Find Financial Freedom

I’ve been reading a very interesting book recently, called The Millionaire Next Door, and it’s all a digestion of various studies and surveys taken by a couple of guys on American millionaires, to try and understand how they made their millions.

I thought it would be an interesting read, full of inspirational stories about how ordinary people like you and I overcame great adversity to start a business and then build it up from scratch to be worth millions. However, it is sadly not like this at all. It is in fact almost the opposite of inspirational, though it is still very insightful and has really made me understand a few issues that I never understood from my childhood.

You see, I had a best friend from school who’s dad was (and still is) a self made man. He built up his nursing home business and eventually sold it about ten years ago for over £1million. I always thought his ways were a bit strange, he was always frugal and never seemed to get carried away with his success. I always thought that this was simply his way of dealing with it, but it seems from reading this book, that his behaviour is not uncommon amongst the self made millionaires.

You see, most people in life strive to have a large income, but never really understand the benefits of having a large income, almost assuming that your outgoings must automatically increase in line with your income otherwise you’re not playing the game fair.

It doesn’t have to be this way, and the book’s findings share this view. The lesson I’ve picked up from reading the book is that the vast majority of millionaires live frugal lives, consuming only what is necessary to live and perform their everyday tasks, and using whatever is left to invest.

So to achieve financial freedom, live like a millionaire and follow these easy steps:

• Control your (and your spouse’s) consumption, don’t spend up to or beyond your income level
• Buy a modest house, with a modest mortgage (no more than two times yearly income) and work to pay it down as quickly as possible
• Don’t get into debt, if you are already in debt, get out of debt as quick as possible, here are some useful articles (how to get out of debt quick and how to repay credit card debt examined)
• Buy a 2nd hand car, with cash - don’t get sucked into buying an expensive luxury car (BMW/Audi/Merc/Porsche etc) on credit or worse still, hire purchase, it’s just not smart
• Don’t buy expensive “label” clothing, it’s the same as cheap clothing, all made in sweatshops in the far east, so why pay more?
• Buy a cheap watch for £10 ($20) and replace every few years, don’t waste four/five figures on an expensive Breitling/Omega/Rolex or any other expensive make, all they do is tell you what time it is
• Don’t go on expensive holidays, yet…do it when you’ve achieved financial freedom, in fact, when you’ve achieved financial freedom, the rest of your life is a holiday!
• Have a budget for your everyday life, work out how much you need each month for groceries, utilities, insurances etc and stick to this budget. You should even budget for little luxuries every now and then, which is ok, as long as it’s been budgetted for!
• Don’t waste money eating out every other night, you can easily spend a week’s shopping budget for two on a meal in a restaurant for two, so it’s just not financially smart to waste so much money on eating out, keep it as a treat, once a week at the most.
• Don’t waste money on expensive club memberships, like golf club or country club memberships. If you need a gym membership (which I do), then make sure you get value for money, in fact here’s a great idea about how to Reduce Your Monthly Outgoings By Going Down The Gym
• Don’t waste money on keeping up with the Jones’s, this is the key thing to remember, most other people who seem to be wealthy are usually only a few months from bankruptcy because all their income (and more) is used to keep up this pretence of wealth, when in fact they are slaves to their debts and high consumption livestyle.

In the gym yesterday I had a chat to a chap who recognised me having read my other blog, as usual we got chatting about business opportunities and ideas (the topic of my other blog). He’s particularly interested in Internet business ideas that he can start and run from home as he’s not keen on getting a job. While he’s getting started however he’s working hard to reduce his monthly outgoings and the way he decided to do so is interesting.

He’s a gym rat so he’s not prepared to give up his gym membership, instead he’s opted to get the maximum value out of membership. He does so by training first thing every morning and then getting a shower (and presumably shave etc.) in the gym. By doing this he saves on his heating, water and having to heat water at home. He then goes from the gym straight to wherever he’s going to be working that day. As a result he’s out of the house all day - which saves having to go to the expense of heating it to a comfortable level.

He’s also been quite active in reducing his cost of living in other ways too. At the moment he needs some work doing to his car so he’s arranged to work in the garage to help out in return for the labour on his car - thereby reducing his costs.

An interesting approach to reducing his cost of living by squeezing every bit of value possible from his gym membership, but would it work for you?

I read in on The Times Online today that BMW Mini have laid off 850 agency workers at their plant in Oxford, apparently waiting until an hour before the shift was due to change to let the workers know. In effect this gave a large number of these agency staff just one hour’s notice of their redundancy. Not surprisingly, the agency staff in question have been up in arms about it, throwing fruit at the managers as they left the plant, and telling reporters that they feel they have been used.

I can’t really have too much sympathy with the now redundant staff, surely they must have known that eventually BMW Mini would have to lay them off, the news is full of stories about how the car industry is in dire straights, demand having dropped through the floor. Also, why on earth would they expect BMW Mini to show them any loyalty when they haven’t shown BMW Mini any loyalty in joining their workforce proper, rather than being employed as agency staff?

