Posts Tagged ‘money’
According to the Federation of Small Business, the economy across Europe and the USA is continuing to ‘fail to improve’.
In a new year report just published, the FSB says that whilst more jobs are being created (which is keeping unemployment down), wage levels are declining and the amount of money that businesses and individuals have available to spend is declining every month – with no end in sight.
As a result, companies and individuals continue to tighten their belts and are on a constant lookout of ways to cut costs.
Whilst I am constantly reviewing all of my spending (both personal and within my Small Business), we as small business owners always need to be wary of cutting costs too far and on the wrong things, which can lead to damaging the cornerstones of our business.
Keeping our Business Cornerstones Intact
Regards of the type of business you run, the size, how successful your business is, or the services/products you offer, there are a few things which every company needs to do to stay viable; marketing, sales, invoicing, accounts, payroll and paying taxes. Without any one of these, a business will soon hit problems and start to die.
So whilst cutting costs are fine, trimming the fat in any of the cornerstone activities can lead to problems. Take marketing….
When times are tough and money short, it’s a very easy decision to cut back or kill any money spent on marketing – adwords can be cancelled, postage is saved by not sending out mailshots, transport costs reduced by no longer attending networking events. Or we may just decide to stop marketing to spend 100% of our time doing billable work. Cutting costs in marketing can see an instant win in terms of cash flow and reduced costs – but what will be the impact in the future?
You may have work at the moment, but what happens if one or more of your existing customers cancels work, goes under or cuts their own costs (with less work for you). Marketing effort takes time, and by the time you realise you need more work, the damage will be done and it may take months or years to start finding new customers again.
Taking advantage of the downturn and avoiding the future hits
One of the advantages of the continued down-turn is that with other companies cutting costs, competition is fierce. This competition produces a double win for a company willing to keep investing in their cornerstones.
Firstly, with less companies spending money, there is less demand for services so offers are on the table. If you use services such as Google Adwords (or the Bing/Facebook equivilants), this reduced competition means that advert placement is cheaper, which means you can now get more exposure for the same money (in my own adwords campaign, I am getting almost 13% more exposure for the same money as last year simply because there are less companies bidding on my key words).
In addition, the fact that people are spending less means that for the savvy shopper, there are plenty of deals to be snapped up should you need to invest in outside services, training, hardware, rental or finance arrangements. You just need to be wary of headline ‘discounts’ which are not quite as good as the advert pretends to be.
But the main concern in cutting costs on the key aspects of your business is that it could lead to more costs down the road. For instance, trying to save costs by putting off paying taxes (PAYE, VAT, corporation tax, etc.) will lead to all kinds of future pain including additional late payment penalties, interest charges and more detailed scrutiny in the future on top of the actual taxes which still need to be paid.
So by all means, continue to review your costs and outgoings and trim the fat where it makes sense to do so – but always have another eye on the cornerstones of your business, and the ability to take advantage of the downturn where your available cash allows.
I have talked about wanting my passive income buy-to-let project being as low risk as possible – and for me, having somebody to manage the whole thing from start to finish was the best way to de-risk the project. It also means that the project really is passive – I have very little to do to make it a success.
Different Levels Of Service
Letting managing agents can be found on most high streets. They will all offer a full range of services – you simply pick the level of service that you need.
Services offered will range from finding a letting tenant (usually for a fixed amount around £600), to moving the tenant in (for a fixed amount, typically around £250) through to a fully managed service. A fully managed service covers everything – finding a tenant, running a credit check, moving them in (including doing a property inventory), dealing with the deposit, collecting rent, chasing late payments, eviction and moving them out at the end of the lease term.
For it to be passive, with as little involvement as possible (other than some initial project management to get the property decorated and fit to live in), a fully managed service was the preferred option. For this, you (and I) are charged a % of the rent collected.
The charges – Factoring them in
One thing I did from the start (as I do with anything to do with money), is that I factored the charges in from the management company into my maths (see the original spread sheet for passive income growth).
