My “never sell a house” approach applies to my own homes too, when buying a house (as a home) I consider not just it’s suitability for my family, but also the potential to rent it out in future/when we move on. Again the reasons are relatively simple, if we sell the house we’ll almost certainly end up doing so through an agent (we don’t have time to sell privately) which will cost between 1% and 2% of the price achieved, we’ll also probably have to pay a fee to close the mortgage (probably a couple of hundred pounds). In return we’ll get a pot of capital (our equity) to invest elsewhere, or to use as a deposit on the next house.

If instead however we kept the house (assuming we’d brought with consideration to the rental possibilities) we could rent it out and receive an income from the property. Admittedly the income is likely to be relatively small initially, but it will grow over time as rents rise and in the long term property prices are also likely to rise, so any capital gain is likely to increase. In short if you don’t need the deposit for your next home, then I believe you should never sell your house. Instead rent it out.

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The part I never really understood, was if you buy an option to hedge your position, surely then someone else has to sell the other position, which implies they leave their position exposed. Now since then, I have gone onto do my own studying and learnt a bit more about this subject (but am by no means an expert). Principally, I was first introduced to the concept of writing options by Robert Kiyosaki’s Rich Dad’s Retire Young, Retire Rich book.

In his book, he explains how he is able to write options on stock that he does not hold, making a nice quarterly passive income. He also goes on to explain that this is not risky because the options he was writing, were for stock of a company he wanted to own anyway, and that the profit he makes from writing the options for the previous quarters would be used to acquire the stock in the event of the options excercised by the owner of the options.

I have come to learn that this strategy is called a buy-write, because the writer is obligated to buy the stock at the strike price, if the option is excercised. The opposite of this is a covered-call, whereby the writer of the option already owns the underlying stock, and is writing a call option to sell the stock at the strike price should the option be excercised.

So how could these strategies be used to make money, and what risks are attached to each strategy?

Buy Write Strategy and Risks

To make money using the buy-write strategy, it seems you have to agree to buy up shares of a company you want to own anyway, and then make money from selling your obligation to buy the shares at the strike price.

The risks with this strategy are that you could be obligated to buy shares in a company whose share value is taking a nose-dive. So for example, you may be obligated to buy 10,000 shares in a company that normally trades at £10, but your option is excercised when the share price hits £9, meaning you need to stump up £90,000 to meet your obligation under the contract. Now if the shares plummet to say £2 (as some UK bank shares did last year), you could be £70,000 down on the transaction (of course you could hang onto the shares and hope for them to recover).

Covered Call Strategy and Risks

This is where you agree to sell shares that you already own, at the strike price, to the owner of the call option you wrote. Sounds simple enough. If you own the shares already, and are happy with them, it may seem stupid to sell them, however, this is a strategy for increasing the returns on your existing shares, by making extra money by writing the call options.

For example, if you owned the same 10,000 shares that are currently worth £10 a share, and you were able to sell a call option for 10,000 shares at a cost of £5,000 each quarter, then you are making passive income (assuming the option is not excercised) of £20,000 a year. This is over and above any dividend income you may be receiving from the shares as well.

The risks with this strategy are that your shares my drop in value, but that is a risk with holding onto any shares, so is not confined to this strategy. The risk that is inherent in this strategy is the opportunity cost associated with being obligated to sell a share that is sky-rocketing.

For example, if you own 10,000 shares which are currently worth £1 a share. On the back of some good news about the company, the share price quadruples to £4 a share. If you weren’t obligated to sell the shares under the option contract, you could have hung on and sold for £3 a share profit, but instead, may have to sell at £1.50 (for example), thus the contract has an opportunity cost of £2.50 / share in this instance.

Hopefully this rudimentary explanation of how options trading from the point of view of writing the options, rather than simply buying and selling them offers an insight into how to make extra money from existing shares, and also how to earn money without even owning the shares. I don’t profess to be an expert in options trading, but found this option traders journal website to be very useful.

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The evidence is clear in the amount of lending being done during the last quarter of 2008 that despite the governments best efforts to get credit flowing freely again, the banks are simply not playing ball. I wonder why this is though?

Is this simply a case of banks trying to take the government for a ride? One minute saying

“yes, we’ll start lending money willy nilly as long as you (the govt) bail us out”

And then as soon as the deal is done, deciding to renege on their promises to the government, and simply stashing the money away and building up their capital reserves, at the expense of Jonny Taxpayer and a naive government no less.

Or is it simply that as a nation, there is now not enough “good credit risk” customers out there, only swathes of “poor credit risk” customers, whom the banks no longer wish to lend to anymore? I suspect it’s a bit of both, banks probably do want to stash money away, build up their reserves, and lend at higher margins than previously, whilst the government would like the banks to start lending freely (as this would potentially boost spending in the wider economy), the banks can’t comply if in doing so, they end up repeating the same mistakes which caused the credit crunch in the first place.

There has been talk of the government starting a new, nationalised bank, that would buy up all the other banks’ bad debt, thus cleansing the financial system of all the toxic debt that has been causing so many problems for the past eighteen months or so. Even this may not help the situation, if the real problem comes down to there being a lack of credit worthy individuals or businesses to lend to.

