Find Financial Freedom

I remember earlier in the year reading an article in the paper (I think it was The Times) about house prices and how they would plumment about 25% during 2009-2010. This seems not to be the case now, as there was a story in the news last week that house prices were rising again.

I suspect that this rise is simply the result of some good marketing/selling by the estate agents of this country, and also the result of the efforts being made by the govt to get the banks lending again. I however, expect this optimism to be short-lived.

You see, house prices are over-priced, fact. I can’t afford to buy a fairly typical three bedroom house in my home town - prices are currently hovering around the £180k mark. This is more than three times my income and I’m earning more than the UK average. So how does everyone else afford to buy then?

Some people have saved up large deposits, or because there are two earners in the household, they can afford a much bigger mortgage than I could on my own. In some cases, the parents may help out, in fact, a friend of mine had his parents help him and his wife buy their first home. In this case, the parents “lent” them the deposit (about 20%), but then when they sold the property after four years, they took 20% of the sale proceeds, which netted them a nice little earner, and still left the children with a hefty deposit on their next house.

My feeling is that with the recession that we are all feeling, these generous parents may be less than willing to help out their children, and it’s this lack of funds for deposits that will lead to a sharp decrease in property prices, as the purchasers realise they need to raise the deposits themselves and with the credit markets (banks/building societies) being much less generous (requiring at least 10% deposit, sometimes 20%), people will simply have to hold off buying for a long time until they have saved up a deposit.

Until prices come back down to a level where an ordinary couple can save up a deposit in a relatively short period of time (1-2 years), then buying a house will remain out of reach of many and it’s this lack of demand that will pull prices down.

By taking a quick look at the Big Mac Index courtesy of The Economist, it would seem that Thailand is the cheapest place to retire to. Of course, some people’s tastes may have graduated beyond that of a Big Mac and fries by the time they reach retirement age, so with this in mind, what other factors should one look at when searching for a cheap place to retire to?

Cost of property

I’m sure some people from over in Scandinavia may well look at the Big Mac Index and think that retiring to the UK would be cheaper, given how much cheaper the Big Mac is over here than over in say Sweden. But if they did this without considering the cost of housing, then they would be in for a nasty shock, as the UK has some of the most expensive housing in the world. If you want to retire abroad, to somewhere cheaper, then do some research into the price of property. You may well be pleasantly surprised to find that you can sell your fairly average four bedroom detached house in the UK and buy a lovely five or six bedroom palace with a swimming pool in a country with a nice sunny climate!

Cost of living

Clearly the Big Mac Index is not sufficient to make a proper decision on, to do this you will need to consider what the local costs are for groceries, utilities, taxes, petrol (assuming you will run a car), insurance and health care. As well as this, you will need to consider the impact of flying back to the UK every six months or so to visit relatives and/or friends.

Social cost

If you retire abroad, you may struggle with the language – especially if it’s somewhere exotic like Thailand – and it may be too difficult to learn. In addition to this, there may not be a large population of ex-pats, especially British ex-pats, so your social life may well take a hit. And unlike working abroad, you may not get the opportunities to meet lots of new people and therefore make new friends that easily.

Cheap Countries

I haven’t done much research into this, but if I were to, I would be looking at places that are still fairly backward compared to the UK. Think backpacking and gap years, as these places tend to be cheap enough that you can exist for less than £500 a month and still have a bloody good time.

For instance, South America, South East Asia, South Africa, Australia and New Zealand are all popular back-packing destinations, so why not consider these as an ideal cheap place to retire to.

Early retirement is still a concept in use today, primarily to describe the ability to retire before the standard retirement age of 65 in the UK, though these days people tend to talk more about financial freedom as opposed to saying they want to take early retirement.

If you are looking to achieve financial freedom or take early retirement, then you will need to do some planning, it won’t just happen otherwise. First thing that you need to do is set yourself a goal. When I used to work as a mortgage broker, I was lucky enough to receive some good advice from fellow financial advisors about how to help clients get the most out of their financial planning. The technique that was passed onto me is called “The Broad Concept”.

Apparently it is a strategy planning tool that was first conceived during the Vietname war by the Americans. The idea being that if you want to achieve a set of objectives, you must first follow these four simple steps:

1. Work out what objective you want to achieve, or work out your retirement goals.
2. Work out where you are now (with respect to achieving your stated goals).
3. Work out all the various different ways you can achieve your goals.
4. Lastly, analyse and decide upon the best way to achieve your goal by discounting each route in turn.

So how does this work in practice?