I have heard some horror stories about landlords who have based their calculations on the assumption that they would be getting all the rent charged from the tenant, only to be disappointed and stretched when the money hit their bank accounts (minus the management fees).
I factored the management fees in from the start, and even with those fees, it still turns a nice healthy profit.
What I pay, and What it means
Now different leasing companies will charge different percentages depending on the level of service and their own success (at finding and managing tenants). For my passive income buy to let project, I was happy to pay the 8% of rental income that was asked.
Yes, it means that 8% of the rental charge is not hitting my bank account, and yes, this means that the profit from the project is 8% less than it could be.
BUT, for this 8%, a lot of worry is taken off of my mind. If the tenant doesn’t pay, the letting agent does the chasing. If a pipe bursts, the letting agency will send in a person to repair it. If the tenant has a query or a problem, I do not have to deal with calls in the middle of the night. In short, the 8% is money well spent in terms of peace of mind.
Now it may be worth haggling with property managers. There were cheaper ones than the one we selected (some down at 6%), but we felt happy with the service being provided and the money asked in return.
The other De-risking options I took
In addition to the managing agent, the other two items I purchased prior to a tenant moving in was:
- Landlord Rental Insurance – Full landlord insurance was not needed as my company already had personal and public liability cover. But I did pay £99 for a year of rental insurance – if my tenants fail to pay any of their rent, the insurance will make up the difference.
- British Gas Management – I signed up for the British gas landlord managed service – which provides me with the yearly service, the certificate of safety for all the appliances, plus a call out service should anything go wrong (which the tenants call). For £18 a month, its great value for money (no 2am calls about water leaks or heating not working).
Continuing on with my passive income Buy To Let project, I wanted to touch on some of the problems I encountered on the first part of the project – which were all around finding and buying a property to let.
On Wednesday 17th July 2012, the exchange and completion on the property took place. Because we were keen to get cracking on finding tenants (and start earning money), we made sure that we exchanged and completed on the same day.
We also did this as we had a schedule of work to do to make the property letable. Keeping the fact that empty (or void) days means a loss whilst a filled (or let) day means a profit, we scheduled everything around this day. We had arranged a week before the exchange/completion so that the moment we completed, our work force went in with a list of items to do.
The Work to Make Good
For our first buy to let property, we wanted a mix of the easy things that we could do ourselves (and so save time and money) and those that we would just pay for and get the professionals to do. Our list consisted of:
- Paint all the walls and repair ceiling cracks (professionals)
- Service the central heating and report (professionals – British Gas – on a landlords service/maintenance/certificate deal)
- Put up window curtain poles and curtains (us)
- Replace worn out taps, a new radiator and other plumbing jobs (professionals)
- Purchase and install new dishwasher, washer/dryer and fridge freezer (us)
- Fit coat hooks and shower screen (us)
- Clean the carpets and oven (professionals)
- General clean (Windows, sinks, etc) (us)
We timed all of this so that the moment we got the keys – the various people would arrive and start work. It was an interesting week of project management to make sure everybody could do their part over the next few days without stepping on each other or getting in each others way.
We created a mini project plan for all the teaks, including the purchasing of the required items (from white goods, to a kitchen sink, to radiators and even paint) so that everything should (and did) fall into place.
The Problems and Advice
Of course, up to the exchange and completion, things did not always run to plan. We hit no end of problems in the purchase which included:
- Having to change lenders 3 times – each lender had strange made up rules on what they would lend to (for instance, the original Bank Of China would not lend on any property within 5 miles of a train station – which of course ruled out almost all towns and cities in the UK)
- Delays in funding meant delays in purchase, which meant somebody else came sniffing and we got ourselves into a mini bidding war (which increased our costs slightly)
- Delays in funding also meant that more work was needed by the legal bods, which added some more cost onto the purchase
And of course the delays also added to a little bit of stress to our own activities
Bending and Flipping Back
In the end, we completed on the purchase (and I had a cup cake to celebrate). And the work kicked off on the rapid refurbishment project.
