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I’m back after a summer break! Today I shall share some financial rules, principles and tips that I now adopt…and to some extent wish I had adopted sooner in my own personal financial life! You get to learn from some of my mistakes, hopefully also my later, better judgement as time has passed too, along with some of what I picked up from wise sages along the way. I, therefore, hope this helps to save you such lost time in your own quest for greater financial control and success than I experienced. Save yourself a couple of decades of substandard financial management by adopting the 11 tips shared in today’s show.
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Resources mentioned
Link to the Podcast feedback survey
The Property Voice Live on 7th October – Workshop Event Details
Podcasts mentioned: Freakonomics Radio, Money for the Rest of Us & Motivate Yourself Podcast
The Index Card – Forbes article reference
Stanford’s Research into Delayed Gratification – The Marshmallow Experiment
Today’s must-do’s
Join me at The Property Voice Live!
Review the 11 financial principles listed in the show notes…how are you doing, where can you make improvements, what did I miss?
Subscribe to and review the show in iTunes…and while you are at it please help us to spread the word by telling all your friends too!
Send in your property stories, questions or moans to podcast@thepropertyvoice.net and we will try and feature YOU on the show too!
Property Investor Toolkit – here is the book link on amazon.co.uk & amazon.com
Get talking!
Join in the discussion, either here in the comments section below, or by emailing us at podcast@thepropertyvoice.net
Start a conversation on Twitter with us @PropertyVoiceUK or on our Facebook page
Transcription of the show
Hello and welcome to another episode of The Property Voice podcast. My name is Richard Brown and it’s a pleasure to have you join me on the show again today.
So, did you miss the Property Voice Podcast over the summer then? Well, I missed you, but at the same time, I took a well-earned break and shut down my weekly ‘what will I share on the podcast’ dilemma for a few weeks too.
One of the things I did this summer, was explore a few new podcasts to listen to myself. I delved into science, technology and other future-thinking themes, along with a few personal development ones and of course one or two more directly related to my own podcast theme with property and finance. Two of these latter podcasts fused to inspire this episode in fact.
The first is an old favourite that I had slipped away from. The Freakonomics Radio guys looked at financial education and how surprisingly few people around the world understood some of the basics. This was supported when a social scientist called Howard Pollack wrote a blog that went viral called The Index Card. His 9 original principles to financial management fitted onto a single 4 x 6 inch index card.
The second is a podcast called Money for the Rest of Us, from David Stein. There is no specific episode that I am pegging today’s show against, it is more his general philosophy of simplifying financial education for everyday people that captured my attention. In the About Us section of his website, David describes his mission partially as follows: ‘Money For the Rest of Us is for people like you and me who aren’t relying on someone else to make sure we have enough to retire. We’ve taken control of our financial future.’ I might change the mission to ‘make sure we have enough to provide for our future’ for the purposes of my audience, as I don’t simply focus on retirement.
That said, today I shall share some financial rules, principles and tips that I now adopt…and to some extent wish I have adopted sooner in my own personal financial life! You get to learn from some of my mistakes and hopefully also my final better judgement as time has passed too. I therefore hope this helps to save you such lost time in your own quest for greater financial control and success than I experienced.
These principles that I will share today helped to turn around an approximate 20-years of haphazard and debt-laden financial management in adulthood into a more disciplined and deliberate approach resulting in millionaire status. This was achieved over an approximate 7-year period, once many of the practices that I will share today were gradually adopted and applied more consistently to my personal financial management.
Usually, I am more modest in making such claims, however, if you are to take this guidance seriously, you need to know that it has some substance. So, if you fancy saving yourself a couple of decades of average to poor financial results, turning into very good financial results, then today’s episode is for you and in truth, it’s not all that complicated! I am by no means the finished article and continue to learn and grow myself each day; we are all on a journey…just at different stations along the way.
Then, a little later, I shall share an opportunity where we could get to meet in person in October too, so stick around for that, or check out the show notes if you want further details and simply can’t wait to grab one of the limited tickets to The Property Voice Live Workshop!