Well, the first thing to do is work out step 1. For example, let’s say your objective is to retire at age 50 with an income (in today’s terms) of £25,000 a year.

The next thing to do is work out step2, where you are now (in relation to achieving that goal). So for example, if you are 25 years old and you have no retirement planning, you have 25 years to acquire £500,000 (£25,000/5%) - I’ve assumed a fairly typical 5% return on investment. Clearly this example doesn’t take into account inflation, so to do this correctly, you would have to tweak to allow for the impact of inflation etc.

The third part is the bit where you can have a little bit of fun! Step 3 you need to work out the various different ways to achieve the stated goal of acquiring a pot of £500,000 in 25 years. You could work out that if you invested a few thousand pounds each year into a pension fund, you would achieve the goal. 

You could also look at investing some money into property, with the intention being that in 25 years, the capital appreciation, as well as the mortgage being paid off could provide you with the amount of capital required to retire on. Though, I would potentially just look at investing in property with the intention of holding onto it for the income that it would generate. Remember that with property, if you sell it to release the equity, you will pay capital gains, so it is sometimes better to hold onto it indefinitely.

Another option could be to start a business with the intention that over the next two and a half decades you will have built up something of value that could be sold. The proceeds of the business sale could then be invested in an annuity to provide you with the requisite income.

The safe option, in many eyes would be to find an employer who would provide you with a nice comfy “company final salary” pension scheme, and hope that by the time you get to retirement age, your salary is fairly high, thus affording you a decent retirement income.

There may even be a few other options, but I’m not going to go into them at this stage. Let’s move onto stage 4 which is the analyses of the various different options that can be taken to achieve your stated goal.

You may look at the option of starting a business with a view to selling it at retirement age and decide that’s not for you. That’s fine, at least you’ve explored the possibility. Similarly, if you’ve no interest in becoming a landlord, you may well discount that option too. And lastly if you don’t fancy being responsible for your own pension planning, it may be wise to discount that option and look to go and get a job with an employer that pays a nice final salary pension, and hope that the scheme will still be going when you come to retire.

Whatever you do with your retirement planning, you can be sure of one thing - you need to do some, and it won’t necessarily be the right type, but unfortunately, you won’t know until it’s too late. The most precious asset we all have is time, and no amount of money can buy any more, so it’s best to put some serious thought into what you will do about retirement when you are young, rather than just hoping that it will magically just work out all right in the end!

With the credit crunch having turned into a recession, I’m sure there are many out there that are wishing to cut down on everyday expenses, so here’s my tips for frugal living. However, don’t think that being more frugal is the only way to beat the recession - the optimum strategy to beat the recession is to play a good offence and a good defence. So cut your costs down by following my frugal living tips, but also look to increase your income by following these simple ways to make money online.

Frugal Living Tip # 1

Downgrade to a less expensive supermarket than you usually shop at. In the UK, the conventional wisdom is that the most expensive supermarkets are Waitrose and Marks & Spencer, with the cheapest being the Aldi’s and Lidl’s of this world. So to make a huge saving, stop shopping at M&S and start shopping at Aldi. If you want to make a modest saving and you usually shop at Sainsbury’s, try shopping at Asda or Morrisons for a few weeks - you’ll notice a difference in the price of your shopping and the quality is comparable, in my opinion.

Frugal Living Tip # 2

Take a keen interest in the prices of petrol/diesel at your local garages. The variation in petrol prices can be pretty big, especially if like me, you fill up with premium unleaded (104.9p/litre) by accident. This was a full 10p/litre more expensive at Texaco half a mile down the road than the local Morrisons regular unleaded, which is £4.80 on a 48 litre fill up! But even comparing like for like (ie, regular unleaded with regular unleaded), the variation in price between the supermarkets and other petrol stations, even within a small radius can be quite large. Clearly it’s not worth driving an extra 20 miles just to fill up, but if you’re passing nearby, a slight detour may be worth it if it will save you £2-£3 on a tank.

Frugal Living Tip # 3

Eat in, or if you really must go out for dinner/don’t have time to cook, then get a takeaway. If you order a takeaway, you don’t pay VAT, so immediately you’re saving that 15% that would have been added on, also if you are eating a takeaway, you can buy any booze to go with it cheaply from the supermarket, rather than paying expensive restaurant prices!

Frugal Living Tip # 4

Take sandwiches/packed lunch to work. I find that when I don’t prepare a lunch to go to work, I end up buying rubbish or spending more because I am shopping in more expensive shops than I would do my everyday grocery shopping at. If you make your own lunch each day, you could save £10 - £15 a week, which is a significant saving over the course of a month.

