Archive for the ‘Financial Planning’ Category
The most fundamental element of radical retirement planning is your mindset.
If you have read some or all of the articles on this subject you could be thinking you could not give up so much convenience, luxury and enjoyment. But, the point is that it’s not about giving up but getting.
A smoker who wants to quit is better off thinking of all the benefits they are going to get (like good health) rather than thinking they are giving up the enjoyment of smoking. It’s the same with our expenditure.
Radical retirement planning starts by understanding that we have a built in programme which gives us an insatiable appetite for MORE of everything. This is not a mental disorder or a moral shortcoming, it is just part of the way we are from way back.
Our ancestors were insatiable. They always wanted more food, more social standing and crucially more security. They achieved this with more mates and by having more children.
Insatiability was great for survival but in the modern world we don’t need to be so worried about being killed by our enemy. Insatiability does not lead to more happiness; in fact it can lead to the complete opposite.
To experience happiness today, we have to trick ourselves into being happy by buying things. But, as soon as we buy something there is a drive to buy something else.
There is a good argument that most of us waste our lives in a pointless pursuit of happiness. We have goals and desires that we start to chase but the problem is that each desire or goal achieved is just replaced by a new one.
After a lifetime of chasing we can end up no more satisfied than he was at the beginning despite all the consumption along the way.
The answer to this catch 22 could be known for a long time. Back in Roman times Stoics worked out to learn to want the things you already have. A technique that helps you achieve this is Negative Visualization.
Close your eyes and think about your life with not having something you have, perhaps not having your eyesight. Imagine how your life would be day-to-day. Now, open your eyes and be happy that you can see. Appreciate the colours and the expressions on your loved ones faces.
If you practice Negative Visualization, you will appreciate your current life much more and be truly happier without spending a penny.
The next great trick is the one that allows you to eliminate anxiety about the present and the future. This comes from the book The Power of Now.
The mind is always working, thinking about the past or future. They key is to quieten the mind and focus on the now. So, instead of worrying about what may happen in the future with your health or money you simply focus on now. If you don’t have a problem this second, enjoy not having a problem. If you do have a problem, go and do something about it.
The third trick is to seek out discomfort by doing things that make you feel uncomfortable. A simple example is not turning on the heating on a cold day or booking a camping holiday with a tent when you could afford a luxury mobile home.
It sounds weird but doing this helps you expand your comfort zone. The complete opposite philosophy is someone who becomes irritated if they ever have to travel in less than a first-class, stay in less than a five star hotel or drink anything but Champagne.
By using voluntary discomfort, we appreciate far more of our life, and can be content with a much simpler and less expensive way of life.
Understand your mind and take control. Use your mind to create happiness and put yourself into uncomfortable situations so you can enjoy the simple things in life.
According to research by the Skipton Building Society the typical UK family now spends £5,077 on food a year, £423 a month.
There is definitely an opportunity to save money on food. Not just by buying less but by changing what you eat.
If you are serious about implementing a radical retirement plan then it’s time to look at food in a new way…break it down into calories and shop to a budget.
With three meals a day, that works out to be 91 meals a month each. If the average person needs 2,000 calories per day so you need to each meal to have 667 calories.
Can this be done for £2, £1 or even 75p a meal? Yes, but you will probably need eat differently and less.
If you could hit the 75p a meal then your monthly food bill would be £274 a month for four. How much of a saving would that be for you? Every £150 a month off the food bill over 10 years is worth £23,292, compared to paying down your mortgage or saving is a plan than returns 5%.
Look to get your calories in non-expensive foods. And, look to shop in low cost shops and buy shop brands.
Take inspiration from around the world. People in India know that great food is all about preparation and spices, rather than costly ingredients, the same for Chinese and Thai food.
Needless to say, no more takeaways!
A radical retirement plan needs to be underpinned with strategies on all forms of expenditure. This articles looks at cars.
Ignoring our home, a car is often the second most expensive thing we will buy. I deliberately used the word “thing” rather than “asset” because unlike a home, a car (unless it is a classic) will always go down in value.
A car is NOT an asset and it is important to recognise this because the first rule is that you should never borrow money to buy something that goes down in value. However, many people do. According to an article in the FT in October 2013 75% of new cars are bought with direct finance.
This is interesting because in the book The Millionaire Next Door (which you can get from the library rather than buying) you will find that self-made millionaires never buy new cars and never buy on credit.
Think about it this way. Should you spend ALL your money on a car? If the answer is no then why would you spend more than all your money because that is what you do when you buy a car with a loan?
But, assume you do have the cash to buy a car outright and the local dealer is offering finance at say 2%. You could think borrow the money cheap and invest my cash and get a higher return. Sounds good?
Well, you’d be wrong because you need to look at the total cost per year and the cost per mile rather that the cost per month. When you do this it can change your choice of car and your driving style!
The most important factor is to reduce the amount you use the car. A two car families can become single car and you could be looking at 10,000 miles a year or even 5,000 miles a year, especially, if you look at the car as a luxury and restrict your use. This means a modern car could last you 30 years.