Right…some tips to better control our financial future coming right up…
Property Chatter
As promised, here are some of the financial rules, principles and tips that I have picked up over the years. They have come through a combination of experience and and also from listening to such wise financial sages as Warren Buffett and Robert Kiyosaki. I hope you agree that these simple principles will enable us to take control of our financial future.
- Invest in your financial education
‘Sharpen the saw’, as Stephen Covey says in his excellent book The 7 Habits of Effective People, is all about personal development. We can apply personal development to our financial management as well. I have read and listened to many excellent sources over the years, some several times over before it sank in. Our financial education does not need to be expensive, but it should come from credible sources!
Here are a just a few books and audios that I have found helpful, which you might want to check out if you have not done so already.
Books: Rich Dad, Poor Dad for its striking lessons of adopting a strategic approach to money, The Richest Man in Babylon for its simple parable-like illustration of financial principles over the ages and; How to Get Rich, Not Quick for a simple and very practical approach to financial budgeting and control.
Podcasts: Freakonomics Radio for the varied and interesting insights into all things financial, Money for the Rest of Us for the no-nonsense, everyday approach to financial planning and perhaps surprisingly, Motivate Yourself, which is not dedicated specifically to finances, but is about gaining control of our thoughts and emotions, without which we will never be able to control our finances.
So, make a point of studying financial management and adopt many of the practices of those that have mastered money control and management would be my very first tip.
- Have a financially-measured goal
Without a clearly written goal, which has a monetary value and a specific date attached to it, we will remain aimless in with our personal finances.
Good examples might include:
- I want to retire at 55 with a gross annual income of £35,000 per year.
- £5,000 per month in passive income within 5 years.
- A net asset value of £1m by 2025.
Have a written financial goal, make it realistic but also challenging to some extent – aim for the sun and if you miss, you still end up among the stars as the saying goes! Remind yourself of it daily, try to visualise your life having already realised the goal and ask yourself with all matters financial…is this taking me closer or further away to my goal. Finally, make the goal a plan by outlining what actions you will take to work towards achieving it. Remember that a goal without action is just a wish.
- Have a budget and track our expenditure
Put simply, what gets measured gets controlled.
Unless we write down and track our income and outgoings, not forgetting irregular or infrequent expenses such as holidays, birthday gifts or the quarterly phone bill…we will not be able to control our finances effectively.
My old, not-so-diligent self would often wonder how I managed to run out of month before the end of the money…yes I did say that correctly! Many times, it was because I did not set a budget and then track my expenditure against it, failing to make corrective changes when I inevitably broke my own spending rules.
It might take a few monthly sit downs before this is perfected, but get into the discipline of tracking your income and expenditure each month to see where it is all going. You will be amazed at how many automated payments you find on your bank and credit card statement, or surprise yourself at how much you spend on coffees, takeaways, meals out and leisure along with other casual expenditure. As you do this exercise, you will be able to better choose when to spend this money and when to set it aside for your financial future instead of wondering what happened.
The How to Get Rich, Not Quick book will help here.
- Make money work for us as much as we work for it…if not more
It is often said that the poor work for money, but the rich make money work for them. It possibly sounds easy to think, ‘well if I had money, then I would make it work for me that’s for sure, but I don’t so I can’t’. However, a very large number of the world’s billionaires today are self-made, they did not inherit their wealth, they often started with little or nothing themselves. Buffett (investments), Gates (technology) & Jianlin (property) are all self-made billionaires in the Forbes World Billionaires List and they know how to make money work for them…but all started with little or none of their own.
If all we do is start to set aside a little money for saving, investing or to start a business, we will be starting to make some of our money work for us instead of us working for it. Getting money to work for us is based around owning assets and businesses that can give us leverage and / or passive income and growth as Rich Dad, Poor Dad illustrates so well.
- Understand how the financial principles of compound growth and leverage can work with you or against you
‘Compound growth is the eighth wonder of the world’, according to Einstein.
To illustrate the point.
Let’s assume we could get a return of 10% a year on our money saved or pay interest on our credit card debts at this same level. Arguably, interest on unsecured debt is higher, but we will stick with the 10% rate for now.