Whilst a lot of people go through a property purchase, its better with a Buy TO Let, as we wont be living there so there is no emotion involved. If the numbers still made sense and worked – the answer was always going to be yes – if not, then we would have canned the project.
So it was a question of just rolling with any setbacks, and snapping back (like grass) once they had passed. Oh, and remembering to get on with the day job whilst all of this was going on.
As I have talked about many times in the past, I wanted a way of generating money for my company regardless of what I was doing – eating, sleeping, working – I wanted to generate more revenue and more profit.
The next few posts describe the reason for this decision, the when, the how and the results. I will include my spreadsheets, my maths and the outcome – warts and all.
It is worth noting that these entries were written between the Spring and Winter of 2012, and stacked up to be available once the project was completed and had settled down.
I hope they prove useful.
It started with a problem
At the start of 2012, my company closed its 2011 financial year end. Thanks to some hard work and a lot of luck, I found that my company was sitting on a fairly large chunk of money. After I had taken account of the money to be paid on the profits (Value Added Tax (VAT) payback to the government and corporation tax on the profits), my company had recorded its best year ever.
But this left me with a problem – what to do with the money. Yes, it’s a nice problem to have – but its still a problem.
As I type this, its April 2012. Inflation in the UK is sitting at around 3.8%, and the best bank account with interest is paying 3.45% (very long term, and locked away cash) – which means that each year that the cash is sitting in a bank account, the money is reducing in value by 0.35%. Or put it another way, for every £10,000 in the highest interest paying account available, it would actually reduce in value by £35 a year.
Ok, so maybe that’s not a lot, but a loss is a loss – there must be something better to be doing with the money rather than letting it rot in a bank account.
Plus, I really wanted to start generating money from passive income.
Ways of generating Passive Income I wanted to Avoid
There are many ways suggested on the web for generating passive income. They range from the boring and predictable (sell e-books, trade on e-bay) through to the more obscure (generate virtual currency like bitcoins, create server farms to enter competitions) and even to the more risky (investing in stocks, spread betting). None of these appealed to me – either they were too risky or too much hard work (I didn’t want to spend all my weekends wrapping items to be posted from e-bay sales).
I was also looking for a large return and minimum risk option (yeah, I know, the holy grail of investments). By minimum risks, I meant something that would still be worth the original investment should anything go wrong.
What I decided On – My Passive Income Plan
There were lots of options still on the table, including expanding my business, buying another business, investing in other companies (via angel investments) and a whole host more. After listing all the options, weighing up the pros and cons, and looking at the risk verses reward – I decided that my company would invest in……. property.
Lots of companies have invested in property in the past – but on the whole this has been through investment in commercial property- buying offices or shops and then renting them out . But looking around the UK today, all I see are empty shops (or shops with £1 stores in them) or offices that are being given away for next to nothing. Invest in the difficult world of commercial property? No thank you.
But residential – that was the ticket for me. Residential properties have been dropping in purchase value over the last 5 or 6 years so at the moment is very cheap. And with the banking chaos, banks are not giving out mortgages so people are having to rent.
I checked with 5 estate agents in my home town, and indeed that was the case. People were desperate to sell their properties (so would provide a good bargain) and also in desperate need for rental property. The initial numbers looked good.
So that was my plan – I was going to buy 1 or 2 residential properties through my company (why I am doing it this way in later entries), and will rent them out.
Next, I will cover the maths of the project.
I have just decided to treat my wife to a quick weekend break in the spring of next year. I am taking her for a ‘city break’ to Venice, Italy. Its just a short stay – 4 days visiting this wonderful (I hope) floating city of canals, bridges and great Italian food. The picture below is Venice from the air (I didn’t know its an island, did you?).
