think now is the time to make a killing.

Interest rates are dropping, house prices are dropping and rents are increasing – could there be a better time to invest? Yes, wait six months and prices could be lower, as could interest rates, but even now it makes sense. I’ll give you a real world example to demonstrate the point.

My property is a regular three bedroom semi detached in Bristol. It’s probably worth about £150,000. The mortgage is currently on the lender’s standard variable rate (1.75% over base) and we are paying about £500 a month for the mortgage and buildings insurance. The rent is £795 a month, leaving us a nice little profit of around £300 a month.

I did a quick scout around to see what sort of rates would be available for buy-to-let mortgages and found that on MoneySuperMarket there were no rates available (I searched for £150,000 property purchase, 3 year deals with an income of £50,000 and no adverse credit). I found this strange considering I found deals on other websites.

I suspect this is because they make more money by getting you to complete an enquiry form, which is then sold off as a lead to a mortgage broker than they would if they allowed you to source your own product (likelihood is not many searches would result in any revenue for them).

I eventually found some useful information on the Cheltenham & Gloucester website, a lender that I put a number of deals through when I was a mortgage broker, and a lender that on the whole I found to be quite good.

Their buy-to-let range has products for 2, 3 and 5 year fixed rates, nothing else. The max loan-to-value is 75%, but if you can find a 40% deposit, they will shave 0.3% off the rate they offer you.

Let’s consider my investment property on the most expensive deal they offer, currently a five year fixed rate, max loan-to-value of 75%, 2.5% arrangement fee and a rate payable of 5.69%.

Assume a purchase price of £150,000, requiring a deposit of £37,500, stamp duty of £1,500, survey fees of £1,000 and legal fees of £1,000 (rough figures only). For a total of £41,000 you could acquire an asset that pays you a rental yield of 6.4%.

The actual return you would receive is £228.23 per calendar month. Over a year, this would be £2,738.76 or 6.7% return on your capital. I’m sure there are better mortgage rates out there, and I’m sure when the govt and the lenders stop arguing over passing the base rate cuts onto the borrowers, the rates will come down even more so, which is good news as it will make this deal stack up even more.

The best bit is that in ten years time, the property will most likely have doubled in value, so you will have had money in your pocket each month and a nice capital gain too.

Calculations

£150,000 purchase price
1% stamp duty: £150,000 x 1% = £1,500
25% deposit: £150,000 x 25% = £37,500
75% loan-to-value: £150,000 x 75% = £112,500
2.5% arrangement fee: £112,500 x 2.5% = £2,812.50
Total borrowing: £112,500 + £2,812.50 = £115,312.50

Monthly interest: (£115,312.50 x 5.69%) / 12 = £546.77
Monthly costs (interest + buildings insurance): £546.77 + £20 = £566.77
Monthly profit (rent less costs): £795 – £566.77 = 228.23
Yearly profit (assume 12 months profit): £2,738.76
Return on capital: (£2,738.76 / £41,000) x 100 = 6.7%

I read an interesting article in the Guardian money section yesterday, which can be found here. The story is a question to readers of the paper, posed by another reader that had written in, seeking some useful advice.

I’ll briefly explain the situation. A readers’ partner has died, leaving her with some money, which she has decided that she wants to invest for her fourteen year old son, to give him a good start in life, once he’s old (and mature) enough to handle the money. Her question to the readers is “when should she give him the money?”.

Most of the answers seem to focus on the fact that at 18 years of age, the likelihood is that he will be too young to deal with the money, most likely spending it on a fast car and living it up for a while. The perceived wisdom is that at 25 he should be mature enough to handle the money.

There is even one reader that thinks it would be wise to give her son £10,000 a year while at university for three years, so that he would leave without any debt and have the best start in life.

I don’t agree with any of the advice. If I were in her position, I would put the money into trust for him, such that he can spend the income but never the capital, and make the income available to him from the time he starts university, should he go to university or from age 21 if he doesn’t go to university. This way, he’ll be motivated to go to university, which is a good thing, and if he doesn’t, when he gets to 21 he’ll have a helping hand in the form of extra income that he will probably appreciate all the more having worked for a few years already.

What I find most interesting is that the question is not “what should I invest in?” but rather “when should I give him the money?”. In my opinion, it doesn’t matter what age someone is, if they don’t understand money, the process of suddenly coming into a lump sum of £30,000 or more will usually result in the money being spent fairly frivoulously, so it’s in her best interests to educate her son about money so he is able to handle the money when she eventually gives it to him.

I recently read an article on this subject on a well respected financial portal. I didn’t like the article that much because I found it a little one sided, and focussed solely on the notion that if you are in debt, it’s your responsibility to repay the debts.

Hang on a minute, the people you owe money to (the Banks) are the same w*nkers that have caused the global credit crisis at the moment by being irresponsible with their lending decisions in the pursuit of quick profits and seven figure bonuses, should we really extend anything but contempt to these people?

I propose that if you are in debt, you should seriously think about taking this opportunity to wipe the slate clean – remember, the banks have all been bailed out by the government to the tune of billions of tax payers money, your money, so why not let your own taxes bail you out too?