Frugal Living Tip # 5

Examine all your monthly direct debits to see firstly how much you are spending each month and secondly to identify which ones could be switched to cheaper suppliers. I did this recently and found that I was paying £35 a month for a mobile phone contract which supplied me with more texts/minutes than I ever used. I’ve now downgraded to a cheaper deal (with the same supplier) and am saving £15 a month.

I got rid of Sky TV and bought a free to air box, am saving £37 a month that I used to pay to Sky. Clearly if you are a big football fan then this will be painful, but it does give you more excuses to go to the pub - but make sure you only have a squash and don’t spend the money saved on Sky on beer instead!

I wear contact lenses, and couldn’t do without them (I’m as blind as a bat otherwise), so what I did was shop around and find a supplier on the internet that will supply my contact lenses and solutions for £15 a month, compared to my optician that was charging me £33.80 a month.

And of course, it goes without saying that you can switch your home insurance, gas, electricity, water, telephone, broadband - just make sure you are getting a better deal, this can only be calculated by reading the small print of each deal to ensure there will be no hidden surprises!

Lastly, as an ex-mortgage broker, I’m going to recommend that you don’t use your trusty mortgage broker when buying your life insurance or other protection products. Instead, get some quotes from them, this will ensure you get the correct amount of cover for your needs etc etc, but then go and buy from an online broker that strips out the commission (about 30-40% of the monthly premium) and instead charges a small fee (£30-£50) to set the policy up. A company I used was Cavendish Online and they were very efficient.

There are a host of ways to make money online, but many of them are not that simple, for instance, if you wanted to setup as a competitor to Expedia, it would be pretty difficult to do on a shoe string, actually it would be impossible.

However, if you have a love for travel and fancy yourself as a internet entrepreneur, then there are ways you can make money, hell, you can even get yourself signed up as a partner of Expedia and sell their products for a commission.

This is what is known in the industry as affiliate marketing, and it’s something I did for a few years, specifically in the travel industry. It’s quite simple really, all you need do is refer traffic to the merchant, and they will credit you for any sales that result from that traffic in the form of a nice commission cheque at the end of the month. That’s the simple part, you don’t need any specialist skills, just some basic web design skills will get you up and running.

The hard part is getting the traffic to come to your website in the first place. This can either be done by buying the traffic as part of a pay per click campaign or by optimising your website so that it appears high in the search engine rankings and therefore gets lots of targeted traffic.

An even simpler way to make money online is to become a published author, by publishing a blog. There are lots of free blogging software tools available, such as WordPress (in fact, this blog is written using WordPress) that are easy to install and use. Once you’ve installed it on your website, all you need to do is get the creative juices flowing and write lots of content that the search engines will love. This will eventually translate into traffic, and then you can monetise this traffic with adverts on your blog - simple!

The Bank of England announced the new interest rate for the following month today at midday, and in what was not exactly a shock, their decision was to hold it at it’s current rate of 0.5%.

With inflation running at 3.2%, well in excess of the Bank of England target of 2%, this does start to ring alarm bells in my ears. Clearly the economy needs a sustained period of low interest rates to restore confidence in both consumers and businesses, but will the Bank have to raise interest rates in the near future to combat inflation?

If you look at the falling value of sterling against the dollar, you can see why inflation is set to continue to rise in the near future - the relative increase in the price of energy. Hang on a minute, aren’t oil prices much lower than they were this time last year? Well, yes they are, however, in sterling terms, energy is getting more expensive, because we have to buy dollars to buy the energy.

There is something that could be done to release the pressure on the Bank of England, they could start to use the RPI, which is currently much lower than the CPI thanks to it taking into account mortgage interest into its calculations which consumer prices index does not.

With the credit crunch meaning everyone is looking for ways to save money, it struck me that there are still lots of people that waste their hard earned cash on “lunches” everyday at work. Only the other day, the plumber that was in to fix our bathroom nipped out at lunch time to buy himself a sarnie and a drink. No doubt he spent at least £3 on a sandwich and a bottle of coke from the local shop, if he does that everyday of the week, he’ll be spending £15 a week on lunches!

Now it shouldn’t take a genius to work out that you can make your own sandwiches for much less than £15 a week, so you could easily save money each week by doing so. Ok, it does take time to make your own, but if you get into a routine of doing every evening when you’re making your dinner, it’s really no fuss at all.

There are other ways you can make similar savings, for instance, if your office or workplace has a coffee machine, don’t spend money buying a coffee or tea, just take your own coffee / teabags into work and make your own.