But, I am not here to gloat about going away next year. No, if I am going to gloat about anything, it’s the cost of the trip. From England to Venice, 5 star hotel in the center of the city, flights and transfers is costing me just £22.
Ok – honesty time. So it didn’t really cost me £22 – it actually cost me £590 – but… in terms of budgeting it only cost me £22, because I saved £570 though other savings.
I have talked before about cutting personal and business costs. Well in October, I really pulled out all the stops.
For a lot of suppliers, I used the ‘I’m cancelling my account with you (now show me your best deal)’ trick with almost all my personal and business suppliers.
For instance, I struck a deal with Sky (my satellite TV provider) for a 50% discount for 12 months, which saves me £150 a year. And British Telecom (phone for home and business) gave me a 60% discount for 12 months – so that’s another £90. And so it goes on – totaling £570 of savings. Some were instant money back or savings, and some were discounts over time. So the savings were invested in a short break.
And the point is, anybody can do the same – all that is needed is advice about money.
I am not talking about specialist ‘Financial Adviser’ type of advice, its just a question of staying up to date with current advice, warnings of changes which may effect you (such as utility price rises), and taking advantage of the advice which is out there.
So if you are interested in saving/making money (both for yourself and your business), can I introduce to you, my definitive list of great money information (all the changes I made this month which saved me that money came from these sources).
There are a lot of resources out and I could list them all for you, but these are the cream of the crop:
BBC Money Box – For UK freelancers, this weekly show brings you all the latest personal finance news
BBC Money Box Live – Again for the UK, a weekly phone in show covering a different topic each week
Which Money Podcast – Another UK weekly podcast, with advice from the Which team
Radio 5 Wake up to money – Final UK podcast – a daily update on all things changing in personal and business money.
Planet Money – Three times a weekly, American based finance news
CNBC Fast Money – Daily updates on US Finance from the CNBC team
MoneySavingExpert – For the UK, signing up to this weekly email feed is a must, with alerts on finance changes, utility rises, discounts and ways of saving money. Sadly, there does not seem to be a US version of this site.
GetRichSlowly – A collection of articles about both reducing debt and growing wealth.
I will teach you to be rich – This site is run by Ramit Sethi. It is less about saving money, and more about growing wealth.
@prairieecothrif -If you want to be inspired to live the life you have always wanted in a sustainable way, check out the connected blog.
@retirebyforty – He quit his corporate job! Now you can follow and see if he can stay out of the corporations for the next 40 years, whilst he shares money advice!
@TalkMoneyBlog – They talk about personal money issues and give free information, help and advice about the mortgage market, debt problems, credit cards and money saving tips.
@thisismoney – This is Money: news, conversation, top articles, tips, advice and opinion from the team at the UK’s best financial website.
@lovemoney_com – Lots of useful information to help you have a better relationship with your money.
If you have any other suggestions of blogs, podcasts or tweeters to follow, I would really love to hear about them. Please, leave a comment below.
However, if you are a one-man band type of freelancer or contractor, generating extra income is always going to be an issue. Being a lone-gun may give you the freedom and control you demand, but the only commodity you have is time – and time does not scale well.
So what are the 9 options a lone-gun freelancer has for increasing their income?
- Work more hours (the Treadmill of doom) – Lets get this option out of the way. This is called the treadmill of doom, because if you work too many hours, you will earn more money, but your health and personal relationships will suffer. Also, if you end up working too many hours, your productivity will tail off and you will end up working harder just to produce the same quality/quantity as working a normal day. Working more hours for money over an extended period of time is just a treadmill to failure.
- Work smarter hours – Whilst I said time doesn’t scale well, there is the option of making better use of your time. If you have to commute to a customers site, can you reduce the commute time, work from your house, or work (on other projects) whilst commuting? If you can fit more work hours into the same time period, you should have both a productivity boost and therefore an income boost.
