How can we achieve financial independence & wealth creation when we start in debt?

http://www.ispeech.org/text.to.speech

This short (1:31 min) video from The Money Charity got me thinking this morning...how can we even think about investing, financial independence and wealth creation when our starting position is one of debt?

I am no expert but I do have some experience and a story to tell...

I was drawn back to property investing in the mid-noughties when I realised that my pension was totally inadequate for a few reasons (lack of contributions, poor performance & bad investments). My IFA advised me that I would need to contribute over £800 per month into my pension for the next 25 years in order to plug the hole that existed and get me to the retirement position that I wanted to have. Ouch!! I realised that this was nigh on impossible and nor was it preferable to go down this route.

Then, a personal and financial disaster struck - divorce. Anyone that has been through a divorce will relate to this but essentially, it left me with no home, no savings and a ton of debt. Double ouch!!

The immediate impact of this separation financially also left me with a shortfall each month where my expenses exceeded my income by a margin of around £500 per month, so the idea of contributing over £800 per month into a pension that I would maybe get in 25 years was not exactly my top priority.

At this point, my financial position looked like this:

• Inadequate pension
• No savings
• Heaps of debt
• Expenses exceeding my income
• No home of my own

Never mind the emotional deficit that existed at the time, my financial position was dire to say the least.

Now, fast-forward five years and the position is much better as now I have no debt, my income comfortably exceeds my expenses, I have a home of my own, I have a decent investment portfolio and the pension hole plugged. A five-year turnaround from a very bleak position indeed.

Without going into elaborate detail, I will share with you what I did to bring about this turnaround. Here is my plan, reverse-engineered (in other words looking back to figure out what I actually did):

1. First of all, I needed to cut back on my expenses. This started by ruthlessly trimming back my expenses and getting rid of unnecessary expenses or luxuries. I wrote a budget in excel and revisited it regularly. I went through all my bank and credit card statements to crosscheck everything where I spent money. My employer had a subsidized staff canteen, so I made lunch my main daily meal at a reasonable cost and ate simply for breakfast and dinner. I bought at cheaper shops and became one of those reduced price section rummagers in the supermarkets; days out with the kids were high on fresh air or movie rentals and low on cash-draining days out and other expensive entertainment experiences. Coffee was the crap stuff from the machine not the nice stuff from the coffee shop. Meals out became meals in...and so on…you get the picture. The book, Get Rich, Not Quick is an excellent one that helps to address this aspect very well.

2. Next, I needed to address my income. I was in a well-paid job that also provided for bonuses for above-target performance - so I worked my socks off to exceed target and get a bonus. Not everyone is in such a position to have this kind of 'upside' to their earning power I know but variations on this could be a second job, a home business, car-boot sales / eBay and so on. I remember vividly when I was a college student aged eighteen and worked part-time at KFC that one of my colleagues back then was a middle-aged chap who had a 'day job' as well. I asked him why he also worked at KFC some evenings and he said he had some debts that he was paying off through the extra job. I admired his commitment and dedication to addressing the problem that he had very much. In addition, to the hard work ethic that I adopted, I also took in a lodger in my home...a Monday to Friday lodger working away from home during the week, which was ideal, as I had my children stay with me at weekends. This brought in some much needed extra income and was a way to generate income from an otherwise fixed expense of my home. I could also have downsized but this route served me better, as I wanted a decent homely environment for my children when they visited instead of a pokey one-bed flat with a sofa bed in the lounge...

3. Next, start to tackle the debts. Paying off loans and credit cards using the minimum payment options will keep us a slave to debt and so I wanted a different plan. I decided that I would pay everyone the minimum amount possible and then pay more to the one card I could pay off the fastest, starting with the smallest balance one. Some people choose to pay off the highest interest cost one first instead but for me I wanted a psychological boost of getting rid of a card debt to motivate me to carry on. Therefore, I overpaid the smallest one by as much as I could afford each month. Soon, I had got rid of one card and then I threw all of the payments I was making on this card onto the one with the next smallest balance, following the same pattern and repeating as each card went. Yes, I did have a few. Loans were a bit different, as I would not save as much interest by paying them off early but I did weigh up the monthly payment against the credit cards as at some point it might be better to settle a loan and increase my monthly budget surplus to accelerate the whole process of throwing more money at the debt problem.

