Find Financial Freedom

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Starting An Internet Business

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

1. Pick an idea;

2. Pick a business model;

3. Set up the business;

4. Market your business;

5. Refine, develop and grow the business.

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

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

But What If You’re Not A Geek?

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

Just Do It!

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

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

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…