I suspect it comes down to the age old human emotion of greed. They probably earnt more money as agency staff, and were quite happy to take that and forgo paid holidays, pension etc when times were good, but as soon as times get bad, it’s BMW Mini’s fault for laying them off, as is their right to do with temporary staff. You can’t have your cake and eat it, goes the saying, so why do so many people think that they can?

I wonder how many of them have done anything to offset the effects of this redundancy? I wrote about ways to earn extra money in your spare time last week, it seems that it may have been a bit late for these workers, but it just goes to prove how useful having some extra income could be should your employer pull the plug on your job without much notice.

On the flip side, Kentucky Fried Chicken have announced plans to create 9,000 new jobs in the UK as part of an expansion drive. The expansion plans include opening a further 200 - 300 restaurants across the UK in the next three to five years.

This expansion drive will also see refurbishment for some existing restaurants which will pump money into the economies via the trades, assuming that KFC use UK contractors. Clearly it seems that despite the credit crunch and the ever growing health movement in our society, our appetite for fast food is still growing.

Given that the economy of the UK and most countries around the world is not in good shape, it’s no surprise that governments worldwide are lowering interest rates in an effort to increase the flow of money in the economy.

You see in economics, there are two theories about how government can control the flow of money in an economy:

• Fiscal policy - control of taxes
• Monetary policy - control of interest rates

When I studied economics at school, I had no “real world” experience, so found this subject incredibly dull. It’s only now as an adult that I find it fascinating, especially as the effects of monetary policy and fiscal policy can be seen in real time on the UK economy.

The Bank of England have been using monetary policy to steadily lower the base rate in an effort to increase the amount of disposable income that UK consumers and businesses have.

But how does this work?

Simply put, if you were a typical UK homeowner, who had borrowed £100,000 on a tracker mortgage, you will now be paying £4,000 a year, or £333 a month, less in interest than this time six months ago. The theory goes that most borrowers will see this as a windfall and go out and spend the extra money they have in their pocket.

I would strongly advise not to do this. Not because I’m a doom-monger who only wants to see the UK economy worsen. Simply because when interest rates revert to a more normal level (somewhere between 4% and 5%), those people that had gotten used to having this “extra” disposable income as “normal” will suddenly feel the pinch.

If you use the extra money that you have to either pay off some of your mortgage early, or invest for the future, you will be far better placed to deal with the inevitable interest rate rises in the future.

The same goes for any businesses that are suddenly feeling an easing in their interest payments. Use the extra money to build up reserves, or pay off the capital on the loans, mortgages and/or overdrafts.

By following a frugal strategy whilst interest rates are low will no doubt lengthen the recession by not playing into the hands of the policy makers in the Bank of England and the government, but from your own perspective as UK consumers and businesses, you will be better placed to strive once the UK economy does recover.

When times get tough, like they are at the moment, it makes sense to look at ways to mitigate the effects of a downturn in the economy and the potential risk of losing one’s job. It was with this in mind that I thought it would be a good idea to examine some of the various ways we can all build an additional income alongside our main source of income.

There are only really two ways that you can earn extra money in your spare time, and they are either from getting a part-time job, outside your normal working hours, or starting up a part-time business that can be run around your day job.

Part Time Jobs

The great thing about part-time jobs is that there are always lots of part-time jobs going because, by their very nature, the role isn’t suited to longevitiy. Most people will use a part-time job as additional income or to fit in around their other commitments. Part-time jobs rarely lead to better positions, so when workers get dissolusioned or need to earn more money, they move on and find a more suitable vocation.

Below is a list of potentially easy to do, low skilled (and low paid) but ultimately readily available part time jobs that for most people (assuming they work a nine-to-five) can fit around their existing work:

• Bar work - pubs, wine bars, hotels, night-clubs are always looking for new bar staff. If you live in a university town, the summer holidays will be a time when a lot of these jobs come up as the students return home for the summer.
• Waiter / Waitress - restaurants, cafe’s, hotels will always need waiting staff. In certain establishments, there will be a small amount of skills required (silver service), however it’s not exactly rocket science - you simply serve food using a spoon and a fork - which can be trained very easily.
• Baristas - the posh word adopted by the Starbucks / Costa / Coffee Republic’s of this world, used to give their coffee serving staff a sense of importance, however, there are always jobs going at these places, as with bars, the summer holidays will see a big transition of workers, so is a good time to pick up this kind of work
• Kitchen assistant - sometimes referred to as a KP (kitchen porter), this is general ad hoc duties working in a commercial kitchen. This could include washing up or food prep (though generally the unskilled stuff like peeling potatoes). Hotels, restuarants and larger pubs will always have a high staff turnover for these kind of jobs, so they are a good place to look. There are also specialist catering services recruitment agencies, one that springs to mind is Berkeley Scott (I used them myself when I was a student).
• Evening merchandiser - the most elaborate way of describing a “shelf stacker” that I’ve ever heard, but it is an actual job description from an old client of mine, who stacked shelves overnight in a well known discount retailer. Plenty of work to be had here, not going to be well paid, but if you want easy, mindless work with a bit of exercise thrown in, then this would suit well.
• Fast food delivery - work for a well know chain, like Dominos or Pizza Hut, or your local takeaway, there is always work for delivery drivers. Peak hours are after normal working hours so easy to fit around your other work, and for some reason, for this kind of work, the pay is usually around £7 an hour, plus all the tips you’ll likely get (usually the spare change from a £10 or £20 note, but it mounts up).