I know, I know some of you are probably thinking “how irresponsible and anarchic”. Well if so, look at your retirement fund, your ISA’s and the value of your property. The reason they are all significantly less than this time a year ago is because of the aforementioned bankers and the mess they made of the financial system. If you were coming up to retirement age and have just seen 25% or more of your pension value wiped off, are you glad that may now have to work beyond the age of 65 or that you will have 25% or less money to live off than you had hoped for?

Enough of my rant, I’m probably a little biased as I was working as a mortgage broker, doing ok until the credit crunch came along and wiped my business out, so I don’t have any sympathy for lenders given the stress that I went through, not withstanding that as well as losing my business, my marriage failed, largely due to the stress that I went through in losing my business. Hopefully that should give a bit of context to my rant.

So my top tips for getting out of debt quick are, in descending order of speed:

Bankruptcy

By declaring yourself bankrupt, and choosing how you do it, you could write off 100% of the money that you owe. Clearly there are significant implications for bankruptcy, namely the effect it will have on your ability to obtain credit now and in the near future.

However, the effects of bankruptcy will only last for a maximum of six years, after which, it will no longer appear on your credit file, so will not affect your ability to borrow money. You may be obliged to inform a creditor that you have been bankrupt, but as long as you can prove you are discharged and it doesn’t appear on your credit file it won’t affect your ability to get a mortgage, loan or credit card.

In fact, if the banks don’t learn the lessons of the credit crunch, you may well be able to borrow sooner than that, albeit at a higher rate of interest, to reflect the increased risk that you represent to a lender.

Individual Voluntary Arrangement (aka IVA)

The exact amount that you can write off by going through an IVA will vary, dependent on what your creditors are prepared to accept as an acceptable loss (remember you are writing off your debt, and that becomes a bad debt for the bank on their balance sheet, so it’s in their interest to write off as little as possible). Generally, you should be able to write off 50%, in some cases, as much as 70%.

The IVA process will take five years typically, whereby you agree to pay off what you can afford, in regular monthly payments over sixty months. There is an exception to this rule, the “One off IVA”, which is a one off, lump sum payment that is used instead of paying monthly for sixty months.

Again, as with bankruptcy, the IVA will severely affect your credit rating for up to six years after the end of the IVA, as I understand it.

Debt management plan

Is an informal agreement between yourself and your creditors that is very similar to an IVA. You agree to repay what you can afford, and your creditors agree to freeze or reduce interest payments and charges on your debts. As it is an informal agreement it does not affect your credit file, however, most lenders will only agree to a debt management plan on delinquent accounts, whereby there are arrears or even a default has been issued.

I would suggest if you are going to use a debt management plan, use it as a short term plan for one year, get yourself on your feet financially, then raise enough money to make an offer to your creditors to settle the remaining debt. I would start off by offering 25% of the remaining debt as a “full and final settlement” and increase the offer by 5% increments until all the creditors agree. This way, you will have saved yourself having to pay back 100% of the debt, and will not have had to pay interest for the previous year either.

Debt consolidation loan or remortgage

If you want to keep your credit rating in good shape, but need to clear your debts quicker, then one of the best things to do is look to reduce the amount of interest you pay. If you have various loans and credit cards, calculate how much you owe altogether, borrow that amount from on personal loan or remortgage and use it to repay all the other debts.

This system will only be of any benefit to you if you commit to using the money that you are saving by having all your debts in one loan to be overpaying the loan and thereby reducing the amount owed.

Focus on most expensive interest rate first

If for whatever reason, you don’t want to consolidate or simply can’t consolidate your debts, the next best thing to do is focus on repaying the most expensive card or loan first.

To do this, you will need to pay the minimum payments on all your other debts, work out how much all your repayments come to each month, and then work out how much you can afford to overpay on your most expensive debt and commit to making that payment until it is cleared.

Once you’ve cleared that debt, take the money you were using to pay off that debt and add it to the minimum payment on your next most expensive debt until that is cleared and repeat the process until all the debts are cleared.

Naturally, you will need a certain amount of discipline to do this, and you will also need to ensure you set yourself a budget to live off each month and stick to it. Another useful tip for those that are messy with their money, is to have two bank accounts. One is where your income is paid into, and the other is used to spend money. If you work out your monthly budget for all your outgoings, mortgage or rent, council tax, insurance, utilities, phone etc, you can leave the exact amount of money needed to cover these expenses in the first account, then transfer the remaining money into your spending account. This way you can never overspend and accidently spend money that was earmarked for something important, like the mortgage for instance!

Conclusion

I don’t recommend that anyone takes my thoughts on the subject of debt as advice, because it is not – it is merely my thoughts about the subject and some interesting ideas for those that are prepared to think a little differently…

As wholesale energy prices have increased this year the electricity firms (and all the other utilities for that matter) have been quick to pass on the increased costs. As a result the average household now spends around 47% more on their electricity bills than they did a year ago (Source: Telegraph).