Then, let’s say we can save £10,000 but we also run up a credit card bill of £10,000 over a similar period.
If we spend the interest each year on our savings, but effectively leave the credit card balance unpaid each year, by the end of 10 years the results will be as follows:
- Savings will still be at £10,000 as we spent all the interest earned.
- Meanwhile, the credit card bill will have swollen to a staggering £25,937.
One of these figures was compounded, where interest gets added to interest, and one was not.
Now, you might be saying, but inflation will erode some of the real terms value of that credit card balance and you would be right…but it would also erode the value of the savings too, so the problem is likely to be worse in real terms in fact.
Now, imagine you could invest that £10,000 at a compound interest rate of 10% per annum and you could leave the money invested for 25 years and meanwhile, avoid taking on that credit card debt. It will have grown to £108,347 over 25 years and that 10% rate could be a combination of capital growth and income from a property investment, which would easily reflect the performance over the last 25 years in BTL that’s for sure.
As for leverage, well the easiest way to illustrate that is to imagine that you could borrow £30,000 on top of that £10,000 of savings. That £108k we just talked about just now would have turned into over £400k after 25 years, even after repaying the original £30,000 of borrowed funds! Now that’s a 40-fold or 4,000% increase on your original personal cash investment, as opposed to a still attractive 10.8-fold increase or 1,080% increase without leverage. Besides a pension with its tax and employer contributions, this is effectively the only kind of leverage investing ‘the rest of us’ can gain access to, which by using a BTL mortgage and similar lending in property.
Most of you know this to be true already don’t you, so enough about compound growth and leverage apart from this last thought…the longer you leave the funds invested without touching it, the bigger the smile on your face will be have when you eventually do touch it!
- Three financial strategies for long-term wealth creation
- Avoid bad debt which saps our income and wealth, but use good debt to acquire income-generating assets to bolster our financial security and wealth. So, pay down those credit cards, unsecured lending and the like. But, as mentioned under the leverage point just now, good debt is financing an appreciating or income-generating asset and will magnify our returns over the long-term. Consumerism keeps us poor, passive income gives us financial security, whilst acquiring capital assets makes us wealthy. Property neatly enables the last two!
- Save for the short-term – pay yourself first as Kiosaki and others have said. This means taking the first 5%, 10%, 20% or more from your earnings to set aside before you pay for your living expenses. If you are on a low income, in debt and wonder where the next meal will come from, you can still start small by setting aside say £5 per week. It is more the discipline to start us off that is important here. Once you get into the habit and genuinely set the money aside, as your circumstances improve through better financial management, you can start to increase the sums saved and get towards the 10% to 20% of income figure that would be the Money for the Rest of Us and The Index Card’s teaching.
- Invest for the long-term – my recommendation would be to buy property as early in life as you can possibly afford to. Applying the principles of leverage and compound growth, transfer most of the saved money from the pot created above and put it into investments as soon as you can. Even if this means buying a BTL in an area that costs less than where you live and work…try and get onto the property ladder sooner rather than later is my strong suggestion and the next point explains why! Make sure you maintain the saving discipline after switching the funds to investment though.
- ‘It’s not timing the market that counts, it’s time in the market.’ – Warren Buffett
Markets go in cycles and the classic investment advice is to ‘buy low, sell high’. However, if you never sell, then the best time to buy is…as soon as you possibly can. OK, sure we can bag a bargain at the bottom of the cycle, but it is difficult to know exactly when that will be and our cash may sit idle as we wait, so I suggest buying when you have the funds ready to invest and as long as the asset pays for itself along the way, then you can almost leave it to grow naturally over time using natural waves of market growth to boost your net worth over time.
The best time to buy property is today; the second-best time to buy property is tomorrow.
- Delayed gratification – a better tomorrow starts with a small sacrifice today.
This is a tough one for some, myself included! That new release smart phone, drinks and meals out every weekend or that all-inclusive trip to a lovely sunspot can make us feel good or provide even a sense of reward to us for all our hard work. However, setting those funds aside for our financial future just doesn’t sound as exciting or fails to give us a buzz and we may feel as though we are missing out in this material world.