- Double your rates – Maybe doubling is a little extreme, but raising your rates will generate more income. Yes, you may lose customers, but as long as you are not relying on just one customer, this may be for the better. Lets assume you have 4 customers, you double your rates and as an effect you lose 2 customers. You will be doing half the work, for double the money, thus earning the same for half the effort. You then have half of your working time free to fill with new and better customers, thus doubling your income. Test an income rise on 1 or 2 selective customers before committing to an all out price rise.
- Expand your team – Another option is to take another person on and expand your team. The trick is, the costs and associated risks must outweigh the extra income they could generate. Whilst the majority of the cost will be in salaries and tax, some associated costs (accounting, finding work, etc) will already be factored into your existing costs. However, your main concern will be making sure that there is always enough work now AND in the future to pay for them, otherwise they become a burden on your business and will cost you more in the long term.
- Cut the costs – I have talked before about cutting freelancer business costs. Whilst the effect will be minimal in the great scheme of things, cutting back on business spending will make some slight impact to your bottom line. Its always worth doing a regular cost review exercise.
- Do the same work faster – My second favorite way of increasing income is to work faster. The vast majority of my projects are performed on a fixed project price basis (rather than quoting day rates and number of days). Therefore when I am able to quote for work to take 20 days, but in fact able to complete it in 10, the extra time means I can do more chargeable work (and therefore get paid twice for the same time). My method for working faster is to reuse existing work wherever possible.
- Move from service to product – A logical leap that many freelancers try is the move from providing a service to providing some sort of product – normally some form of software; either mobile, PC or cloud based. This can make sense if you can find something very unique that people want. However, I have yet to see somebody who has pulled this off and is actually making enough money to support them fully and allowed them to move away from selling solutions or services. Clearly it can be done, as there are plenty of software product companies out there – but these are the exception rather than the norm.
- Passive Income from existing customers –What we are talking about with this option is providing either a product or service to a customer, and then negotiating to retain the customer through a Support and Maintenance contract. The customers pay you a passive income amount to support the item that you have already provided. Support and Maintenance charges is how big software companies are built.
- Get a passive income – The final option is to generate an additional stream of money via some form of passive income. Many people suggest sell-able things like eBooks, on-line courses, WordPress templates, Mobile phone apps and the like. However, in a word when we are so used to getting things for free, the effort in creating such items to sell may never recoup the investment. That said, there are other ways of generating passive income, which I will talking about later this year.
So, will any of these options allow you to generate additional income?
Even for the most busy of freelancers or small business, running a business can be a roller coaster of moving between famine and feast. Bank balances will of course reflect this – with an ever changing cycle of too much money (which leads to higher taxes) to almost being broke.
But when times get tough, customers dry up, work is just not there, or you are forced to take work which frankly does not cover the costs, what is a responsible freelancer or small business owner to do?
Last year, I attended a small business workshop with a hundred or so other freelancers, and this subject was discussed as part of a finance round table. I thought it would be worth me sharing the collective thoughts for anybody who is currently struggling in these difficult times:
Things to do Before you run out of cash
The following advice is worth all companies considering before you start to run out of money and get desperate:
- Keep an Eye On Cash Flow – The number one task is to keep an eye on cash flow. Have a clear picture of your incomes, outgoings and what this means to your bank balances over time. Do this for both your personal and business accounts. It doesn’t matter if you do it on paper, use excel or better still, use a cash flow projection system. Know what your cash situation will be at all times.
- Be proactive – Keep an eye on your work load, and recognise when you have less work than you want or can handle. When you have free time, send out feelers for additional work to your business contacts, old customers, friends, family and social network. Don’t leave it until you reach the period of inactivity, send out the requests for work as soon as you realise there is a work gap.
- Offer incentives to fill the cash gaps – When you have been working hard but cash flow is becoming a problem because of other reasons, offer incentives to fill the gap. Offer discounts for customers who pay early or before a project starts. However, recognise that by discounting, you may be actually be making the situation better today, by creating a bigger problem in the future due to less (discounted) income.