I wrote a similar post on my other blog recently, which was called make your own supplements to save money, and it’s the same issue with supplements. You can buy all the raw ingredients and mix your own shakes for a fraction of the price of the big brands, but for some reason, countless people get sucked into splashing the cash on expensive, well known brands, either because they think it’s better or simply because they can’t be bothered to mix them up themselves.

I filled up my car the other day and for the first time in a while I noticed that the price of a litre of petrol had risen to well over 90p. This took my by surprise as the price of petrol had been getting lower until recently, and I had rather hoped that for the health of the nation’s finances, it might stay low.

But with sterling being worth less than monopoly money at the moment, it’s no surprise that petrol prices are rising, you see, oil is traded on the global market in US Dollars, which have been getting relatively more expensive for us here in the UK. This pushes up prices at the pumps, though there is a bit of a lag due to the nature of forward contracts etc etc.

Another issue that is going to affect the price of petrol at the pumps is the fuel duty rise 1st April 2009 of 1.84p per litre on petrol and diesel.

I wonder how this will effect the consumer price index over the next few months? With the Bank of England doing everything within their powers to stop deflation and stimulate the economy, will the weak pound contribute to UK inflation thanks to higher petrol prices. It’s an interesting situation that we could be faced with, if the economy is still very weak and the pound weaker, we could see ever rising oil prices and that will lead to inflation. To combat this inflation, the BoE will have to raise interest rates, which will either lengthen or deepen the recession that we are in, or worse still both!

My suspicions are that eventually the government will ask the Bank of England to revert back to using the retail price index, and thus with house price deflation being fed back into the equation, they will have some justification to keep the base rate at it’s all time low of 0.5%, and thus the weak pound causing higher energy prices will not effect the inflation statistics as much and we’ll all be able to carry on delaying the inevitable.

In my experience, businesses are either run by frugal people who have keep a close eye on expenditure, trying wherever possible to keep costs as low as possible, or they are run by people who don’t worry too much about what they are spending, because they concentrate on generating a large turnover and hope that this will be larger than their inflated running costs.

I can kind of see the logic in this, though something I picked up from reading “The Millionaire Next Door” is that to really be successful in business, you should place equal emphasis on both aspects of your business. In essence you should try to maximise turnover and minimise costs, to therefore maximise profit.

As such, I decided to come up with some money saving ideas for businesses.

Offices/Premises

In reality, the office or premises that a business operates from is a neccessity, but it does not have to be regarded as a luxury, as many big corporates believe. The evidence of this can be seen in any city centre, where you will find big lavish office buildings housing various firms. They must spend a fortune on these offices, not just because they are city centre, but also because they are flashy, and that costs money.

Even the government are guilty of this, take the Financial Services Authority for example, they are funded by the fees levied against regulated financial services firms, something in the region of £200m a year, and they blow this on a very fancy head office in London’s docklands. They could reduce the fees levied each year and move the HQ to Barnsley and save a fortune.

Company Cars

The amount of money companies spend on car fleets is astronomical, mainly because they buy or lease brand new cars, and so pay the lion’s share of the depreciation. They would save a fortune if they bought the cars three years old and sold them once they were five years old, in effect get some other sucker to pay for the depreciation. But I’m sure there are good reasons why they have to have brand new Mondeo’s and Vectra’s, I just can’t quite work it out…

Expensive Marketing

How many companies that you see advertised on TV or in magazines, newspapers etc do you think ever really see a return on the amount of money they spend? I bet most of these firms pay large marketing agencies huge sums of money to come up with ideas for their brand or various products/services, and I’m sure the whole process for the client is very lovely, but in terms of value for money I bet it’s pretty poor.

I have in the past done some affiliate marketing, and when I was a mortgage broker, I worked on commission only, so I know about marketing from the sharp end. I bet if the marketing agencies that are retained were given the option to earn a commission on only the extra sales that their campaigns generated, they would run a mile.

My theory is that it’s very easy to spend thousands of pounds of someone else’s money without really worrying about the outcome, but if they actually had to be accountable for the money spent and the results, it would be a different story.

I’ve even heard anecdotes of companies that have cancelled profitable affiliate marketing campaigns because a marketing budget had been slashed…how bonkers is that? With affiliate marketing, you only spend money on the marketing if you make a sale, it’s win win! To arbitrarily cancel an affiliate marketing campaign because the overall marketing budget has been slashed is completely stupid. If anything, they should slash wishy washy TV/magazine/radio/newspaper advertising that doesn’t generate results and move any affiliate or commission only sales out of the marketing budget.