Granted none of these jobs will earn you masses of money, but you may be able to scrape together £40 for an evening’s work that can be fit around your other work, which could over a month be more than enough to pay for the mortgage.

Part Time Businesses

There are a multitude of different business opportunities that can be reasonably lucrative, relative to the amount of time spent on them, thus making them well suited to supplementing your income from a full-time job. There are some opportunities that are what’s called “turn-key”, while others are slightly more complicated and will require a small degree of business sense to get going. However, having said that, none of these opportunities are capital intensive and so the barriers to entry are really your own motivation and belief in yourself and your ability to run a part-time business.

• Leaflet delivery - local businesses are always looking for reliable people to deliver their marketing communications (fancy word for leaflets) to their potential customer base (fancy way of saying local houses). Here’s a great article and discussion about how to start a leaflet distribution business for under £200 which I’ve also commented on.
• Network marketing - sometimes also known as multi level marketing, network marketing leverages the power of your personal contacts as a sales channel and also by signing up contacts as distributors, with you making a small commission on your distributors’ sales. I wrote a post about this, please read passive income opportunity in the health and wellbeing market for a breakdown on a real life network marketing opportunity. I’ve also in the past looked at becoming a distributor for a company called Utility Warehouse, I even set up a website for it at Piggy Bank Savings.
• Hobby business - if you already have hobbies that you are passionate about, then why not try and make some money out of them? You’ll never find the work to be a chore if it’s already something you are passionate and excited about. With the internet, it’s even easier to start a small web-based business around your existing hobbies. I run a blog about my own hobby, though it’s not a traditional hobby, my body building and fitness blog is a way of me keeping a training diary and writing posts about fitness and weight training and in doing so, making a bit of money from it to help pay for my gym membership and the various supplements that I take each month.
• Franchise businesses - there are a lots of different franchise opportunities, ranging from McDonalds restaurants (which are capital intensive and full time) down to snacks and chocolate vending machine businesses that require little capital outlay and minimal effort - the vending machine does all the work - all you need do is re-stock every week. I found a useful website for browsing the various franchise opportunities that are available, http://www.franchisedirect.co.uk/ and here’s some more useful posts and discussion about franchises.

So you can see that there are a lot of different opportunities available to make an additional income around your existing work commitments. Some of these may not be suitable for you, and some of them you may think are beneath you (I certainly wouldn’t want to be stacking shelves, but I would if I had no other option). The thing to remember is that a part time job or businesses, is just that - part time, it’s not your full time role, it’s not what defines you, merely a way of earning a little extra money to supplement your income during the testing economic times ahead.

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

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

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

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

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

Yesterday the Bank of England Monetary Policy Committee once again cut interest rates by 0.5% to a record low of 1%. It’s the 5th interest rate cut since October when interest rates were 4.5%.

The cut is great news for borrowers with tracker mortgages, or borrowers whose lenders choose to pass on some or all of the interest rate cut, but not such good news for savers. On the other hand it’s the borrowers that we really need to help out at the moment, reducing the burden on them (both consumers and businesses) will help to stimulate the economy. Whilst savers provide little benefit to the economy and may in fact - much as it pains me to say it, in times like these, harm it by saving.

I predicted this cut in interest rates last week, in my post Bank Of England Base Rate Predictions - not that it took any great insight to do so, and unfortunately, in light of the continuing state of the economy, I think our interest rate predictions remain valid for the forthcoming year. So if you’ve got a significant level of savings, it’s perhaps time to consider some alternative strategies for your savings and investments.

I read on The Times Online yesterday that RBS, the failed bank that owns Natwest and ABN-Amro is set to pay out millions of pounds in bonuses to its staff. At first I was rather annoyed that the bank would have the audacity to do this despite the fact they were bailed-out with taxpayers money and are still on handouts to from the Bank of England to help prop up it’s trading activities.

However, having read the article all the way through, and watched the video posted with the article, I am a bit more understanding. It seems the vast majority of the bonuses will be paid out to staff who are contractually obliged to receive a bonus should their activities have turned a profit.

In the case of RBS, their foreign exchange, bonds and commodities traders all had a good 2008, so it is only fair that they receive a bonus as a share of the profits they have generated.

The insurance side of RBS - better known as Direct Line - which had a record year in 2008 are also set to pay out bonuses to their staff, and this I’m fine with as it is performance related.

The staff that I don’t think should receive a bonus for are the staff that were involved in mortgages and derivatives of mortgages which contributed to the bank’s losses (reportedly in the region of £7 - £8bn) in 2008. These staff should receive no bonus as they have not generated any profits in my opinion.

There is also talk of the regular branch staff not receiving their usual 10% bonus that they get in March. I suspect that this has become the norm because over the past decade, the norm has been that RBS makes lots of profits, and thus shares some of those profits with it’s workers. If the bank doesn’t make a profit, like in 2008, then the workers shouldn’t receive a bonus - simple as that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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