4. Next, savings and yes saving whilst still in debt! This is absolutely crucial - there is no way to achieve future financial prosperity than to save money for it...no matter how small you start...you just have to start. My personal approach here was to start saving into a savings account a small amount of money each month on payday. I started with £25 per month but it could have been £2.50, I just knew I had to start somewhere and I would manage my budget to a lower disposable income after allowing for the saving to happen. I also resisted dipping into my savings as hard as that was around Christmas say. In addition, I started a piggy bank where I put all my coins into each night before I went bed. OK, so I kept the pound coins and above but the rest all went into the piggy bank. When it was full, I went to the bank, got some moneybags and counted it all up banking it into my savings every 3 months or so. It added up I can tell you, with each full piggy adding up to around £60-£80 depending on how many 50 pence pieces I had!

5. Pension - what am I doing thinking about something over 25 years away when I am still in debt you may ask? Well, I realised that the longer I leave it, the bigger the problem will become. So, I decided that whatever my employer's maximum contribution into my pension was I would match to make sure I got it. A pension is one of the most tax-efficient ways to save money for the future and it has a very powerful feature to it that I like very much...leverage. Leverage is using someone else's money to improve our own returns. With a pension, this comes in two forms - the company contributions and the taxman's tax credit. This is effectively free money. As I said, I was fortunate enough to have a decent job at the time and so I was a 40% taxpayer. For me paying 5% of my salary into my company pension actually meant that 12% was invested on my behalf when I added in the company contribution and tax credit. This is a leveraged investment at 140% of my contribution. Even as a basic rate taxpayer, this would have been a 120% leveraged investment, so happy days!

6. Property investing - this was the hardest part of the equation altogether I have to say. However, once I had become more financially stable early on by getting a grip on my income and expenses and had a plan to tackle my debt, some modest savings and a start on my pension I knew I HAD to do something about plugging that pension hole from the past and property was my solution. I could not justify that £800 or more each month as I said. I managed to earn a reasonable bonus over a couple of years adding this to my savings and eventually stuck it down as an investment on a property. I was off on my property investment journey. However, more than this, I had worked out that I could probably only repeat this exercise maybe every three years or so and I wanted faster growth than this. So, I got myself educated in the various property investing strategies and worked out that if I could add value to a property that I could refinance it later on to extract some or even all of my invested funds. My preferred investment strategy became buy-refurbish-refinance and I sought out properties suitable to do this. It was not easy, nor break-neck speed either but slowly and surely I started to grow the properties until now they are a decent sized portfolio, where much of the investment funds come from recycling my initial investment fund. I usually end up leaving some money in the deal, as it is difficult to pull it all out but now I re-invest my rental surpluses, I still save money and then any extra funds that I can generate all go into the property pot. The reasons for the property pot and not the pension pot directly for me are diversification, leverage and estate planning but that's a whole different topic.

That was my plan in outline and today it has been refined such that I save a set % of my income into an ISA. I max out on any company pension to take advantage of any employer and taxman contributions. I look for ways to increase income from my home such as a lodger (as uncomfortable as that sounds). I have started a business in addition to working full-time to generate additional income and to create more of a passive income stream to fill up the top of my property investment funnel. I still invest in property where I can recycle my profits but have added HMOs to the mix now as they raise better cashflow into my investment fund. I still budget hard but am slightly more free in terms of my spending and that's because I had the discipline to do it in the early years and am in better shape now than then. Oh…and I still have that piggy bank today!

OK, so this was not by any means easy and some may claim that I had certain privileges that others do not. I would beg to differ on that, as whilst I did have a well-paid job, the principles remain the same regardless: spend less, earn more (be creative), manage the budget, tackle debts head on, save regularly, contribute to a pension and invest in assets for your future. Taken in steps it will work and when I look back today at some of those dark, grim days shortly after getting divorced I was not sure that any of this was even possible. However, it most certainly was and the feeling of self-accomplishment is so worth it I can tell you. This is as much a journey of self-discovery, mental strength and the power of dedicated, continuous, positive action as much as one of financial turnaround. I would go as far as to say I could not have had the latter without the former and that is a massive lesson as far as I am concerned at least.

It can be done...literally, I am proof of that!