As we use most of our yearly energy during the winter months, now is a great time to start thinking about reducing your electricity use and therefore your bill. So how can you do so?

Well many would tell you to switch providers, but I’ve never been convinced that it’s really worth the effort and according to Ofgem 30% of the population agrees with me (or is too lazy to bother :-)). I seem to recall seeing a recent press article that stated that most people who switch actually end up worse off too, unfortunately I can’t find it again.

Next, if you pay by direct debit check your bill, in the last couple of weeks I’ve found that I’m in credit with my provider to the tune of nearly £200 and my mother in law is in credit to the tune of around £500! If you find yourself in such a situation phone up your provider and demand you money back then stick it in a savings account where you’ll at least get some interest - besides the banks need your money far more than the utility firms, just avoid any of those excellent Icelandic banks.

However the real gains come from cutting your use. Don’t fill the kettle to the top, only add the exact amount of water needed, one acquaintance of mine claims that step alone has cut 30% off his electricity bills - although that might say more about the amount of coffee he drinks than the amount of energy you’ll save.

Turn off the damn lights too, far too many of us leave lights on when we’re not in rooms (yes darling I’m thinking of you). Turn them off. Next turn off the television, video, DVD player, Sky TV (in fact why not cancel Sky TV), turn off the computer and unplug the mobile phone charger when they’re not in use.

Finally for those things you really need (light) invest in low energy equivalents, low energy light bulbs use a fraction of the electricity of normal bulbs and if you’re a geek like me a modern laptop of energy efficient PC uses far less power than a standard desktop.

So what are you waiting for, stop wasting electricity reading this! :-) Oh and the great thing is by reducing your electricity bill you’re also reducing your carbon footprint - you save money and get to be green, what a bonus!

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.

It sounds stupid, but I have moved back home to live, at the age of 28. Great!

I should probably not have moved out in the first place now I come to think of it, the house is much nicer than anyting I could afford myself, I get my washing done, my food cooked for me and my bed made! The only downside is that my housemates are in their late fifties!

I was discussing my parent’s courtship the other day and to my surprise found out that both of them didn’t own their own home until they got married. In fact, my mother was living with her parents, and had been for a number of years (even though she was in her mid / late twenties) and my dad lived in “digs” during the week and went back to his parents on the weekend.

Contrast this with how people think nowadays and it is completely different. Because my parents were living cheaply they had managed to save up a fairly hefty deposit when they bought their first home - in the region of 25%. That is pretty much unheard of these days, most first time buyers struggle to put down even a 5% deposit!

It begs the question, why? Why have attitudes altered so much in one generation? My parents weren’t radical in their thinking, nor were they high-flyers earning spectacular salaries, so how did they managed to save up a 25% deposit on a three bedroom home in the 1970’s?

What would that be equivalent of today? If you assume the avereage 3 bed house is worth £160k, that’s equal to £40,000 saved up in the space of a few years. That sort of thing is practically unheard of today. So why have attitudes changed so much?

My best guess is that the banks have contributed to the change in attitudes by offering credit so freely, and the increase of the “I want it now” culture, you only have to watch a TV advert and see all the happy, carefree, beautiful people consuming vast quantities of anything they can get their hands on.

This has created a generation of consumers who are only interested in spending money, there’s no thought to how they will afford to pay for the spending or in fact if they really need it. The fact is people buy with their hearts now and not with their heads. This attitude will have to change in the coming years because most people are going to find it much more difficult to get access to “easy credit”, which will mean they will have to live within their means.

So if you’re young, just about to leave university and thinking about how on earth are you ever going to afford to buy your own place, then consider moving back in with your parents for a few years. You’ll be able to save a decent deposit up, you won’t have to wash your own clothes and best yet, you will act as buffer between your parents and stop them tearing into each other on a daily basis!

It’s an interesting position to be in, but more and more people are in this situation thanks to the credit crunch and subsequent economic slowdown (polite way of saying “bust”, eh Gordon Brown).

I read an article in The Times over the weekend about the “couple crunch”, which was referring to the number of couples that are breaking up due to one (or both) of them going through financial difficulties, as a result of job loss or drop in their self employed income.

There must be thousands of families all going through a similar situation, and there will be more in the future as the recession goes on - it will get worse before it gets better.

But what can you do about it? This entirely depends on your situation, but suffice to say that there are many options available.

If your problem is short-term, and you suspect you will get another job soon, then the best thing to do is cut back on spending where possible, contact your creditors (because we’ve all got creditors) and inform them of your change in circumstances. They may well accept a reduced payment from you while you sort out your employment situation. However, you will need to clear any unpaid amounts once you’ve started a new job, which may be difficult depending on how tight your budget is.

If your problem is not related to loss of income, but is endemic of the fact that you have lots of debts which aren’t getting paid off, then you may have to look into other solutions.

The three main solutions in situations like this are:

There are various ways that each different plan will help you, and each plan will affect your ability to borrow in different ways. I would recommend that if you are struggling with paying your bills, you seek professional advice.