No More Snakes and Ladders - The 8 Rules for Guaranteed Financial Freedom by Chris Downham

"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." The Micawber Principle from Charles Dickens, David Copperfield This book and all the content is copyright of Rob and Chris Downham. All rights reserved. No part of this book may be reproduced by any method for either public or private use – other than for ‘fair use’ as brief quotations embodied in articles or reviews – without prior written permission of the authors.

You are however welcome to forward it without alterations to everyone you know! 2

Contents Chapter One ‐ Should you read this book? ................................................ 5 Chapter Two ‐ Financial Uncertainty .......................................................... 7 Chapter Three ‐ Financial Certainty .......................................................... 12 Chapter Four – Introduction to the 8 Rules ............................................. 18 Chapter Five ‐ Start with Firm Foundations ............................................. 21 Chapter Six ‐ Be Financially Organised ..................................................... 30 Chapter Seven ‐ Make a Financial Map .................................................... 34 Chapter Eight ‐ Understand the Financial World ..................................... 48 Investing Money ................................................................................... 49 Borrowing Money ................................................................................. 63 Protection ............................................................................................. 74 Chapter Nine ‐ Put together a Budget and Stick to It! ............................. 80 Ways to reduce your commitments ..................................................... 81 Ways to reduce your regular spending ................................................ 83 Ways to control and reduce your occasional spending ........................ 86 An example ‐ Emma and John .............................................................. 88 Chapter Ten ‐ Increase your Income ........................................................ 97 Earn more from your existing job ......................................................... 97 Law of effort and reward ...................................................................... 98 Develop a second source of income ..................................................... 99 The miracle of compound interest ..................................................... 100 Develop yourself ................................................................................. 101 3

The cash flow quadrant ...................................................................... 102 Chapter Eleven ‐ Take the journey Step by Step .................................... 104 Chapter Twelve ‐ Take Action Now! ....................................................... 106 Chapter Thirteen – The End .................................................................... 107

IS YOUR LIFE LIKE A GAME OF SNAKES AND LADDERS? WOULD YOU LIKE TO GUARANTEE THE GAME? WINNING

Chapter One ‐ Should you read this book?

Think about your financial position today. Is there anything that causes you concern? This book gives you the tools to remove those concerns, now and forever! It is not a get rich quick plan or another personal development book. It is a practical guide to achieving financial freedom. We run a financial services company and over the years have met many people in very different financial positions. We have experienced financial highs and lows and learnt from our own mistakes. Over recent years we have been searching for a way to help people achieve financial certainty in their lives. Our experience, combined with those of our clients, advice from the ages and modern financial planning techniques has helped us develop 8 rules that will guarantee your financial freedom. Over the last 20 years society became increasingly dependent on government, corporate and consumer debt to fuel economic growth, house price boom and retail bonanza. Undoubtedly the “credit crunch” and subsequent global downturn brought this trend to an abrupt halt. The world has changed for good and for the good. As “long term risk analysis” replaces the “short term bonus culture”, bankers will remain reluctant to lend and credit flows will stay tight around the world. We 5

will all have to tighten our belts and get used to a more prudent way of life. This need not be a depressing thing. Would you like a life without financials worries? If the answer is “Yes” then the good news is that simply by prioritising your outgoings, and following some tried and tested rules you can make absolutely sure that you are financially secure and achieve your own definition of financial success. It does not matter how much you earn right now. Even if you can’t provide for your basic needs (if you really want to change) this book will help. This book is only for you if you are not afraid of a little hard work and maybe sacrificing some short term “must haves” in return for long term happiness. Alongside this book we have designed a comprehensive budget planner that will help you design your budget and monitor how you are doing against your plan. The budget planner is in Microsoft excel and is free to download from our website www.downhambrothers.co.uk

FINANCIAL UNCERTAINTY

FINANCIAL CERTAINTY

Chapter Two ‐ Financial Uncertainty Achieving financial freedom starts by moving from financial uncertainty to financial certainty. Do any of the three types of financial uncertainty seem familiar?

Financial Ignorance

Financial Worry

You don’t think about your finances, the future or what would happen if things go wrong. Your attitude is that you “will cross that bridge when you come to it” or hope that things will work themselves out. You might win the lottery! You are aware that there are things you should address but you have not put together a plan to sort out these issues. You worry about money, either your current situation or your financial future.

Financial Risk

You live life on the edge. You are aware that you risk your financial future but understand these risks and believe you are happy to take them. As an optimist you are prepared to take the risk but really don’t expect things to go wrong.

You won’t live all your financial life in one area or another. You currently may ignore some issues, worry about others and risk the rest. If you are living in financial ignorance, we are going to move you to a less comfortable place, financial worry. We are going to make you feel worse by focussing on things that until now you were not even thinking about. Only once you have progressed to financial worry (not a great place to be) will you be able to take the step to financial certainty, where you will 7

have financial security, financial freedom and potentially financial abundance. It is human nature to try and avoid as many negative emotions as possible by focussing on the positives, this is absolutely understandable. However, negative emotions such as worry, frustration and stress are actually powerful enablers of change and action. We will work harder to avoid pain than we will to obtain pleasure. If you are worried or frustrated about something use it as the catalyst for change. If you are not financially certain, then the worst thing you can do is NOT think or worry about your finances at all, Reality will sneak up and bite you on the backside. Something will happen and you will not be prepared. For example you get to the age when you need to retire and you haven’t made sufficient provision and hence spend 30 years of your life in poverty. You may not have been worrying about this for the previous 40 years, but you certainly should have been, and done something about it. That way you remove the reason for worry. Relieving financial uncertainty is not about not worrying, it is about not having reason to worry. There can be many reasons to be uncertain about your finances. Maybe you are in debt or are not making sufficient provision for your retirement. What if things went wrong? What if you lost your job, became ill or even worse....? So let’s get in touch with your financial stresses. It’s time for your first exercise. Remember you will only get out of this book what you are prepared to put in. 8

1) In the first column, write down areas that you are uncertain about. Things you should worry about if you think about them! 2) In the next column write down what would happen if you did nothing to improve your position.  Make these concerns personal to your own circumstances. At the moment you might not feel you have any worries, but look at things from a “What if?” perspective, how would you cope in that situation? What if you landed on a snake?  Try to get down as many things as you can. Think from the head and the heart, you can always cross them off later. This is not a test and there are no right or wrong answers.  If your financial life involves a partner try to undertake this exercise (and all the others in this book) together. The table below gives a couple of common examples. When completing your table think about: debts, retirement, redundancy, illness, death, education, weddings, personal cash flow etc, etc What worries you now or in the future?

What is / could be the effect if you do nothing about this?

I am not saving any money for my retirement

I will live in poverty in my retirement or will have to work into my old age.

How would my family cope if I died?

My wife would not have enough money to look after the family without going back to work. Who would look after the children then?

I am spending more than I earn! The money runs out before the month!

I will go bankrupt or at some stage I will need to radically change my lifestyle. I could lose my house

What worries you now or in the future? 10

What is / could be the effect if you do nothing about this?

We are aware that this exercise doesn’t make you feel particularly good. It is designed to create some pain. This pain should be a motivator for you to take action! Writing down you financial challenges can, can in itself be a liberating experience. It is the start of your journey to eliminating those challenges, removing the nagging You should have feeling of uncertainty from your life and identified your putting you on the path towards main areas of attaining financial freedom.

financial uncertainty, removing these is the first part on achieving financial certainty.

Chapter Three ‐ Financial Certainty There are three levels of financial certainty. You are in a position that whatever happens you will be able to maintain a basic standard of living throughout your life without relying on others or the state to support you. Financial You are financially secure and you are able to improve Freedom your standard of living without jeopardising this. You are able to purchase things you want without borrowing money or if you have borrowed money (such as to purchase a property) this borrowing will not affect your financial security. Financial You have achieved financial freedom and without Abundance jeopardising this you are able to live a quality of life occasionally or permanently that most people will only ever dream about.

Financial Security

You have looked at your areas of financial worry and hopefully you’ve completed the exercise, if not, then we urge you to take 10 minutes to do it. It is so important to complete the exercise because until you start to associate pain with financial uncertainty then you won’t have the necessary motivation and discipline to move to financial certainty. Below is a bit more detail on the three levels of financial certainty. 1) Financial Security –you have got your bases covered, you know that you have got enough money to pay for a roof over your head, the food on your table and that whatever happens in the future, you will always have enough money to live. (This means that you have all the necessary insurances and adequate retirement planning). It is not; 12

however, the most exciting place to be. It means that you don’t have money worries; it does not mean that you have become an affluent person. It is the first step towards financial freedom and if you desire it financial abundance. Whatever your situation, you can move to financial security within 5 years, and for many people this could be done within a matter of weeks. Financial security is not difficult to achieve but once achieved it must be maintained. For example if you are in a position at the moment where you owe a lot of money just by creating and following a repayment plan you are starting to achieve financial security. 2) Financial Freedom – this is where things start to get a little more exciting. You have food on your table, a roof over your head and you have disaster management in place. If things go wrong you are not going to have to rely on the state or others to provide you with the basic essentials of life. Financial Freedom is about more. You may want to have a plasma screen on the wall, a new car every now and again, and to be able to go on holiday. But you don’t want to worry about how you are going to pay for it. The key to financial freedom is getting yourself into a position whereby your security is in place, and you are able to save up enough money to have the things you want. There is, however, realism wrapped around this. At a restaurant you would order a £15 bottle of wine and not the £50 bottle. You have to consider the price and the timing of your purchases. If your expenditure is greater than your income you would very quickly move back to financial uncertainty. 13

Financial freedom for most people is all they wish to achieve in their lives. Many books would make you feel that you have to strive to become a multi millionaire and potentially risk it all. If you aim for and achieve financial freedom then you are as successful as the person who achieves financial abundance. You just had different definitions of success! 3) Financial Abundance –is a topic that many books have been written about. How we can get rich quick or have more than we ever need! There is absolutely nothing wrong with desiring or achieving financial abundance, however financial abundance is not something that everyone can or will achieve. Only a small percentage of the population can achieve financial abundance, the majority can achieve financial freedom and everyone in the western world can achieve financial security. Financial abundance is when you can have what you want, when you want it. This must be viewed within a realistic context and hence a house on Mars is not currently a possibility. However it could certainly include, retiring at 50, owning a large luxury home, spending 6 months a year on holiday and never having to use a vacuum cleaner or iron again. The aim of this book is to guarantee you achieve financial freedom. It is your choice if you want to strive for financial abundance after this.

“How I made my millions” autobiographies and “get rich” guides can be great, but be wary of the ladders they promote. It may have worked for the author but there are many people who have tried and did not succeed. These people do not tend to write books. For every rags to riches story there are failures. By all means aim for the stars but ensure you build your house on firm foundations. This exercise will help you focus on the areas of worry and decide how you can remove them. It is about how you achieve the first stage of financial certainty, security. Look back at the areas of financial uncertainty that you identified in your own life at the end of the previous chapter and 1) Write down what you can do to remove the uncertainty, 2) What would be the new result if or when the event occurs? What worried you

What can you do to avoid it

How would my family cope if I died?

Take out a family protection life insurance policy?

What would be the result if I take the necessary action? My family would be financially ok. They could keep the house and my wife would not have to work more.

You may not have sufficient disposable money TODAY to relieve all your worries but you should still think of the solution. 15

What worried you?

What can you do to avoid it?

What would be the result if I take the necessary action?

What worried you?

What can you do to avoid it?

What would be the result if I take the necessary action?

What worried you?

What can you do to avoid it?

What would be the result if I take the necessary action?