However, in a famous scientific experiment among nursery age children, those that could resist the temptation to eat a sweet and instead wait a few minutes to get two sweets, were tracked later in life to be wealthier than those that could not resist the instant gratification.
One flump today or two flumps tomorrow, what’s it to be?
- Take the free money on offer when it’s available.
The big two tax-kickers for ‘the rest of us’ are:
- HMRC tax contributions into a pension, boosted by matched employer contributions when available, as part of your long-term pension plans, and
- Tax-free capital and income returns in a stocks and shares ISA to help save for property deposits and / or to have an extra degree of asset diversification
Take them both if you possibly can I say.
Other free money tax-kickers of note include, your annual capital gains allowance (e.g. when you sell a BTL at a profit), primary residence relief (free gains on the house price growth of your home) and lettings relief (when you convert your home to a BTL).
Whilst we should not make investment decisions purely for tax reasons, it is amazing how much a difference cutting our tax bill or boosting our net contributions by utilising the tax breaks available can make.
- Avoid ‘swinging for the fence only to strike out’ with diversification.
When we start out, we may just about be able to scrape together the deposit on a single BTL property and that’s OK that’s all I could manage too. All I am saying here is that as we grow our investing portfolio, we would be well-advised to have our money spread around a little. Some in fast-access savings, some in different properties, some in stocks and shares or equity funds, perhaps a bit in precious metals and so on.
Or, a easy asset allocation rule ‘for the rest of us’ might be: a pension, an ISA and a few BTLs and that keeps things diversified and simple if you prefer.
- Minimise management & transaction fees, unless you can beat the normal market
- Buy and sell shares and you have stamp duty and broker fees to pay.
- Buy and sell in an equities managed fund and on top of the stamp duty and broker fees will come asset management and admin fees.
- Buy and sell property, using a mortgage and you have legal fees, stamp duty, broker fees, lender fees, valuation fees and agent fees on the way in and on the way out potentially.
- Buy and sell property in a REIT and much like an equities managed fund, there will be an asset management and admin fees on top.
So, the message is clear…the fewer transactions you have, the less you will have to pay in wasted transaction fees, which means you retain more of the capital invested. So, holding for the long-term pays off.
The main exception to this is with a trading strategy, where you can get to ‘take profit’ as soon as you have created the increased equity you are seeking. Here, ‘deal velocity’ may work with you if you can beat the market in the short-term through ‘forced appreciation’ before the value then normalises to the natural market pattern. So, buy, force the appreciation, take profit and then rinse and repeat for larger, accelerated returns through a higher transaction rate or increased deal velocity.
As we become more experienced, we may have a mix and match approach here; holding some assets for the long-term, whilst trading others along the way. The key differentiator with the latter is to achieve better than normal market growth over a short period, whilst taking account of our transaction costs.
These are my top tips for greater financial control and wealth creation.
Disclaimer: At this stage, I must say that this is by no means intended as formal financial advice, it is merely my personal opinion as an insight and in no way, reflects your specific situation, which we have not discussed.
What about you, do you have any financial principles that you use I may have missed? If so, drop me a line and please let me know.
Now, if you are wondering how you can possibly dovetail your financial and property goals into a practical action plan, then The Property Voice Live Workshop is going to be of great interest to you. I am hosting the very first Property Voice Live event on Saturday 7th October in London and I would love for you to join me there.
It is designed for new, early stage and turnaround property investors looking for practical insights & a step-by-step approach to their property investment plans & strategy from an experienced, trusted and non-guru advisor…that’s me!
During the workshop, we will collectively work on your personal plans and strategy and some of you will have the opportunity to be coached live on the day, observed by the others. You will be able to network both during the event and in the relaxed Happy Hour afterwards. There is also an opportunity to support charity and the Grenfell Tower tragedy in particular.
Tickets are limited and are available from the Eventbrite listing in the show notes, or just drop me an email at podcast@thepropertyvoice.net and I will share the link. You can also email me if you want to talk about anything from today’s show or more generally in property investing. As usual, the show notes will be over at the website www.thepropertyvoice.net
But for now, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao ciao.