This is important to appreciate because when you buy a car you are buying the future mileage. And, like any good business you don’t want to carry too much stock. You are paying for something you will never use!
Let’s look at example.
Car buyer A buys one of the lowest cost-per-mile small cars for £15,000. He drives it for 13 years, traveling 200,000 trouble-free miles.
Compared to paying £15,000 off part of a 5% mortgage or making an investment that pays a 5% annual return the real cost is £31,705.
Car buyer B buys the same car but six years old with 90,000 miles the clock for £6,750. They can only get another 110,000 miles out of the car which takes 7.3 years. They then buy another used car to cover the remaining 90k miles for £5,625.
Buyer B uses up £6,750 over the 13 years, which is worth £12,912 if it were used to pay off part of the mortgage or in a 5% investment plus the additional £5,625 for the extra 90,000 miles for the final 6 years. This has a cost of £7,588.
So at the end of 13 years, car buyer A costs £31,705 while buyer B cost was £20,500. This is a saving of 35% or £11,205 every 13 years. And, this is driving essentially the same car.
You just need to ask yourself what’s important to you. Looking like you are well off and driving a new car or being well off and having financial freedom?
The truth is that well over 90% of the car market is people are buying cars that they cannot really afford.
On the topic of radical retirement planning, we should consider the costs of cars and travelling.
Take the example of a couple who each travel 19 miles a day in the commute which takes 40 minutes. Most would think this is not “too-bad”.
But, think again – 38 miles at 25p per mile cost is £9.50 a day plus the time cost. If you work 240 days a year that works out to £22,800 but that is not the opportunity cost. Had that been invested over 20 years with a growth rate of 5% you would have £78,096.
40 minutes a day each way adds up to just under an extra day a week. This is two and a half months extra pay a year. If you take home £2,500 a month each then the value of your time is £12,500 a year. If this was invested monthly at 5% you’d end up with £411,033.
So, that commute in the morning (where you risk your life) is actually costing close to half a million. If that sounds ridiculous that is because it is.
Also keep in mind that many cars have a loan associated to them. So, your radical retirement plan could include these actions:
- Move closer to work, work from home or change jobs
- Walk more and/or use a bike every day
- Only have one much cheaper car*
*Even if you allow for a small fund to keep the cheaper car on the road you will be far better off.
Keep in mind that the time it takes to walk or ride to work counts against the time you’d need to spend in the gym. And, it also means you can cancel the gym membership that you don’t use anyway.
This also applies to non-business trips. Think twice before you head off for the day on a jolly and instead think of creating a more local lifestyle.
If you want to embrace Radical Retirement Planning and save 50% or more of your after tax income you cannot afford to have any payments on debt other than your mortgage. This includes student loans, credit cards and car loans – they all need to go.
Remember, debt has a double whammy. You are paying interest rather than savings money and making earning interest.
Traditional financial planning suggests creating a budget and “working-on” getting rid of the debt over a manageable and comfortable timeframe.
Radical financial planning approaches debt slightly differently. We don’t have years to clear this, we only have months. If you are serious in being financially free in 10-15 years you need to clear this debt as an emergency. Like you had to save what you owe in debt to pay for a life-saving operation.
So, stop all non-essential spending and change your lifestyle. This basically means spending nothing apart from food and transport to and from work.
Here are some specific suggestions on what you can cut out and use to clear your debt:
- Meals out
- Going out for drinks
- Costa coffee
- Buying lunch at work
- Gym membership
- New clothes
You can also change your lifestyle:
- Change your car (or go car free)
- Walk whenever possible
- Become a vegetarian for a while
- Take an extra job
- Take a lodger
- Rent your garage or loft space for storage
- Rent out your drive/parking space
- Sell jewellery and toys like an expensive bike and jet-ski
There will be time for some of these things to return later as part of a plan. But, for now you need to be 100% focussed on clearing credit cards and non-mortgage debt.
It should only be a matter of months and all credit cards and non-mortgage loans will be gone forever.
As part of my research into lifestyle money management I am being challenged on my own preconceptions what is possible. I hope the articles I write challenge you.
Here is a simple formula to think about – radically change your lifestyle and save 50% (or more) of your current after tax income, invest it wisely and enjoy a more secure and free life in the future. If you had done this from the age of 20 you would probably be able to retire at 37.
Depending on your current income and asset base you could be just 10 to 15 years away from financial complete freedom. How does that sound?
As always, there are choices
- Work longer than you need to
- Make more money
As a business owner have the option of developing your business and making more money. But, you will need to make a lot more and save a lot more because:
- You tax rate will go up
- Your base expenditure will be 100% higher (or more)
The thing about focussing on saving is that you learn to live on much less. This means you need less capital to live on. If you focus on making more there is a good chance you will fall into the trap of spending more.
What’s interesting and potentially makes the saving focus a better option is that it is really about living a better quality life.
Here are some suggestions on how you can live on 50% less. I will explore each one in future articles.