What worried you?

What can you do to avoid it?

What would be the result if I take the necessary action?

What worried you?

What can you do to avoid it?

What would be the result if I take the necessary action?

What worried you?

What can you do to avoid it?

What would be the result if I take the necessary action?

Too often people measure their success by how much money they have. Internalise success, base it on, how happy you are, your lack of financial worries, amount of love in your life and your selfless contribution to others. This is more important than what kind of car you drive and how big your house is.

Chapter Four – Introduction to the 8 Rules Have you identified your financial worries and thought about what you can do to remove them? If so you should be in the right frame of mind for the 8 rules.

These rules (if followed!) will GUARANTEE that you achieve financial freedom There are millions of people that have achieved financial freedom all by themselves; they have followed some or all of the rules without even realising that they were. Most of them are just good old fashioned common sense. However, today, it is far easier to be distracted on the journey as companies and their advertising are constantly encouraging us to do the wrong things.

Buy now, pay later” “Take out a loan for your dream holiday” “Please find enclosed your credit card cheques” “

These rules will work whoever you are and whatever your current financial position. For some of us it may take a little bit longer and the amount of time we have will be a major factor in what level of financial certainty we are able to achieve. If you are thinking “I’m young, I’ve got ages to sort this out” then stop thinking this immediately, the fact you have plenty of time means that you will be able to enjoy the fruits of your financial freedom for longer. Start NOW! Achieving financial freedom is not complicated but it is also not easy! You will need to really think about the 8 rules and how you can apply them to your circumstances. Understanding them is the easy bit, following through and achieving financial freedom is going to take a bit of effort.

Can you get your spending to look something like this?

Savings and Insurance Commitments Everyday Spending Occasional Spending

Minimum of 25% Maximum of 40% Maximum of 25% Maximum of 20%

Build on firm Foundations Organise your financial life Make a Map of your future Understand the financial Set a Budget and stick to it Increase your Earnings Take it a Step at a time Take Action NOW

Chapter Five ‐ Start with Firm Foundations

RULE # 1

By completing the first 2 exercises you have started on the rough plans for a financially free life. In order to actually make this happen you must understand and prioritise your expenditure. Saving consistently, insuring prudently and reducing your financial commitments are a huge part of achieving financial freedom. Once you have read this section, download the budget planner from www.downhambrothers.co.uk and then complete it so you can see your current expenditure. The rest of this book will only be of practical benefit if you complete the budget planner. Firstly we are going to compartmentalise your expenditure into FOUR different areas. The first one is the most important, SAVING AND INSURANCE. This does not mean you do this before you eat food or have a roof over your head, but it will make sure that you always have food and a roof! If you believe you can’t afford to put money into this area then you should take it out of other areas. In fact this is where your money should go before it goes anywhere else. You should do this first rather than last. Most people use what is left over for savings and insurance, but they run out of money before the end of the month and therefore never achieve financial certainty and freedom. You should be spending a MINUMUM of 25% of your household take home earnings on long term savings and insurance.

At least 25% of your income should be spent on long term savings and insurance 21

We say minimum because if you can afford it then you should spend more. For example, as we are writing this book, people on tracker mortgages (Bank of England base rate is at 0.5%) have far smaller mortgage payments than they ever expected and instead of spending this extra money they should be reducing their commitments or saving the money to accelerate the time it takes them to achieve financial freedom. Then comes COMMITMENTS; these are the regular payments that you have to make because you are contracted in some way to do so, like paying your electricity bill, your car finance or your mortgage. If you buy a house that is too expensive for your income or a car that is really beyond your means then you can end up with commitments that are far greater than what you are able to pay. You should be spending a MAXIMUM of 40% on your financial commitments. A maximum of One of the reasons the recession hit the 40% of your UK and individuals hard is that many income should be people have extended their spent on financial commitments beyond their affordability. commitments They have done so by buying things they can’t really afford using credit cards and then rolled this excess spending into future financial commitments. A sure fire way to spend the rest of your life in a state of financial uncertainty! The next area is EVERYDAY SPENDING, the things that week in and week out we spend our money on. Simple examples are food, petrol, parking, alcohol (if you like a little tipple)and cigarettes (if you smoke). This should be limited to a MAXIMUM 25% of your earnings. 22

Finally you should spend a MAXIMUM OF 20% on OCCASIONAL SPENDING. This can be divided into 3 categories.   

Things we know will happen and we know when. For example the annual family holiday, Christmas and birthdays. Things we know will happen but we don’t know when. For example car or house repairs. Things we choose to happen and can control how much it costs and when it happens. For example luxury one off purchases.

We must ensure that for all of these events we budget in advance . We must put money away every month to prepare for these events, but don’t kid yourself that this is part of your savings, it’s not. The savings are for the long term, to provide security and eventually to provide an income that will be paid every month whether you are working or not. So don’t save £300 per month and then blow it all on holidays, clothes and car repairs. So we end up with: Savings and Insurance Commitments Everyday Spending Occasional Spending

Minimum of 25% Maximum of 40% Maximum of 25% Maximum of 20%

You will notice from the above that we have 3 maximums and 1 minimum. (and they add up to 110!) This is important. If you can afford to put more than 25% in to savings and insurance then you should do exactly that. As you go through the stages of life you should pay off the majority of your commitments and therefore be in a position to put more money into the savings pot. 23

Hopefully you now understand the four areas of spending and the minimums and maximums we all should work within. This principle should form the basis of your financial plan and is fundamental to the firm foundations that your plan will be built upon. It is not always easy but the first thing you should do is look to bring your budget within the limits we have set out above. Here are a few simple tips that will help get your expenditure under control: 1.

You should pay yourself a minimum of 10% of what you earn. Before you pay any of your commitments, the moment the money lands in your account you should transfer at least 10% into long term savings and investments. Why pay someone else before you have paid yourself! In almost every book on achieving financial success they agree that you should pay yourself at least 10%. You must take the mindset that you earn 10% less than you actually do. If you earn £2,000 then pretend you only earn £1,800. That £200 must go out first – it is yours and yours forever. Without saving 10% you are in fact on a treadmill, working hard simply to pay everyone else. Get off the treadmill and pay yourself first! This 10% should be long term savings but not include the capital repayments that you make off a mortgage. Once you get into the discipline of saving and continue to do this over a period of time you will start to see the miracle of compound interest at work. Over a long enough period of time, with sensible investment decisions you will reach a stage whereby your money has multiplied enough that you will no longer have to work to earn enough to live. Rather than working for your money, your money will work for you. For example if you were to invest just £50 per

week, and you increased the amount you invested by 10% per annum and this amount grew at 10% per annum it would result in: 2.

£ 1 million £ 2 million £ 3 million £ 4 million £ 5 million

26 years 31 years 35 years 37 years 38 years

Pay off your debts first. If you have debts that are costing you 18% per annum and you will make significantly less interest than this from saving then you should reduce your debts first. At this stage we would recommend that you still put a small amount away every month (even if it is just a pound) to start the discipline of saving. If you are reducing debts then you should use the interest payment as the figure for the commitment and in the short term the amount you reduce the debt by can count as saving (and therefore within your 15%). If you are in a position that it will take years and years to pay off your debts and indeed you are struggling to meet your monthly commitments then you should look at the debt management options that are available to you. There is more on this in chapter 8. It is extremely important when you are initially looking at paying off debts that once they are gone, most of the money you were spending on the commitment and the debt reduction goes into the long term saving pot. One thing is absolutely certain – paying £300 per month off your credit card is far less satisfying than saving it to provide an amazing future for you and your family. “You will get far more satisfaction saving for the things you want in your future than paying for the things you have used in the past.” 25

If you are in so much debt that you think it will be impossible to ever reach a stage where you begin to save then do not despair. However bad your situation it should not take more than 6 years to sort it out. You can do it! You need to start now. You need to draw a line in the sand. You will not jump straight into financial certainty but you will have taken the first step on the journey, this is the hardest step and the one most people don’t take. 3.

You must insure against things going wrong. THINGS WILL GO WRONG! During our time in financial planning we have come across many people that have not recognised the value of insurance as well as those who fully understood the necessity of covering themselves against insurable risks. Our father had a heart attack aged 45 and could never work again. For most people this would mean financial disaster. However he had taken out an income protection policy and this meant that he kept on receiving 65% of his salary until his retirement date – tax free. This prudent financial planning meant that what would have been an unpleasant and financially catastrophic event for most people was in fact just unpleasant! It was this lesson early in life that taught us the value of insurance. We are all extremely fortunate that we can now cover ourselves against many unforeseen events yet amazingly many people still choose to live in financial ignorance, and pretend that nothing bad will happen to them. These risks don’t just effect your health they

can affect your property and your job, but the great news is that for limited monthly costs you can reduce or eliminate the financial effects of these potentially disastrous events. “If you had a machine in the corner of your house that printed £500 every week for the next 40 years, would you insure that machine?”

That machine is you! There are, however, risks that we can’t insure against or that insurance will only reduce rather than eliminate the consequences of. Some of these things we may bring about on ourselves and others will be totally out of our control. For example if you lose your job because your company goes out of business, you can have unemployment insurance in place. However this will only pay a small amount of what you were earning and only for a set period of time. The best way to mitigate the consequences of such an event is to have insurance and to make sure your attitude and skill sets are such that you are extremely employable and that you would quickly get back into employment at a similar or higher earning level (see chapter 10). Many people that became extremely successful can actually thank the impact of a crisis for giving them the opportunity they otherwise might not have taken. Another example of things going wrong is unsuccessful investment. Let’s say you are financially secure. An opportunity that appears too good to be true appears and in a rush to achieve financial freedom or abundance you decide to take it up. It was too good to be true 27

and you lose the money you invested. If you only invested what you could afford to lose then the effects of this unfortunate event are reduced. If however you invested your life savings then you only really have yourself to blame. “You must reduce the effects of unfortunate events by putting yourself personally in the best place to counter these events and by only risking what you can afford to lose.” You must take advantage of when things go right. THINGS WILL GO RIGHT. Well thank goodness for that. The last section was a bit depressing. Every now and again things will fall in your favour. Some of these events you can definitely influence such as building a successful business or getting promoted at work but other good things may happen that are not really down to you at all. You could win the lottery, receive a large inheritance, or have a tracker mortgage when rates hit 0.5%. You must use these opportunities to accelerate your journey to financial freedom and not blow the lot on short term pleasures. That does not mean that you can’t enjoy a bit of your good fortune; just don’t enjoy it all....yet! A great rule to use if this happens is to spend a maximum of 20% on everyday spending, a maximum of 20% on occasional spending and invest the rest! Unless we die or take a radically different path we will all go through set stages in our lives. We leave education, work, have a family (accepted not everyone will do this) retire, then die. Amazingly some of these known stages of life catch people by surprise. They get to 65 years old and suddenly realise they have not adequately prepared for their retirement. They have a child and

have to rely on the government for financial support and when the child grows up and they are unable to support them on their first steps towards financial freedom.

Put yourself in the position of going to visit yourself on the day that you retire. What would the older you say? Follow the advice you would give yourself!

This same exercise can be used for lots of other situations that may occur in your life.  What would you say to yourself if you lost your job?

 What about if you get ill and are unable to work?  What would you say on your deathbed?

Would you want to jump back in time and prepare adequately before it was too late? You must put yourself in the position you would be in if and when these events

occur and take the action NOW. Hopefully you now understand the importance of putting firm foundations in place, saving for your future, protecting yourself against insurable risks and making sure that whether things go for or against you that you will definitely achieve financial freedom.