So perhaps the reality of 2009 is that we will all have to improve our credit ratings, which will allow the banks to lend to us again, thus resolving the current financial crisis. Doesn’t bode well for the government - who seem to think that bankrupting the country, by borrowing heavily to fund spending on public works and job creation schemes is the way to stave off a serious recession - if the banks will only lend to those with excellent credit records (who generally don’t need to borrow money).

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Simply put, paying your bills on time will reduce the level of late payment fees you pay. Given such late payment fees range from £10 to £50, that alone could be a significant saving on each bill. On top of that, the easiest way to make sure you’re not going to be late paying is to switch to direct debit payments and many companies, especially the utility providers, offer a discount if you pay by direct debit, which could save you another £10-£50 per month.

Additionally if you pay by direct debit you’ll usually know what you will be paying and when. You can then schedule your payments to ensure you don’t go overdrawn and incur interest charges on your bank account, or if you’re already overdrawn don’t exceed your overdraft limit and incur additional over-limit charges.

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Quit smoking, detox, lose weight, blah blah blah

The usual resolutions that in most cases won’t last until the end of January. If you are to make any new years resolutions, this year especially, it should be to manage your monthly outgoings, reducing them where possible, to ensure you are not overspening. What with the credit crunch affecting the availability of credit (though you should really ask yourself, is that such a bad thing?), and the economy in a worse state than Gazza on a night out, this year is going to be a tough one!

Now if you have a fairly stable job or business that provides you with a predictable income each month, then there is no reason why you can’t get through it. Yes, you will have to tighten your belts and watch what you spend your money on, but with a bit of careful consideration to your spending habits, there is no reason why it has to be a real struggle.

I have a monthly budget spreadsheet which I use to keep a track of my monthly outgoings. I find this useful, as it enables me to see how much disposable income I have each month to spend on whatever I like. Without knowing how much money is earmarked for important outgoings like rent, bills, debts, groceries etc, you can easily get into a mess with your finances.

If you make one new years resolution to stick to this year, commit to sorting your finances out, by monitoring your monthly outgoings, reviewing them to reduce them where possible and set your household budget so that you don’t overspend. If you do overspend, you may find things very difficult this year, as lenders are less and less willing to dish out easy credit, especially where the credit is to be used as a way of living beyond your means and overspending.

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Before you look at your calender to check that it isn’t April Fools Day, please indulge me. By my reackoning, both of the potential investments are roughly the same price (assuming you don’t live in London where property prices are wrong). A Lamborghini Gallardo costs £130,000 on the road, and you can comfortably buy a 1 bedroom investment property for the same amount.

Now conventional wisdom would say something along the lines of “don’t do it you fool, think of the depreciation!!!!”. However, in the current economic climate, and property market, you’d be hard pushed to find much difference between the depreciation on the car against the investment property.

According to these property price predictions, the general opinion is that 2008/2009 will see the following falls in UK property prices:

• 20% - Morgan Stanly
• 25% - Nationwide
• 25% - Savills
• 20% - London School of Economics

Which does not paint a very rosy picture, and this comes off the back of news recently that the UK property market has already declined by 16.2% in 2008 according to Halifax.

So given that a Lamborghini Gallardo would depreciate in the region of 20% year 1, then 10% a year thereafter, for the next couple of years at least, it will hold up well against an investment property.

But what about the yield I hear you say. Yes, what about it, I can tell you that with very little efford you could achieve a much better yield on the car than you could on the house. Yes, that’s right, I genuinely believe you could get a better yield on the car than the house!

Let’s look at some realistic figures here. A 1 bedroom property is at best going to rent at a yield of 6%, so if it costs £130,000, that gives you an annual rent of £7,800 (assuming it’s rented for 12 months of each year…).

How much could you rent the Lambo out for? Well this depends on what you do with it. You could rent it out to your friends and family and colleagues and most likely make a better return than the property. Or alternatively you could build a small part time business around renting the car out for track day experiences or even as a posers’ car for the weekend.

Track day experiences for this sort of car start from around £25 a lap, some of this will be eaten up by fuel, track fees, insurance, financing and depreciation. But if you get the model right, there will be plenty of demand for these experience days at the moment. Think about it, thousands of out of work bankers, thousands left in the industry without a six figure or for the lucky few (thousand), seven figure bonuses this Christmas, they must be looking for cheaper thrills, perhaps this could satisfy that need?

And of course, you could simply rent them out by the hour in the City - normally bankers and City types would have just bought a Lambo or a Ferrari - but as I’m sure many of you will have heard the joke:

What’s the difference between a pigeon and an investment banker?
A pigeon can leave a deposit on a Lamborghini…

No doubt this joke has an element of truth in it!

In all seriousness, I’m not suggesting everyone should go out and invest in a Lambo rather than an investment property - simply illustrating the point that property prices are falling at rates similar to the depreciation on a thoroughbred sports car. And in light of this fact, coupled with the fact the sportscar could have a far higher yield, and with the tax relief you get on business expenses related to the running of the car, and its’ depreciation, it could actually work out a better investment in the short term. Who’d have thought it…

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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.

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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.

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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!

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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!

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