- Get rid of emergency debt
- Live close to work
- Don’t borrow money for cars
- Ride a bike
- Cancel Sky and the TV licence
- Stop wasting money of groceries
- Only use basic mobile phones
- Use your body more
I continue my research into effectiveness personal money management and as with business development it all starts with personal development. If you want to change your situation you need to change your thinking.
Consider the idea of there being three of you – the past, present and future you.
The reality is that the past you has put you where you are today; his or her decisions with money has determined your current situation.
If they worked hard and saved you can thank them because you will have some level of financial security and could be well on the way to financial freedom. If they have been a little irresponsible and frivolous then you could be anxious about the future.
But the “present you” can change that for the “future you”.
You can literally give yourself a better future by changing your thinking and behaviour. The key is working ON your life not just IN it and you can do this by having a plan. As with a business plan your life plan will have a vision, assumptions and fundamental methodology.
The actions will include changing your behaviour and saving. This can be challenging because it takes time and money away from the “present you”. It can feel like you are denying yourself of happiness. But, you can learn to enjoy a different lifestyle and be happier now. Part of this is thinking of saving and personal development as a gift to the “future you”.
A £1 saved now will be return yourself more than a £1 later. An hour invested today developing yourself and improving your effectiveness will save you more than an hour later. In 5, 10 or 20 years you could look back at yourself today and the action they took and thank them.
What you do now is a gift to yourself and your family. Start to develop a personal plan and question your lifestyle choices and make sure your being smart with money.
There is a lot of advice available on making, saving and investing money but little on how to spend money. So, I was interested to find a book based on scientific research.
The book “Happy Money: The Science of Smarter Spending” explains why we should shift our focus from earning more to spending differently.
There are five key principles to spend smarter to be happier. The great thing is that you could end up being happier with less and this could fundamentally effect your business strategy.
Remember, your business is there to serve your life so if you change your life you should review your strategy. Perhaps you could afford to part-company with high hassle clients/customers? Perhaps you don’t need the volume of business and can stop giving discounts to win new business.
Here are the five principles…all are common sense but not always common practice.
Material things (from big houses, boats and flash cars actually give less happiness than experiential purchases (like holidays, concerts and meals out).
Make it a treat
Limiting consumption of the things we enjoy may help increase our appreciation and enjoyment from them.
If you have your favourite bottle of wine once a week, limit it to once a month or even once a quarter.
Allow yourself to pay other to deal with the dreaded tasks you hate.
This can apply to domestic tasks like cleaning and ironing and to bookkeeping. Remember, you will be spending less on “thing” and need to the time to enjoy “experiences”.
Pay now, consume later
Delaying your consumption enables you to enjoy the anticipation.
This may mean not booking things last minute. Instead, book a table for dinner weeks in advance and a holiday 6-12 months early.
Invest in others
New research shows that spending money on others gives you more happiness than spending money on yourself. This can be people you know or charity which fits with our giving with B1G1.
The really cleaver thing is you can combine the principles and they have a cumulative effect. So, the more principles you use to any spend the more happiness you will enjoy.
Finding out about you and producing a cashflow forecast is great but all good plans need to be monitored.
One way of doing this is to use Xero cashbook on your personal money. You can set budgets on personal expenditure and track actual spending. This will make you more money conscious by helping to keep your important personal goals in mind on a day-to day basis.
The software includes bank feeds which pull information in from your bank and credit cards. This eliminates data entry and the “rules” feature makes allocating transactions even faster. After two or three months you will just by clicking the OK button in Xero to confirm transactions.
We can review your budgets every month, quarter or just once or twice a year, depending on what you feel you need.
Having a review helps holds you accountable and enables you to refine and develop your budget which can then feed back to the life plan.
The idea is that you will create an enjoyable and sustainable life where you maximise your happiness by focussing on what is most important to you.
Once we know what’s important to you we can move on and start to explore if your financial arrangements support your goals.
We do this by creating a cashflow forecast for your future, based on your current expenditure patterns. Without this we are you are just guessing and cannot be 100% confident that your planning is the best it could be.
The cashflow runs from today until your expected date of death and includes exceptional items such as:
- Tax free lump sum from your pension
- Downsizing your home
- Expected inheritances
- Gifts you plan to make
- Expensive holiday’s holiday homes and boats
The cashflow forecast is very visual because it includes a graphical representation. This allows you to:
- Understand how different investment returns and inflation will affect your goals
- Have peace of mind that the financial decisions you make are the right ones
- See how things would change if your business increased its profits by 10% a year
- Look at the impact of downsizing and/or doing equity release
- Understand what would happen if you were able to change your spending habits
- See what would happen if you overpaid on your mortgage
- Work out what would happen if you lived an extra 10 years
Ask yourself “would it be helpful to see what is about to happen in your future?”
For some this is scary because they feel they are looking into a black hole. But, this is an opportunity to be honest and (for some) to become financially mature.
Sometimes, to achieve your dreams you need to wake up…the cashflow forecast is the alarm clock!
Are you ready to wake up?