Chapter Six ‐ Be Financially Organised

RULE # 2

First let’s look at a few reasons to be financially organised. 1. It is easier to be organised in the long run than it is to be disorganised. You will spend more time looking for things, not being able to find them, and shifting paper from one pile to another because you have not filed it correctly. 2. Being organised also allows you to understand your financial life. If you never check your bank statements then you will be unaware as to where your money is going. If you never check your pension statements or understand what your insurances actually cover how are you ever going monitor your path to financial freedom. Only by being organised can you understand where you are up to and how to improve your position. 3. Being disorganised exposes you to financial crime. If someone gets your credit card details you may have no idea that they are making purchases from your account. Financial disorganisation makes it more likely that you will suffer from financial crime. 4. It also allows you to suffer from human error. We are all very much aware that banks make mistakes. Numerous times in the past we have had incorrect charges on our accounts, payments taken twice or direct debits have not stopped when they should have done. Unless we had scrutinised our statements we may never have noticed. Banks are quick to amend these mistakes but only if you bring them to their attention. 30

5. What if you made the mistake by going over your overdraft limit, bouncing cheques or being unable to satisfy a direct debit. When this happens the bank are very quick to apply astronomic charges to your account. If you were organised you could often prevent these charges or petition the bank to refund the charges to your account. 6. You also need to be able to evidence your financial information and position to the banks. If in the future you need a mortgage you must be able to provide every document requested. If you can’t then you won’t qualify for the best or any deals and this could cost you thousands. 7. Finally, missed payments will have a negative impact on your credit status. This can mean that for many years to come you would not qualify for the best value (or any) loans, credit cards or mortgages. At the end of this chapter there is an action list where you can note down what you are going to commit to do in order to become more financially organised, but first a few suggestions! A simple system for organising your financial documents Forget about the bin bag or the cardboard box, these are not effective ways to organise your documents! You need to have a simple system that you understand and use! Our recommendation is:

At the beginning of each year (ideally a calendar year but if you are self employed or a business it could be the tax or trading year) start a new file. During the lull between Christmas and New Year instead of getting creative with a Turkey carcass you get financially ready for the next year. A normal lever arch file will do. In this file you want to keep all the financial documents that come in during that year. On the front of that file write the year (2009, 2010 etc). Use some file dividers and plastic wallets to divide the file into different sections. You should also prepare your budget for the year (download the spreadsheet!)

The first section might for example be “Bank Statements” in which you would keep your bank statements for that year, all together with the oldest at the bottom and most recent at the top. The next sections might be Utility Bills, Credit Card Statements, Mortgage etc. This file would then build up within it all the things that were relevant to that year. Before you file away the documents each month you should make sure you have update your income and expenditure (using our downloadable workbook!)

You will probably also have documents that are applicable to multiple years. For example if you had a 5 year fixed rate mortgage that you took out in 2007, the offer documents would be applicable until 2012. The same applies to many pension and life insurance documents etc. You would therefore also have another file that is a more timeless file where you store the documents that lap over several years. In this you would 32

keep documents like the mortgage offer, life insurance policies and initial pension information. Therefore you only need to keep available one file with the current year’s information and one file containing the longer term documents.

At the end of the year you take that year’s file and store it away. You should keep these files for 6 years. Each year start a new file. Action I’m Going to Take to Get Financially Organised

Chapter Seven ‐ Make a Financial Map

RULE # 3

It is extremely important that you put a proper financial map in place for your life. A map is no help unless you know where you are and where you want to go. This section of the book is about identifying where you are now and the exciting bit, where you want to be. So how are we going to work out where we are now? In chapter 5 you completed an assessment of your current spending (did you use the excel spreadsheet that is free to download from www.downhambrothers.com) and chapter 6, should have got you thinking about how organised you are. If you are financially organised you will know how much money you bring in, how much and on what you are spending this money, what assets and liabilities you have and what uncertainties you are protected against. These are the fundamentals of where you are now. On top of this you need to understand what your expected income increases will be. You then need to focus on where you want to be. This is a far more complex exercise, your current position should be fairly obvious, but your eventual destination opens up a whole world of opportunities. In this chapter we are going to go through a financial goal planning exercise that will allow you to identify what you want in your life. This will include many things as there is a financial implication to almost every goal. Even if it is a goal that may not have a direct cost, there is an opportunity cost, often time, that means you need to be in a certain financial position to achieve your goal. For example if someone wanted to become an 34

amazing pianist then the amount of time they would have to invest in this would have a financial implication on their life. Your goals should be specific, achievable and time focussed. As this is a financial goal planning exercise we are going to split the goals into:   

Financial Security Goals Financial Freedom Goals Financial Abundance Goals

Part of the budget planning workbook that is available free from our website should help you with your goal planning, however if you would rather not use the work sheet then do it in whatever way you feel works best for you. There is a paper based exercise below that can work alongside the excel spreadsheet. The Security Goals are not really that exciting, especially if you focus on the products rather than the results the products will achieve. This is certainly the case with insurances as they will only tend to get called into action when things go wrong. When you focus on your financial security goals you must do so in a mindset that the bad things have happened, feel the pain of not preparing in advance and embrace the pleasure of peace of mind and the fact that you can and will protect yourself and your family from these events. Look back at the exercises you completed in chapters 2 and 3. The Financial Freedom goals are certainly more exciting. You are no longer thinking about things going wrong but instead, confident in the fact that your financial security is assured you can start to focus on the extras you want in your life. The things that make life more comfortable, 35

the objects, opportunities and experiences that previous generations never had, but that today we often take for granted. Some of these financial freedom goals may not seem like big issues but remember that you are not achieving these goals with the help of debt financing but by prudently saving the money and making the purchase as and when you can afford to do so. For example you may be able to go out today and purchase a new plasma screen television and as such it does not really seem to be a goal, simply use some of your long term savings, take out a finance plan, or put it on your flexible friend. NO! If you have not already set money aside for this purchase then you must budget under occasional spending, enjoy saving the money and then purchase the television when you can truly afford to do so. Make it a goal, it may take a bit longer but this strategy will not affect your financial security and will give you far greater satisfaction. You may also find that by waiting a few months to save the money needed the price of your 42 incher will have tumbled. Finally although you may not aspire to live your life in financial abundance, there may be certain things that at some stage you want to achieve. These things may be the stuff of dreams, and will make the difference between you living an ordinary and an extraordinary life. Once you have your financial security protected, and your financial freedom is guaranteed then it is time to live some or all of your life in financial abundance. This may be everyday or it may be a one off experience such as a world cruise. Don’t get us wrong here; we are not saying that you have to have all your financial freedom goals in place before you start to plan your financial abundance goals. Not at all; you can start working towards financial abundance right now. However you must not risk your security or freedom in order to achieve abundance. 36

An example would be someone who wants to go to watch their country at the Olympics, do so in luxury and decides they will do this in 4 years time. Although an exciting goal, if the money they would need to put aside for this means they do not adequately protect their financial security or they raid their long term financial freedom pot then they have got their priorities wrong and will risk their long term security and freedom going in search of short term abundance. In chapters 2, 3 and 5 you should have identified a few (probably quite a lot) of priorities that will ensure you have financial security in your life, whatever happens. Look at these chapters again and then list your financial security goals below: Priority

My Financial Security Goals

Next prioritise the goals above and then take the top 5 priorities and put an approximate cost and a timescale next to them and write down why you want to achieve the goal. Timescale

The Goal

2 years

To make sure if I lose my job I will not lose my house

Cost

6 months income and redundancy cover

Make sure that whatever happens my family will not lose

Why I want to achieve the goal

their home.

What I need to do to achieve the goal

Have some emergency savings, and take out redundancy protection.

Timescale 4 years

The Goal To pay off my credit cards and loans

Cost

Why I want to achieve the goal

£16,000

They are costing me too much and preventing me from saving

What I need to do to achieve the goal

Reduce debts by £400 per month by reducing my spending in other areas.

Now try it for yourself! Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

In this section you may have raised some questions as to the costs of various insurances, savings plans etc. Call us on 0845 6886168 to discuss. We are now going to move onto the more exciting areas of Financial Freedom and Financial Abundance goals. Before undertaking this exercise you may want to review the definitions of financial freedom and financial abundance in chapter 3. To help you out we have listed below a few examples of financial freedom and financial abundance goals that may or may not be applicable to you. All of these goals are based on you saving to achieve the goal rather than borrowing the money. Financial Freedom

Financial Abundance

Purchase a new TV Go on a “normal” holiday Redecorate the house Purchase new clothes Go out for meals Pay for your child’s education

Have no need to work Go on a holiday of a lifetime Purchase the house of your dreams Purchase an amazing new wardrobe Eat at the best restaurants Leave a significant legacy for your family Buy a top of the range car

Buy a new car

In the table below list as many financial freedom goals as you can, use an additional sheet of paper if necessary. Priority

My Financial Freedom Goals

Remember these are things you are going to do with “cash” not by borrowing now and paying later! Next prioritise the goals above and then take the top 5 priorities and put an approximate cost and a timescale next to them and write down why you want to achieve the goal. Timescale Annually

The Goal To go on a family holiday every year. And to have paid for this holiday in advance.

Cost

Why I want to achieve the goal

£1200 p.a.

To have a fantastic time with my family without worrying about paying for it when I get back!

What I need to do to achieve the goal

I will need to save £100 per month every month!

Now try it for yourself!

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Now do the same thing for any financial abundance goals you may have. Priority My Financial Abundance Goals

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

Timescale

Cost

The Goal

Why I want to achieve the goal

What I need to do to achieve the goal

If you have carried out the exercises you should by now have a clear plan as to what you need to do to achieve financial security and have listed, prioritised and costed some or all of your freedom and abundance goals. If you can’t fit them all in this section of the book then please use as many sheets of paper as you need. We certainly don’t want to limit you to just 5 goals but it is important that you prioritise what you want to achieve. Please also remember that you don’t have to start saving towards all these goals immediately. You may only pick a couple for now, especially if you have large debts to pay off etc. These goals are your destination; however it is essential that you get pleasure from the journey to achieving these goals and not just when you achieve them. If you are going to put £100 per month away towards a holiday, make sure that every time that you allocate those funds towards your Although the goal you think about what it is you freedom and want to achieve and the security or abundance goals happiness the achievement of this goal will bring to you and your family.

may be far more exciting, you must provision for your security goals first. This book is about guaranteeing financial freedom!

Chapter Eight ‐ Understand the Financial World

RULE # 4

The following sections of this book aim to help you understand more about the financial world you live within and provide information on:

Investing Money Borrowing Money Protecting Yourself

It is essential that you have a reasonable understanding of the financial world. Without this you will leave yourself open to receiving poor advice from slick salesmen, supposed experts and large financial institutions that DO NOT have your interests at heart.

Investing Money “The purchase of a financial product or other item of value with an expectation of future returns.” “The use of money in the hope of making more money.” Questions to ask yourself: Before looking at the type of investment that is right for you there are a few key questions you should ask yourself….. What are my investments goals? 

Are your investments for a specific purpose – a future purchase, your child’s education, or for your retirement?



Do you want your investments to grow, or to provide you with an income, or both?

What is my attitude to risk?  The more risk you are willing to take with your money the greater the potential returns, and losses.  The risk can be alleviated to a certain extent by spreading, or diversifying, your money between different products.  There are many different ways to assess your risk profile, and a professional adviser will help you with this. If we take a scale of 1‐10, with 1 being the most risk averse, (leave it in a bank account); through to 10 being the most adventurous, (e.g. Japanese or Technology funds).  The more specialised a fund (e.g. Gold), the higher the risk and the higher the potential return.  Although past performance can be no guarantee of future performance, it can be a good indicator of how well the fund has been managed.

Risk Profiler Step 1: ask the questions and record the answers, circling How do you feel about investment risk?

Strongly agree

Somewhat agree

Somewhat disagree

Strongly disagree

I would feel comfortable if my investments could easily rise and fall by a quarter (25%) or more in a year

If my investments fell significantly in value I might see this as an opportunity to buy more at cheaper prices.

I would not feel comfortable if my investments could fall in value at all.

I prefer the security of bank accounts to stock market related investments.

I can sleep at night knowing that my investments might rise and fall quite rapidly in the short term.

Step 2: Now add up the numbers: _________________ 50

Step 3: circle your risk level: From

Risk level is … 1

What the score means Risk rating 1 – 3

4 – 5

Risk Description

You prefer not to accept any capital loss. You understand the future purchasing power of your capital could be reduced by the effects of inflation. You prefer to accept only a low risk of capital loss in return for the opportunity to earn more than from deposit type investments. You recognise that this will limit the potential for real capital growth.

Examples

Cash National Savings Certificates Bank Accounts

Guaranteed Growth and Income Funds Corporate Bonds (investment grade) Cautious Managed Funds

5 – 7

You prefer to invest in a broad range of blue chip stock market linked investments, in return for the potential for real capital growth. In doing so you understand that you accept the risk of some capital loss.

With Profits Funds Balanced Managed Funds Property

7 – 8

You prefer to invest in specialised stock market linked investments in return for increased capital growth. In doing so you understand that you risk significant capital loss. You prefer to invest in volatile investments for the potential for very significant growth of your investments. In doing so you understand that you risk losing your capital.

Global Equity Funds Commodities Japanese and Far East Funds

9 ‐ 10

Japanese Small Companies Single Far East countries Latin American Funds

How long am I planning to invest my money for? How long you are able to leave your money invested will help to determine where the money will go. Whether it is a short, medium or long term investment you have in mind will be dependent on your investment goal. 52

   

Cash ISAs should be considered for slightly longer term, low risk returns Anything over 5 years you should consider pooled investments. Property investment should always be considered a longer term investment of 5 plus years. When saving for retirement pensions are still the best vehicle because of the tax benefits and because the funds are difficult to access before retirement.

Types of Investments: Pooled Investments A pooled investment is one where lots of people put in different amounts of money into a fund, which is then invested in one or more asset classes (such as cash, corporate bonds, property and shares) by a fund manager. There are certain advantages to pooled investments: 

  



Pooled investments benefit from an investment expert to pick investments for you, to watch those investments daily and judge when to sell them. They spread your risk, as you can spread your money across a wide range of investments and asset classes. You reduce dealing costs due to bulk buying by the fund manager. There is less administration, as the fund manager handles the buying, selling and collecting of dividends and income for you. They also deal with foreign stock exchanges and brokers, which can be tricky and time consuming. There is a very wide choice of funds so that you can pick one – or many – that suit you individually.

Types of pooled investments 1. Mutual Funds: This is the most direct route to pooled investments and there are many funds to choose from – all with different values and projected returns. As an investor, you buy units/shares in the hope that the value rises over time as the prices of the underlying investments increase. The price of the units/shares depends on how the underlying investments perform. You might also get income from your units/shares through dividends paid by the shares (or income from the bonds, property or cash) that the fund has invested in. 2. Life Assurance Investments: These have an element of life insurance built into the product but are predominantly investments. They can be regular premium policies or single premium policies (often called Investment Bonds). 3. ISAs: From October 2009 (for over 50s) and April 2010 for everybody else you can invest up to £10,200 per year in ISAs. Of this the cash ISA element has increased to £5,100 per annum. As long as you keep the investments within an ISA you do not have to pay any income tax or capital gains tax on the growth of the investments. Since their inception over 10 years ago more than 18 million people have used ISAs to save. 4. Pensions: The state pension is not likely to provide most of us with the income we would like in retirement, so it is wise to pay into a separate pension scheme that will benefit from tax relief. There are various types of pensions such as Stakeholder, Occupational, SIPP and SSAS that can take premiums from as little as £20 a month or the investment of a company’s office premises. Investing in a pension has several advantages:   

You can pay as much as you like into your pension schemes. You only get tax relief on up to 100% of your earnings if you are a UK taxpayer. The sooner you start paying into a pension the higher your income in retirement is likely to be.

It is recommended that you pay in about 10% of your salary into a pension, but advice is necessary on determining the affordable amount. Things to be aware of when taking advice… Independent? – Advisers can be independent, tied to a particular provider or multi‐tied to a few providers and so the range of products they can recommend will differ. Commission or fees – Independent Advisers can be paid by commission, by fees or a mixture of the two, whichever suits you best. What qualifications does your adviser have? Make sure they are relevant to what they are doing for you. What ongoing relationship is the Adviser proposing? Will they be reviewing your circumstances every year? Using the right adviser should result in you staying with the same adviser for life. Initial fees – These vary from package to package, so make sure that they are comparable with similar products. Try to look at the package as a whole, as a more onerous initial fee may bring greater reward later on in the product’s life. Management fees – You will normally pay a higher fee if the manager pays more attention to a fund, so make sure the fee is in line with other similarly managed funds. Exit fees – These are often evident in the first years of a product and can be used instead of an initial fee. Before investing any money make sure you are aware of any relevant exit charges.

What you are investing in – If you have any particularly strong views about where your money is invested, make this known. There are funds that steer an ethical course away from such things as tobacco and specialist funds that invest in one particular thing. Be aware of the product’s tax implications – Different products will suit higher rate tax payers or lower rate tax payers, so know your tax band. Property Investment When considering investing in property there are many different options available. The majority of less experienced investors tend to look at residential property however it is also possible to invest in commercial property such as offices, warehouses and factories etc. Whatever you invest in there are two ways that you can make money from investing in property: Rental Yield –How much rent do you receive annually, compared to the value of the property? This gives your gross rental yield (e.g. £6,000 rent per annum, from a property purchased £100,000 gives a 6% gross yield). Your net yield takes into account associated costs (not interest costs) such as occupancy voids, marketing, managing, maintenance & repairs and local taxes. Take these costs away from your rental income to give the net rental yield. These calculations don’t give any idea of profit, but shows you how much money your property is generating, compared to its initial cost. This is useful to compare to other types of investment product. Ideally after paying any monthly costs and budgeting for future repairs you would like to have some money left over. When looking at rental yields it is important to put some money aside for unexpected repairs 56

and also if the property is empty (rental voids) for a while. We recommend that investors should always keep sufficient money in an accessible savings account to pay the running costs of the property for a year. Capital Appreciation – This is where people have made significant amounts of money from investing in property. Over the last 10 years property prices have increased dramatically, but remember in the short term property prices do not always go up. This has become very apparent over the last two years!

Figure 1 House Prices from 1973 onwards

The first “mini‐peak” you can see (1988) was the last house price peak and resultant decline. Looks like a mole hill compared to our current mountain. 57

Wise investors should always ensure that they are able to hold the property for long enough to allow them to sell at the best time, rather than rely on selling after a certain period when the market may be quiet. The reason property can make you large amounts of money is because you are able to “gear” your investment. For example, if you buy a property for £100,000 and 5 years later you sell it for £150,000 then you have made £50,000 or a 50% return. However if you only put £15,000 down and got a mortgage for the remainder then although the property has still only increased in value by £50,000 you have actually made a return of 333% ‐ a far better investment return. You should always bear in mind the associated costs e.g. mortgage, maintenance. Again it is essential that you understand that this same effect can multiply your losses. Gone are the days of simply buying another house on your street. Property investors now have a whole world of options available to them. U.K. Property Over the last 10 years many people in the U.K. have got on the “buy to let bandwagon”. Those early investors have made huge amounts of money. Buying almost any house in 1995 and selling it in 2005 was a sure fire way to make huge returns. However those days are gone, and it is going to be far more difficult to make such easy returns in the future. Investors cannot bank on 10% plus capital appreciation every year and many people expect that prices will remain fairly stable or even decrease for the next few years. Good opportunities can still be found however. For example some new build developers need to sell certain phases by a set date and towards the end of this period discounts of up to 20% may be available. You do need to watch out for non genuine discounts (i.e. add 20% onto the price and then knock it off again!). 58

Different areas appreciate at different levels, do your research and find out which areas have gone up, and which are yet to. A well priced property in the right area may still have a lot of potential appreciation in it. Factors such as changes to infrastructure, school performance, crime rates, major employers moving into the area, and many others should all be considered Buying under‐priced property which needs work doing to it is still a great option, but be careful. There could be reasons why this hasn’t been done already (e.g. planning constraints, structural defects in the property). You also need to make sure that the rental income will cover mortgage payments, this will help with cash flow for the investment. A low rental income won’t only leave you short, but depending on your deposit may render you unable to get a mortgage and therefore purchase the property in the first place. Overseas Property The first question you need to ask yourself when looking at buying a property overseas is ……. WHY? Are you looking for a “lifestyle purchase” – i.e. a property that you and your family can use for holidays (such as a ski, beach or countryside property) or are you 100% investment orientated. From our experience in the overseas property industry too many people have purchased coastal property (e.g. in Spain) as an investment and were sold to by the promise of huge capital appreciation that the salesman said was certain. Unfortunately if these returns do not materialise the investor ends up owning a property that would be ideal for holidays but does not make a great short term investment. This can be fine if you can afford to keep the property in the long term and wait for it to increase in value but what if you end up with a property that is hard to rent out and worth less than you paid for it, could you afford to wait? 59

Overseas investment does not always mean buying a holiday home. Just like in the U.K. local people need to rent property, either because they are at university, can’t afford to buy or need the flexibility of renting. There are now many options available to invest in city centre properties where there is a strong local rental market and excellent prospects of significant capital appreciation over the next 10 or so years. Finally it is possible to buy property that will give you a fantastic place to go on holiday but also should go up in value over the short to medium term. Holiday lets can make great investments but be careful if you are buying in a heavily developed resort, is there enough demand for so much new property? The graph below is Dr Jean‐Paul Rodrigue's Manias and Bubbles. It does look remarkably like the UK housing price graph. We believe that it is a useful graph to study to ensure we do not get carried away by the hype of property investment.

Figure 2 Dr Jean‐Paul Rodrigue's Manias and Bubbles

Things to be aware of when buying … Off Plan – You can get great deals by buying off plan. This is because you are assisting the developer with the funding of the build and therefore should get a good discount. The theory is that when the wonderful project is finished people will be more willing to purchase the ready to use unit. But what if the finished project is of a poor quality and does not live up to the sales pitch? Make sure if the brochure promises all sorts of facilities that these are also detailed in your contract (it’s amazing how many brochures over promise and developers under deliver!). Guaranteed Rental – Many holiday properties guarantee rental for a certain period of time. This can be great as it means you should be certain of receiving a set amount of money. However, if real people are not actually staying at the development then it will not mature well and facilities such as restaurants etc may close down. Some developers, for example, add 10% to the price and then guarantee you 5% return for 2 years. Thanks for giving me my own money back! Guaranteed rental can hide low demand and in the worst situations make it almost impossible to resell the property. If you buy a cheap studio apartment in a less desirable part of the resort and keep it for say two years until the guaranteed rental expires….. who on earth is going to buy it from you? The Sangria Sale – We have heard of many buyers that have been seduced by the sun and sangria and despite going out to buy a single “lifestyle” property have been convinced to buy several as an investment. This can cause huge problems as mortgage finance may not be available and in the worst case scenario you may lose all your deposits if you can’t afford to complete. Keep to your initial objectives and don’t be talked into buying more than you can afford. Remember people get paid commission for selling to you! Hidden Costs – Make sure you understand all the costs involved with buying a property whether it is in the UK or overseas. Often people 61

spend all the money they have on the deposit and then have nothing remaining to pay the tax or furnish the property. Ensure you ask the sales agent or developer for a breakdown of all the costs including management fees, legal fees, tax, furniture etc. Independent Legal Advice – You would not buy in the U.K. without getting legal advice so don’t do it abroad. Our Grandfather ended up buying his villa in Spain twice. The first time he just bought a set of keys! The more trusting you are the more you need to make sure you get everything checked out correctly. Do they have all the necessary building permissions? Do they own the property? What if the developer goes bust?

Remember! I run my business / bank to make a profit for my shareholders and a big fat salary for myself. My staff are heavily targeted and they need to hit these targets to keep their jobs!

Borrowing Money The purpose of this section of the guide is to provide an introduction to borrowing money and to give you an insight into the potential pitfalls of doing so. It should provide you with enough information to ensure you are comfortable with basic terms and definitions related to borrowing money. There are two main types of loan available to somebody looking to borrow money; secured and unsecured. Secured borrowing “A loan containing a provision that, upon default, certain pledged assets may be claimed by the lender as payment of a debt.” Typical examples:‐ mortgages, car loans. The most recognisable form of secured borrowing is the mortgage, which involves a lender providing a given amount of money for a borrower to put towards a property purchase. The mortgage itself is the contract between the lender and borrower in which the property is used as collateral (security) for the loan. A mortgage gives the lender the right to collect payments on the loan (and to repossess the property if those payments are not made). This is the case with all secured lending, there is always the option for the lender to exercise its right to claim the property should payments not be kept up. The UK mortgage market is probably the most sophisticated in the world, good news because it means you have lots of choice but bad news because you may choose the wrong type of mortgage!

The next table shows the main different types of mortgage available, the brief facts, the advantages and the disadvantages. TYPE

THE BENEFITS

BUT.......

Your monthly mortgage payments go up and down in line with the bank of England base rate

You pay less when interest rates are low and the mortgage MUST follow the Bank of England rate.

You pay more when interest rates rise, so it’s difficult to budget accurately for your monthly payments. Many lenders have “collared” their trackers to keep the rate above a certain level.

FIXED RATE

You chose to repay the mortgage at a rate of interest that doesn’t change for a set period of time.

You know exactly what you’ll repay each month; rising interest rates won’t affect you.

You’ll miss out on any savings if interest rates fall, and you might be charged if you repay your mortgage early. A booking fee may also be required.

DISCOUNTED RATE

The interest rate on your mortgage is discounted from the lenders standard variable rate, usually with a bigger discount at the start.

Lower monthly payments than the standard variable rate. Your payments will decrease if interest rates fall.

Your payments will still go up if interest rates rise, and may not go down if the lender chooses not follow the Bank of England.

CAPPED RATE

The interest rate on your mortgage never goes above a certain level during an agreed period – but does go down if interest rates fall below a certain level.

You’ll always know the maximum amount you’ll ever have to pay during the agreed period.

It will often be more expensive initially than a discounted rate mortgage. A booking fee may also be required.

FLEXIBLE

You can vary how much you repay each month – you can pay extra, or even suspend payments for a while.

You can pay extra amounts to reduce your mortgage, and build up cash that can be used for future monthly payments.

Often carry higher rates than traditional mortgages, so advantages must be taken or you simply pay a higher rate.

TRACKER RATE

THE FACTS

Things to be aware of…. Affordability When borrowing money always ensure that you can afford the payments now and in the future. Even though it is easy to get drawn in by low initial rates it is essential you consider what happens when the initial deal is over and indeed if interest rates increase. If you are looking at a buy to let investment you need to make sure you have money set aside for the times the property is empty or if the tenants don’t pay. In a word make sure you can afford to continue payments during the good and the bad times. As we write this interest rates are at an historic low of 0.5%. Many borrowers (for valid reasons) are taking out tracker rate mortgages that will in essence track the base rate when it eventually starts to rise again. Interest Only Mortgages Many people have borrowed money on an interest only basis in order to buy a house and keep the payments as low as possible. If the payments continue in the long term on interest only you will actually end up paying a lot more interest than if you had a repayment mortgage and obviously you will never end up repaying the loan. Always calculate your affordability on a repayment basis, if you can’t afford that you are probably borrowing too much. Higher lending charges (HLC) A single premium policy, paid for by the borrower on completion of the mortgage. It insures the lender for losses if they repossess the property but do not receive enough funds from the sale to cover the mortgage and fees added during a repossession. The borrower still remains liable for any amount claimed, and the initial charge itself usually stretches into thousands of pounds. In this instance the lender would recoup the difference from an insurance company, who will then look to reclaim this money from the borrower. Not a good situation to be in! 65

With certain lenders the HLC is charged if you borrow more than 75% of the value of the property. However this type of charge is becoming less common, and most lenders offer products which do not incur an HLC. Tie‐ins Some loan contracts will include additional clauses to try and ensure the borrower doesn’t pay back the loan too soon, by insisting on an additional payment (redemption penalty) that needs to be paid if the loan is repaid before a certain date. Specifically with mortgage contracts there is usually a set period where the borrower must remain in contract or face financial penalty, a feature which has become widely accepted within the industry. However, there are occasions when these early redemption penalties overhang beyond the fixed or tracker rate period leaving the borrower stuck on the lender’s standard variable rate. This is often a particularly unattractive rate. You should ask your broker to find you a mortgage deal without any early repayment overhang, removing the risk of being trapped on a higher rate. Flexibility Loans providing the opportunity to make overpayments with no penalties and underpayments, as well as offering payment holidays, are always an attractive option. They are particularly useful for people who earn non‐guaranteed bonuses or are expecting a lump sum of cash in the foreseeable future. This type of arrangement will allow the borrower to pay chunks off the loan over and above their regular repayments, and usually make underpayments against the surplus built up, handy in times when money is tight. Flexibility always sounds attractive, but it must be chosen for the right circumstances. If the flexibility is not really needed you are merely paying a higher rate mortgage than you need to.

Arrangement fees Over recent years the initial charges made by many banks have increased and it’s always important to factor these in when deciding which mortgage is appropriate for you. One mortgage may have a lower interest rate, and therefore lower monthly payments, but a large arrangement fee may be charged. It could be preferable to take out a mortgage with a higher interest rate but lower set‐up fees. Again, a good broker can assist with this. Broker fees When seeking the advice of a broker you will probably be charged a fee for their service. The advice of a good professional can prove invaluable when trying to negotiate through the mine‐field of deals on offer and should always be your first port of call when looking to borrow. You must always be made aware of the fees a broker may charge, as there are unfortunately a number of brokers out there who will charge excessive fees in exchange for their services, especially if the client concerned has had credit problems in the past. These fees can often reach thousands of pounds, which is never justifiable. Please be aware that an acceptable amount to be charged for advice and arrangement of a loan would be around £250‐£500. It’s also worth asking your broker if they offer a “whole of market” service meaning they have access to almost every product available. Some brokers can only offer products from a select panel of lenders or may even be “tied” to just one lender. There is no right or wrong answer here, it’s just best to be aware of the level of choice available. What happens if payments aren’t continued… Missing payments on any secured loan is not advisable as inevitably these will be recorded on your credit report. In turn this will make borrowing money in the future much more difficult, as unsurprisingly, 67

lenders are keen to ensure that they will get their money back! With mortgage criteria tightening all the time, it is very important to not jeopardize your credit history. A series of missed payments creates a more serious situation and lenders will begin to ask questions about when they will receive the money they are owed. At this point it would definitely be a good idea to seek the guidance of a professional adviser, and to speak directly to the lender making them aware as to the reasons for your situation and potential solutions. Don’t bury your head in the sand, keep communicating. The most serious course of action for a lender to take would be to repossess the assets against which the loan is secured. The process of repossession is defined as the forced or voluntary surrender of merchandise as a result of the customer's failure to pay what is owed. Should the asset in question be your car or a buy‐to‐let property there’s no doubt it would be a massive blow to your financial situation, however if it was your main family residence under the threat of repossession the consequences are more severe. If such a situation did arise the most sensible course of action would be to attempt to sell the property before a repossession order was issued. Contrary to common belief, even when the asset has been sold by the lender, the borrower may still be faced with a financial obligation should the sale price be less than the amount owed by the borrower. It should be pointed out that all lenders regulated by the FSA are legally obliged to do all that they can to help the borrower avoid repossession and also ensure that if it is the only option, they receive the best possible price for the asset. One method used to avoid more serious action being taken is to come to an “arrangement”, allowing you to agree to make payments to the lender that are affordable to you. 68

So if you are struggling to maintain mortgage payments and fear that you may be repossessed then ensure you consider the following; 1) 2)

a. b. c. d.

Speak to the lender, make them aware of your situation and any changes that may occur If the problem is not short term and you feel that you will lose the house make sure you confront this issues rather than wait for formal proceedings through the lender. Once legal fees are added your debt will become larger! Voluntary repossession – voluntarily allow the lender to repossess will reduce the costs Voluntary sale – Get the property on the market at a realistic price and keep the lender informed. Auction Sale – an option for a quick sale but not really suitable for all properties and you don’t want to sell too cheaply. Sale and Rent Back – WARNING this can result in you selling the property at a significant discount and you will probably have no more protection than an ordinary tenant. i.e your landlord could evict you! Visit this website http://mortgagehelp.direct.gov.uk/ “It is crucial that you communicate with the lender and do not bury your head in the sand.”

Unsecured borrowing “A loan granted based only on the borrower's promise to repay.” Typical examples:‐ credit cards, personal loans. A good example of unsecured borrowing would be a credit card. In this instance there is no property for the lender to fall back on should the borrower fail to make payments due. Predictably, such a loan normally carries a higher interest rate than a secured loan, simply because unsecured lending represents a significantly higher risk to the lender. The better credit history you have, the more likely you are to receive an unsecured loan. In order to qualify for the best interest rates available, you will need to have a clean credit history and have kept up with previous loan payments. Recent years have seen a spate of “personal loan” companies emerge, seemingly capitalising on the willingness of UK consumers to binge on credit. You will no doubt have seen TV adverts portraying these companies as white knights riding in to save struggling borrowers or provide people with the money to afford a dream holiday. But be warned, the price for this “easy money” is generally a shocking interest rate and a service loaded with hidden fees, such as redemption charges. The savvy borrower would be best served to avoid such companies and seek independent financial advice from a regulated broker when looking to attain further borrowing. The best advice when looking at borrowing to purchase a depreciating asset, is to save up and purchase the item in cash. Paying off a holiday two years after you get back is never a good idea. “If you can’t afford it, don’t buy it.” 70

Things to be aware of… Single premium payment protection insurance In effect this is a single premium accident, sickness and unemployment insurance which many unsecured loan companies will attempt to sell to you on taking out a loan. With any loan you should try to ensure that you are covered by some sort of insurance, usually paying the premium on a monthly basis. However, a single premium insurance is where you pay every instalment in one, paid up front in full and will usually be added to the loan being taken out. This means the borrower ends up paying the same rate of interest on the entire premium, not just the loan itself. There have even been occasions where the cost of insurance has exceeded the cost of the loan! It’s always best to consult a regulated adviser before taking out insurances as they will probably be able to arrange one insurance policy to cover all outstanding loans rather than taking a number of policies out with several different providers. Many people who purchased single premium policies should be able to gain compensation, please go to our website for more details.

“Single premium policies can make the lender or broker a lot of money. Unfortunately this is why they are sold. Rarely are they appropriate for the borrower.”

Borrowing over a longer term A tactic often used by personal loan companies to reduce monthly premiums is to suggest the loan be paid back over a longer period of time. In the short term this may well look like a cheaper option but be advised that in almost every case, the longer 71

the repayment period, the more you will have to pay back, as the longer you have the loan, the more interest you pay. It would be best advised to avoid taking out credit of any sort unless it was entirely necessary most people can’t afford to by a house outright! Credit cards should be reserved for emergencies and for money purchases where the protection offered by credit cards can be a huge benefit. If you’re after a new car, feel like redecorating the living room or have your eye on that big‐screen TV you saw in the sales, don’t borrow to pay for it, save up and buy it, you’ll find it’s much more rewarding! What happens if payments aren’t continued… Defaults & CCJs There are a number of consequences for failing to keep up unsecured loan payments to a creditor, with varying severity in affecting your credit rating. The most common consequences of not maintaining payments are defaults and CCJs, with the latter signifying the issue of a court order instructing repayment of missed payments and often the entire debt. Both of these outcomes will involve a mark on your credit file and will seriously hinder the opportunity for future borrowing. Individual Voluntary Arrangements A more serious effect would be an IVA (Individual Voluntary Arrangement), which is an agreement with creditors to restructure debts and provide a mutually beneficial solution. Up to 75% of debts can be written off through an IVA, and involve a specialist company dealing with creditors on your behalf in exchange for a monthly payment. It’s a measure you should try to avoid but if there is no option, an IVA is a better alternative to bankruptcy. Typically you will need to maintain the payments for 5 years and you will have an annual review to see if you can afford to pay more. At the end of the IVA it will remain on your credit record for one year, although many lenders will ask if you have “ever” entered into an IVA. 72

Bankruptcy This is a legal proceeding which will allow you to discharge certain debts without having to pay the full amount, or even right them off completely. Unlike an IVA situation, declaring yourself bankrupt can lead to assets being seized from you, even if they were not originally used as security for a loan. Certainly if the potential borrower has been subjected to repossession, bankruptcy or an IVA they will find it extremely difficult to borrow large sums of money in the future as they will be viewed as an extremely risky option for a lender. Should they manage to secure funds from any lender, the borrower is likely to be charged an extremely uncompetitive rate of interest, reflecting the risk posed to the lender for providing credit. http://www.insolvency.gov.uk/

Watch Out! For claims companies that want an upfront fee to try and right off your debts and debt management companies that charge excessive fees!

Protection This section of the guide will be a little depressing to read, but it is much better to seriously think about these things now and be prepared, rather than to just pretend that things may never happen. Things to consider With so many different insurances available, what really needs to be considered, and what is the relevant protection? What If I die? Bad luck! You’re dead, so any impact will be on your family rather than you. This point alone causes some people to disregard life insurance, as it is the only insurance that is guaranteed never to benefit the person insured. However you must seriously consider how your family will survive at a time when they do not need to be further upset with the possible onset of poverty. Would you really want them to have to move home, leave the school they are at, or get another job? Life insurance will pay a lump sum or monthly amount to the dependants if the holder dies while the policy is in force. The majority of plans will pay out following diagnosis of a terminal illness if for example you have less than 12 months to live. As well as ensuring that your mortgage is covered you should make sure that your family has sufficient money to maintain their current lifestyle. On average a child costs £6,500 per annum and the value of a ‘house person’ is calculated to be £25,170!

What If I suffer from a Critical Illness?

Frightening statistics! It could happen to you, me or any one. Nobody is immune to these illnesses. Sure we can eat healthily, exercise regularly and not smoke to reduce our chances, but none of us can be sure that ‘it won’t happen to me’. Insurance certainly won’t reduce the chances but it can reduce the harm caused. Critical Illness insurance is designed to pay out a lump sum or monthly amount on the diagnosis of a specified serious condition, such as heart disease or cancer. The majority of policies also provide for a pay‐out if your child suffers from a critical illness. The amount of cover varies although is usually around £15,000. The problem with critical illnesses is that it is difficult to picture how the 75

illness may affect you or your family. When you die, you’re dead, but with a critical illness maybe you will be able to return to work, maybe you need to move, or possibly you may get a degenerative illness that means you never work again and require permanent and long term care. People often overlook this area because they believe they would be okay, but think of people you know who have developed serious illnesses, would an insurance policy have helped them? Ideally you should ensure that you cover any outstanding debts and also a year’s salary, although critical illness insurance can be quite expensive and sometimes people elect to have full life cover and only part of their debts covered against critical illness. What if I become ill for a short amount of time? Although long term events are most likely to cause problems, many people can suffer significantly from short term illness. You must ask yourself the question “what would happen if I was unable to work”. Make sure you consider how long your employer would continue to pay you for and what would happen if you were still not back at work after that date. Basic sick pay and incapacity benefit is only £70.05 per week. If you earn £36,000 a year this is only 10% of your current gross income! So if your employer won’t pay you, and you don’t think the state would pay enough, then you’ll have to look elsewhere. Do you have enough savings to cover you (is that what you were saving for?), or will a family member pay you (should you expect them to?), these are also questions you should consider. If you feel that short term illness would not affect your standard of living and ability to pay your loans etc then great, you probably don’t require protection, if not, you should certainly consider this area. 76

Accident and Sickness Insurance provides a short term regular income of up to two years if you are unable to work due to accident or sickness. What If I lose my job? If you are made redundant through no fault of your own then it is possible to receive a monthly income for a period of time (up to 2 years) until you find employment. This is a short term insurance and will stop paying after you get a new job or the pay out term expires. When looking at unemployment insurance you have to be really honest with yourself. How long would it take you to get another job if you were made redundant? Would you need to re‐train? If you feel that it could take some time and you would struggle to maintain mortgage and other payments during that time then you really must consider unemployment cover. What If I suffer a long term illness? This is likely to have the greatest impact on you and your family. Imagine if you were never able to work again? Your employer may pay you for up to a year but what happens after that? Long term incapacity benefit is only £81.35 per week and it certainly would not take long before you exhaust your savings and those of family members. The only real option is to take out ‘income protection insurance’. Income Protection Insurance pprovides a regular income until the end of the policy term so long as you are unable to work because of accident and illness. Income protection insurance can cover up to 75% tax free of your pre‐ disability earnings, can usually run to your chosen retirement date and 77

can be indexed each year so that the amount paid retains the same buying power. Policy Conditions Different insurance policies have different terms, conditions and options available. However across the industry there are many standard options available with the majority of providers. Differing Benefits Life and Critical Illness policies are available with either decreasing, level or increasing cover. Decreasing – the amount of cover decreases each year. These policies are usually used to protect repayment mortgages where the debt decreases over the term. Level – the amount of cover remains the same over the term of the policy. Increasing – the amount of cover increases each year, usually in line with the average earnings index. Types of Premium Life, Critical Illness and Income Protection plan premiums are often available on the following basis: Guaranteed – the premium will never increase during the term of the policy. Reviewable – the premium will be reviewed and may be increased depending on the review. Usually plans will be reviewed every 5 years, throughout the plan and more regularly in the final years. 78

Annually Reviewable – the premium will be reviewed annually and will increase each year. These plans are cheaper in the early years but may work out significantly more expensive over the term of the policy. Payment Life policies may pay as either a lump sum or monthly amount. For example it may be preferential for a family protection plan to pay a monthly amount until the children are old enough to look after themselves rather than a lump sum. This can often work out more cost effective as the amount the provider will pay decreases as the policy term reduces. Other features Many other features may be available. These are briefly outlined below: Guaranteed Insurability – At the end of the initial policy term the provider guarantees they will renew the plan on standard terms. Buy‐back – Some critical illness plans may allow for buy‐back. This means that following a critical illness pay out the provider will allow you to continue benefiting from cover, for the main critical illnesses, at a reduced premium and for up to 50% of the original sum assured. Waiver of Premium – If you become ill and unable to work the premiums on your plan will be paid for you after you have been off work for a specified period of time (usually either 3,6, or 12 months). This section could have filled a book on its own so we have had keep it concise and therefore some points that may be important or of interest to you may not be covered. If you have any questions give us a call on 0845 6886168 or email rob@simplicityfinancial.com. 79

Chapter Nine ‐ Put together a Budget and Stick to It!

RULE # 5

Think again now about the Mapping section. Where are you now and where you want to be? Your budget is the route you are going to take to allow you to get from your current situation to your chosen destination. Lot’s of people put a budget together, but it may only be for a single trip to the shops, for a holiday or for any given month. What we are talking about is putting a budget in place that will be for life! Like any journey however you need to check regularly that you are driving along the right road, that you still have enough money to get there and indeed that you still want to get to the destination you set out to. If you look back at chapter 5 you will recall that we divided budgeting into 4 key areas: Savings and Insurance Commitments Everyday Spending Occasional Spending

Minimum of 25% Maximum of 40% Maximum of 25% Maximum of 20%

It may well be at the moment that your current spending does not fit within this plan. If that is the case, don’t worry, it may take time to bring things back in line, but bring them back in line you must. We also mentioned that the FIRST 25% of your earnings must be set aside for savings and insurance and the remainder then goes to your 80

commitments and everyday or occasional spending. This may seem almost impossible but let us assure you it is not. It may take some short term sacrifices and discipline but achieving financial freedom has always been this way. At the start of chapter seven you identified your current spending, now you are going to put a plan in place that will allow you to achieve the goals that you identified at the end of that chapter. If you have not already done so then go to the website www.downhambrothers.co.uk and download the budget planning software. This is an excel spreadsheet so should work on most computers. If within your current spending pattern you are unable to achieve the financial security goals you set down earlier then you will need to reduce your expenditure in certain areas. In order to help you achieve this we have set out some great hints and tips that will help you reduce your commitments, everyday spending and occasional spending.

Ways to reduce your commitments 1.

Reduce your debts – We know this sounds obvious but the quicker you reduce your debts the quicker you will reduce your monthly commitments. For example if you have a personal loan of £12,000 at 10% interest per annum you will initially be paying £100 per month in interest payments. This money is not reducing your loan it is the interest payment and a total waste of money. If you are paying £200 per month to the loan company it will take approximately 7 years to repay the loan and you would pay nearly £5,000 of interest payments. If however you were to increase your 81

payment to £300 per month you would repay the loan over just 4 years and save yourself over £2,000 of interest payments. As soon as you have repaid the loan you can use the money you were spending on loan payments to increase your long term savings and investments. If you have balances outstanding on credit cards then if possible transfer these to a lower interest card, so that more of your payment reduces the debt rather than paying the interest. Make sure you then destroy the cards so you don’t run the balances up again. Pay off your debts as quickly as you can! If you are struggling to repay your debts then you may need to go into a form of debt management plan. Various types exist, there is more information in chapter 8 or become a member of our financial freedom club for more advice. 2. Save on your utilities – this can be an easy way to save a few hundred pounds per year. Many people are paying too much for their gas, electric, internet and phone etc. Even if you were paying the cheapest price it is quite likely that your current provider is not as competitive as they originally were. You can either shop around regularly (although constant switching can be a pain) or make sure you are with a company that guarantees to always give you a competitive price. Personally we are massive fans of Utility Warehouse Discount Club, a low cost utility provider that relies on word of mouth rather than expensive advertising to spread the message and hence can offer significant long term discounts. For more information visit www.simpligrouputilities.co.uk. 82

Get rid of some of your commitments – Okay so now we are starting to affect your current lifestyle. Good! In order to achieve financial freedom you may need to make a few short term sacrifices. Trust us it will be definitely be worth it in the long run. A great example is becoming a one rather than a two car family. We know “it will be impossible to cope” but if you think about the financial implications for a moment and look for other practical solutions it may well be easier than you think. For example if you are making payments on, taxing, insuring and fuelling a car you could be spending over £500 per month. That money on its own could be the amount you need to invest in your financial security. Find out what the public transport alternatives are, get a bike, walk, share a lift with a co‐ worker (and contribute to their fuel). Even if you occasionally have to get a taxi it is likely that this will still be far less than running two cars. Also look at things like telephones, and Sky TV. Do you really need 2000 channels or the latest handset? If you can afford it then great, but these things MUST come after providing for your financial security.

Ways to reduce your regular spending

Discounts, points and vouchers – Keep an eye out for bargains but remember a bargain is only a bargain if you needed to buy it! Many retailers offer loyalty schemes or bulk buy discounts. If there is a great offer on toothpaste for example then why not purchase a years supply at half the price. Create some storage space in your house and use this to horde all those bargains that you use every day, in the long run this can save a lot of money! Another example is using payment methods that get you a discount or cash back. Utility Warehouse have a card that gets you 5% back on all your spending at many high street stores and there are credit cards out 83

there that give you cash back on purchases. Just make sure you pay off the card each month. Finally make sure you collect points where available. If you shop at Tescos keep that club card to hand. Back to Basics – Look to buy the supermarkets own brand value products as much as possible. They are very similar to the brand name products but cost significantly less. Also try and shop at the cheaper stores. If you can afford Waitrose in your budget then great but if not then it is time to get down to Aldi! Budget for Everything – Retailers set up their shops in order to encourage us to buy things we did not plan to buy. They move the supermarket around and place items in certain places in order to make us impulse buy items we never set out to purchase. Make sure you make a list when you go shopping and stick to it. Buy out of Season – The best time to buy Christmas cards is January; they are practically giving them away. If you see the ideal present at a discounted price then buy it early and put it aside. This sort of advance preparation can half the cost of Christmas and you have the bonus of getting the shopping done in advance. Be Efficient – Do you really need the gas guzzler and do you have to drive the way you currently do. Changing to a fuel efficient car and driving more efficiently (56 mph, don’t brake too much and easy on the accelerator) can make a radical difference to the amount you spend on fuel and car tax. Stop Smoking – Apart from the health benefits, stopping smoking can be an easy way to save significant amounts of money. We had a client once who wanted to save money for her child’s education.

She said this was really important to her but she just did not see a way of finding the £100 per month she needed. She also smoked 20 cigarettes per day. At £5 per pack that equates to £1,760 a year, enough for her child’s education and change! Once she asked herself whether smoking or her child’s education was more important the decision she needed to make became clear. So if you can’t stop for your health then do it for your wallet. Buy Second Hand – Nowadays there are a huge number of ways to purchase someone else’s unwanted goods and very often the quality is no different than the new product. So before you go and buy new why not check out the local seconds store, charity shop or ebay? Better for the environment and better for your bank account. Grow your own ‐ Get into the garden or a local allotment and start to grow your own fruit and veg. This is not only (for some people)a satisfying way to spend your time but you will get healthy food at a fraction of the price. Get a flask and a sandwich box – A really simple way to save money is to bring your food and drink to work with you. You can make a great sandwich for less than £1 whereas it may cost £3 to buy it from a shop. Assuming you are at work for 240 days per year this alone could save you £360. Cutting out the £2 mocha everyday would also save you £480 per year.

Ways to control and reduce your occasional spending Whatever the type of occasional spending you should deal with it in the same way....

SAVE UP FOR IT BEFORE YOU NEED TO SPEND THE MONEY

Whilst looking at your own occasional spending patterns you should break down your areas of occasional spending and then work out how much you need to save up in order to pay for these things in advance. You should also start to save 6 months (this may take some time) worth of income in an “emergency money” savings account in case some of the eventualities we should expect but can’t control happen close together or indeed a totally unexpected event occurs for which we had not budgeted at all. For example if you spend £1,200 per year on a family holiday, want a new TV for £600, require £600 for Christmas and £300 for the annual car service. You would need to save £225 per month just for these events. How to manage your expenditure 1) Get your salary paid into a current account. 2) Immediately transfer any savings or occasional spending savings into a separate savings account. 86

3) Within the savings account have pots for (or apportion yourself – the budget planner will help with this) a. Financial Security Saving b. Financial Freedom Saving c. Financial Abundance Saving (if appropriate) 4) Transfer the money you have allocated for everyday spending onto a cash back card (such as the Utility Warehouse Cash back Charge Card)or use a credit card (with benefits) to make the everyday purchases). 5) For larger occasional purchases make sure you use a credit card with good consumer protection and then pay it off within the interest free period from the appropriate occasional savings pot. 6) Make sure all commitments are taken after you have been paid (leave at least one week before this happens in case your pay is delayed). Although the above sounds fairly complicated it does not need to be so. At the start of each year prepare your annual budget and at that time work out how much you need to be saving throughout the year for various things. Some of these things you may be saving towards for several years, whilst others will be annual or even more frequent. 87

An example ‐ Emma and John Intro to Emma and John John and Emma met at university and at age 26 they got engaged and moved in together. We are going to follow how this average couple earning an average income can guarantee their financial freedom by adjusting their spending as they move through their lives. We have assumed that throughout their working lives their average salaries increase by 2% per year. We have also used todays income and expense figures throughout the example and hence inflation has been ignored yet factored in. Starting out. They are both earning and have a combined take home income of £3,184 per month. Although they have been trying to repay their student debt they still have a combined debt of £14,382. They have no children but are saving for their engagement, wedding and deposit for their first home. It is an interesting time in their lives as they want to live it up but at the same time are aware that prudent planning now will reap dividends for the rest of their lives.

Total Monthly Expenditure Total Savings & Insurance Total Commitments Total Everyday Total Occasional

% of Income

£ 955 £ 1,019 £ 700 £ 509

30% 32% 22% 16%

The savings and insurance mainly consists of assigning 10% of their salaries to repay their student debt, 13% towards saving for a deposit for their home and 5% into their pension plans. Occasional Spending % 16%

Savings and Insurance % 30%

Everyday Spending % 22%

Financial Commitments % 32%

Their commitments are now less than when they were single as they are sharing a rental property, because they have no children they still go out quite a lot and hence spend £700 on everyday living (excluding commitments). Finally they put £509 per month on saving is to replace their clapped out student cars, an annual budget holiday abroad and for thoughtful (not overly generous) presents for friends and family. It is prudent that they save to buy these items rather than take out loans or credit cards.

First home After several years of saving and having not taken out any new debt John and Emma are now able to get on the first rung of the property ladder. They purchase a home for £166,000 and take out a £140,000 25 year repayment mortgage. Their spending is now; Occasional Spending % 19%

Savings and Insurance % 25%

Everyday Spending % 20%

Financial Commitments % 36% % of Income

Total Monthly Expenditure Total Savings & Insurance Total Commitments Total Everyday Total Occasional

£ 845 £ 1,216 £ 676 £ 642

25% 36% 20% 19%

They are now spending more on insurance (they need to protect the property and themselves), their commitments have also increased due to the interest that they are paying on the mortgage (the repayment part of the mortgage is under the saving and insurance area). Even though they are earning more they are spending less on going out etc. This is the price to pay for having their own home. Their occasional spending has 90

jumped up as they are saving up for a new couch and television (again this is not being taken out on credit). As you can see from the above in order to do this they made reductions to their commitments (got rid of a car) and reductions to their everyday spending (budgeted and cut back on luxuries). This allowed them to balance their budget and to start reducing the debts. Family time John and Emma are now 32 and their second child has just been born. This has meant that Emma is now only working part time and hence they have suffered a fairly large reduction in income. They are no longer taking foreign holidays and saving for a new car has been put on the back burner. The key now is to make sure that their position is protected and that they are not borrowing to cover expenditure. They have applied for all the benefits that they qualify for. It is amazing how many people do not do this. They have continued to pay off their student debt and by having a structured, disciplined approach to this it will all be repaid by the end of the year. It is tempting to cancel their insurances yet they know that they must insure themselves against the worst as they now have children and hence it is vital that they have life cover. They are still contributing a small amount to pensions (5% of their income) but are aware that this will need to be increased in the future. % of Income

Total Monthly Expenditure Total Savings & Insurance Total Commitments Total Everyday Total Occasional

£ 686 £ 1,064 £ 638 £ 293

25% 40% 24% 11%

Occasional Spending % 11%

Savings and Insurance % 25%

Everyday Spending % 24% Financial Commitments % 40%

Partner returns to work The children are now both full time at school and hence Emma has decided to go back to work full time, although they were managing on one and half incomes they knew that they needed to contribute more to their retirement planning. They are both 38 years old and now is the time to start making real progress towards financial freedom. It is tempting when your income suddenly increases (or costs suddenly fall) to spend the extra on luxuries and un‐necessaries, however, this is the perfect time to put the extra income or monthly cost reductions towards your long term financial security. Occasional Spending % 10% Everyday Spending % 24%

Savings and Insurance % 31%

Financial Commitments % 35%

% of Income

Total Monthly Expenditure Total Savings & Insurance Total Commitments Total Everyday Total Occasional

£ 1,095 £ 1,237 £ 848 £ 353

31% 35% 24% 10%

As you can see their savings and insurance % has increased to 31% as they save more for retirement. Their commitments have decreased as a % of income as their mortgage and insurances have not increased in price whilst their incomes have risen as they advance in their careers. They now have absolutely no loans, they do have credit cards but only use them for the added purchase protection and make sure they are paid off every month. Although they have been saving towards retirement for quite a few years they only have £75,000 in their combined pension funds. However, over time this amount will multiply significantly. Paid off mortgage At age 53 they have finally paid off their 25 year mortgage. In the preceding years they have also helped their children through university and seen them start their own independent lives. Although it might now seem that the golden years are approaching the next 12 years are crucial to their long term financial future. Suddenly they have no dependants and very few monthly commitments. This sudden change in circumstances means that they can now accelerate their way towards retirement. At age 53 they have cumulative pension funds of just over £250,000, yet if they now save hard for the next 12 years this amount can easily triple.

Occasional Spending % 20%

Everyday Spending % 18% Financial Commitments % 15%

Total Monthly Expenditure Total Savings & Insurance Total Commitments Total Everyday Total Occasional

Savings and Insurance % 47%

£ 2,279 £ 727 £ 873 £ 970

% of Income 47% 15% 18% 20%

They are now saving nearly 45% of their income. Their insurance costs have reduced as they no longer need life cover; however, they are still paying for private medical cover. Their commitments are now very low and this has allowed them to put more towards occasional spending which is spent on more holidays abroad and a better car. Retirement Finally they reach age 65 and can retire. They have got a pension fund of £935,000 which sounds a lot but will only create an income of about 50% of what they were earning just before retirement. This is enough as they 94

still have no mortgage and they do not need to contribute towards long term savings. Savings and Insurance % 4%

Age 65 ‐ Retire

Occasional Spending % 30%

Financial Commitments % 27%

Everyday Spending % 39%

% of Income

Total Monthly Expenditure Total Savings & Insurance Total Commitments Total Everyday Total Occasional

£ 115 £ 774 £ 1,118 £ 860

4% 27% 39% 30%

Maybe they could have retired earlier, in this example we have always assumed average earnings, if you can earn more than the average then you can potentially retire earlier. We have budgeted for a nice house, holidays, cars, 2 children and a whole host of associated costs.

The above is just an example intended to show how at different stages of your life you need to change the percentages you allocate to each pot. As your income increases and your commitments reduce it is essential to increase the amount of money you allocate to long term savings and finally to living your dreams! If you go to our website you can down load spreadsheets to allow you to analyse and plan your own income and expenditure. The graph below shows the % of income that should be spent in each area in order to live a financially free life. 50% 45% 40%

Savings and Insurance %

35% 30%

Financial Commitments %

25% 20%

Everyday Spending %

15% 10%

Occasional Spending %

5% Age 22 27 32 37 42 47 52 57 62 67 72 77

Chapter Ten ‐ Increase your Income

RULE # 6

So far we have looked at ways to control your spending, we are now going to look at how to increase your income. Your income is no indicator as to whether or not you will achieve financial freedom although higher income combined with financial prudence will make the journey easier and quicker. Countless books exist telling you how to earn more especially if they are encouraging people to become entrepreneurial. This chapter of the book provides a few simple tips that every single person can do to earn that extra little bit of money. You can earn more per hour, work more hours or ideally break the link entirely between your time, hourly rate and your total income. There are a few different ways of increasing your earnings;

Earn more from your existing job If you improve your performance at work over a period of time you will eventually earn more money. This could be via a promotion, a pay increase, earning extra commission or extra overtime or even not being the one to be made redundant when things get tight. What we certainly don’t suggest is applying yourself more diligently for a week and then asking for a pay rise, this will just wind up your employer. We have often heard people say “life is not fair!” we have also heard people say “life is fair!” we actually believe that these are both true. We believe that you get out of life what you put in, the old saying of you reap what you sow, however, you must recognise that you do not get out of 97

life exactly what you put in and you do not get your rewards immediately. We believe the following “life law” is very helpful to understand.

Law of effort and reward     

If you put in poor effort you will get little or no reward. If you put in average effort you will get poor reward. If you put in good effort you will get average reward. If you put in excellent effort you will get good reward. If you put in outstanding effort you will achieve unlimited reward.

The points below will aid your understanding of this law. 

  



Firstly, effort is not just about exertion, it does not just mean how many hours you work, it is really about could you do it better, could you be better, are you really fulfilling your potential, is your attitude what it should be. Secondly reward is not always financial, quite often it could be even more important than money. Thirdly this law applies to all aspects of your life be it health, relationships, work or family. Fourthly be patient, many people start off in a new position or new relationship putting in good effort, they then realise they are not getting a good reward and hence their effort decreases and their rewards also decrease. What they should have done is put in more effort and hence gained more reward, even if they would still perceive that their level of reward was less than their level of effort. Finally you do not always get out less than you put in. Few people consistently apply themselves to an outstanding level, those that do achieve financial and life abundance. In the first 4

effort levels you get less reward than effort applied, but in the last level (only a bit more effort than excellent) suddenly the rewards increase exponentially. If you feel that you are not getting enough reward in your life have you honestly examined the amount of effort you are truly applying whilst remembering that the rewards do not exactly match the efforts applied? If you want great rewards are you applying yourself in an outstanding fashion?

Develop a second source of income You may already be extremely efficient, unable to earn more and recognised by your boss as an excellent employee. If you don’t want to change your job then you could always look at developing a second source of income. Most people would argue that they have no spare time. It is true that we live extremely hectic lives, but could you reprioritise some of your existing activities and deploy your time in more profitable or developmental areas? The new financial world presents a myriad of second income opportunities. From getting a part time second job to starting your own small business from home the opportunities are endless. Our recommendation is if you are looking at small business opportunities to make sure you thoroughly research the opportunity and keep any upfront payments as low as possible. By applying yourself consistently for maybe an extra 5 – 10 hours per week (when you may have previously been sat staring at the television) you could generate an extra £500 per month.

The miracle of compound interest Albert Einstein, once called compound interest "the greatest mathematical discovery of all time". But you don't need to be as intelligent as Einstein to understand compound interest. In fact, it is a very simple concept. When you invest money you earn interest on your capital. The next year you earn interest on both your original capital and the interest from the first year. In the third year you earn interest on your capital and the first two years' interest. The concept of earning interest on your interest is the miracle of compounding. It is this that means anyone can achieve financial freedom without earning a fortune. In order to really take advantage of the miracle of compound interest it is important to understand a few basic rules. 1. Start Now! The earlier you start investing, the more time you leave for the miracle of compound interest to take effect. Someone who invests £100 a month from age 20 to 29 and then lets their investments grow is likely to have more money at 60 than someone who invests £100 a month from age 30 to 59. 2. Small differences in return matter. A lot! Over long periods of time, the difference between investing at, say, 7% and 8% is enormous. Using our example of £200 per month, if this were saved for 30 years at 7% the amount would be £235,213 at 8% it would be £283,523. 3. Over time, regular saving of quite small amounts can build up an astonishing sum of money. 100

If you save £200 a month for 40 years and your investments compound at 11% a year how much will you have? The answer is an astonishing £1,478,257! It's important to be realistic about what rate of return you expect from your investments. Since 1918 the UK stock market has returned an average of around 11% a year. Depending on how conservative your investing strategy is, you might want to assume a return lower than this. Warren Buffett, arguably the world's greatest investor, has achieved a long‐term growth rate of a little over 20%. Although you might do better than this over short periods, it is very, very unlikely that you will match this rate of growth over the long‐term. Adjusting for the effects of inflation, the real rate of return since 1918 has been 7% (as inflation over this time has averaged around 4%). So if you want to know how much your future pot of money will really be worth make sure you deduct your anticipated inflation rate (4%) from your long term average investment rate. Earning more money is not the secret to achieving financial freedom, it is a catalyst that combined with prudent spending can rapidly decrease the amount of time it takes to get to where you want to be.

Develop yourself There is only one thing that we would say is more important that investing money and that is to invest in your own personal development, your own ability to earn more money. In the long run it is easier to earn an extra £300 per month and save it than to cut your expenditure to allow you to save £300 without your income increasing. However, as with everything this takes a little effort. There is plenty of free support available to increase your employability and earnings potential. For example have a look at:

101

 

http://www.direct.gov.uk/en/EducationAndLearning/AdultLearni ng http://www.open.ac.uk/study/

Undeniably there is a link between people who continue to expand their skill base and keep them relevant to the modern day world and the income that those people generate. You can get books from the library, attend adult education courses, ask your employer about work place training (it’ll impress them that you are even interested), there is plenty of support out there, if you want it, it’s available and it won’t cost you.

The cash flow quadrant We found that Robert Kiyosakis’ cash flow quadrant was a very useful way to understand our relationship with income. Robert Kiyosaki (author of Rich Dad, Poor Dad) speaks often of what he calls "The Cashflow Quadrant," a conceptual tool that aims to describe how all the money in the world is earned. Depicted in a diagram, this concept entails four groupings. In each of the four groups there is a letter representing a way in which an individual may earn income. The letters are as follows. E: Employee — Working for someone else. S: Self‐employed or Small business owner — Where a person owns his own job and is his own boss. B: (Boss) Business owner — Where a person owns a "system" of making money, rather than a job to make money. I: Investor — Spending money in order to receive a larger payout in the future. 102

Employee

Self Employed

Boss

Investor

In order for income derived from groups E&S to increase you need to work more hours and or earn more per hour that you work. However, in groups B & I you have broken the link between time and income. As either a boss or investor ways exist that you can increase your income without trading hours, for instance you could invest more at a higher return or take on more employees and earn on the back of their hours worked. For more information please visit http://www.richdad.com/

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Chapter Eleven ‐ Take the journey Step by Step

RULE # 7

Just two more rules to go! This book is about how to guarantee financial freedom. In order to do this it is imperative that you are prudent with your progress and never risk your current position in search of the next level. This does not mean settle for what you have and not to take calculated risks, it means don’t risk everything it may go wrong. If for example you decided to set up a new business then it is better to plan thoroughly, work out exactly how much money you will need and then find ways to save or raise this money without risking your home. If you are the entrepreneurial type and are happy to gamble then be aware that this is what you are doing. You are choosing to live in financial risk. Good luck to you! We have done the same thing several times in the past and this ability to take on excessive risk is what makes many entrepreneurs extremely successful. It is also however what makes many broke! Even if you are a small business owner or entrepreneur and think you are happy to take larger risks then make sure you think as hard about the downside as the upside. This is not being negative. Often the downside will show you ways to improve what you are doing and at least if you are going to take a risk, make it an informed one. In order to get from uncertainty to security, you may need to make some short term sacrifices. Initially they may not seem worth it. Going out on a Saturday night may seem more pleasure than putting £50 into savings. However in the future, the combined £50 will give you far more pleasure 104

than the night out ever did. The journey to financial freedom is made up of many tiny steps that on their own make very little difference. It is the combination of these steps and the commitment to keep on going that will lead to success. Like a mountain climber, it is only when you are at the top and look back down into the valley will you ever truly comprehend just how far you have gone. As you move forward you must always protect your position so that even if things go wrong there is only so far you can fall. The climber puts anchors into the rock to make sure that if he slips he only slips so far. They never rely on just one of these. If one fails to hold them then they have another just in case. These same principles apply to your financial success. Never risk what you can’t afford to lose and make sure that once you achieve financial security you never gamble with this position. For example you should avoid cancelling insurance policies if you are short of money, and should secure debts against your main residence as a very last resort. It is also a good idea to try and secure an income that comes from multiple sources. For example your main job may pay £1,500 per month, a network marketing business may earn you £700, and your investments a further £500. If one of these went wrong then in the short term the others would get you buy, helping ensure that you can only fall so far. Throughout your life opportunities will arise. Some will work, others will not. It is often impossible to know which is which and therefore you should make sure you look at the positives and the negatives and only invest what you can afford to lose. If you get it right it might accelerate you to financial freedom, just make sure that you can afford the loss!

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Chapter Twelve ‐ Take Action Now!

RULE # 8

This is the shortest chapter. Hopefully you have picked up a few hints and tips and if necessary have decided to make changes to your financial life. If this is the case then start making those changes NOW! Go and buy some files to get organised, put a budget together, review your insurances. You will not achieve financial freedom by hoping for it or thinking about it..... You will achieve financial freedom by taking action. It may not happen immediately but concerted action everyday will guarantee your financial success and that of your family. We wish you the very best on your journey to financial freedom. Watch out for the snakes and don’t always be tempted to take the ladders. Whatever happens enjoy the game!

“KNOWLEDGE IS ONLY POTENTIAL POWER” Napoleon Hill 106

Chapter Thirteen – The End Thanks for reading our book. If you have read all the way to the end then we would like to think that you have picked up a few tips. If you have flicked to the last page then please go back on start at the beginning! Our goal is to help as many people as possible guarantee their financial futures and to do that we need a bit of help from you. We are now asking you to do 3 things for us. We are distributing this book for free (if you have downloaded the e‐ book or pdf) as we want as many people as possible to read it. Please could you forward either the link below to as many people as possible. Become our friend on face book “Downham brothers” and join

the fan page for our book. We are also giving “tweeting” a whirl, under Downham Brothers. Please give us feedback and any additions that you feel we could make. It would be really great to hear how you have benefitted from the book. If you need to speak to a financial adviser then please contact us first and see if we can help. Feel free to email us rob@simplicityfinancial.com, chris@simplicityfinancial.com , contact via facebook or go old school and pick up the phone on 0845 6886168. DOWNLOAD THE BOOK AND BUDGET PLANNER AT www.downhambrothers.co.uk 107