- Other Work – When looking for additional work to fills the famine cycles, don’t forget that there are additional sources of work. You could be looking for agency based work, contract based work, sub-contracting to another freelancer, or even doing work outside your normal scope if it means the difference between making it to the next feast cycle, or going bust.
Things to do when you are running out of money
The above list is great for day to day running of your business, but what do you do when you’re a freelancer who is running out of money? Here are some suggestions:
- Pick up the phone – When the future of your business is on the line, don’t be too proud to pick up the phone. Forget social networks and online adverts, desperate times call for desperate measures. Find local companies who may need your service and start calling them. It doesn’t matter if you get 1,000 rejections, as long as you get 1 yes which will bring in money to help pay those bills.
- Don’t Skip the Tax – Whatever you do, do not try and skip on your tax obligations or attempt to borrow from your tax pot to ease you over the lean times. Tax income (from sales tax or VAT) is not your money. If you borrow from this pot and then cant pay your taxes as they are due, the interest and fines will become massive very quickly. By all means, contact your local tax office and see if they can arrange staged payments, but don’t be tempted to skip the tax.
- Defer Payments – If you have business and personal bills due, defer making payments (if possible). Make a list of payments and sort them in priority. Only pay those which could have an impact on yourself personally or could effect your business. But remember, this is a short term solution and those suppliers will eventually want paying.
- Cut those costs – By the time you reach the point of panic, it may be too late, but it still may be worth cutting costs – both personal and business. If you can cut personal costs, you can afford to pay yourself less, which in term helps your business cash flow.
- Asset/Stock Strip – If things get desperate, look for assets you can strip. Stock and technology (computers, printers, etc) that are no longer in use – generally these can be converted quickly into cash via E-Bay or Amazon. But be warned, this not only hits your future profit margins (as they will have to be heavily discounted from their actual value), but there are tax implications so speak to a financial adviser before heading down this path.
- Business Loans – Of course, the most sensible route would be to arrange a business bridging loan from your business bank. It is well worth trying this route, but it is a general rule that banks are now only lending money to businesses that don’t actually need it. Therefore, don’t use this as your only route of escape, and pursue other options at the same time.
- Short Term Loans/Credit Cards – Where business loans fail, there are short term ‘pay day’ loan organizations springing up which will now help business, or bills can be paid by credit card. This is generally a very VERY bad idea – with loan terms having interest payments of between 30% (credit cards) and 2000% (for payday short term loans). This option is almost guaranteed to make any short term cash situation much worse.
- Family, Friends and other businesses – A better source of short term funding may be from family, friends or other businesses you may know. Of course, this could then not only effect your business, but the relationship you have with the people you borrow from. And of course, they will expect some form of return for their risk, and any agreements should best be put down on paper.
- Peer to Peer Lending – The final option for short term lending is business peer to peer lending such as Funding Circle. They work almost the same as a bank, but seem to be offering better interest rates, and are more willing to lend than the big banks to businesses with cash flow problems. Again, remember that with interest payments, this will cost you more longer term, so make sure there is a feast cycle planned in the future to pay off the loan.
- Mothball the business – The final option is to close the business. This does not need to be a permanent closure, it can be a temporary mothball of the business whilst the economy recovers and you earn money in a permanent job. This may be a much smarter route than sitting with no work, burning through money. Sometimes, walking away for a short while is the smart and brave thing to do.
So these are the suggestions that came out of the freelance finance discussion. Do you have any other options you can add?
Yesterday, I had the pleasure of attended a freelancing workshop with about 120 other freelancers. This workshop covered all kinds of subjects, from legal issues, to finding work, to working with agents and also finance. It was an ‘advanced’ workshop – all the subjects were based around the assumption you had been freelancing for a while, so the presentations and discussions covered the more advanced aspects (such as better haggling with agents/clients/bank managers, dealing with difficult legal issues, expansions, overseas markets, etc).
As part of the freelancing discussions around finance, there was a general question asked – who in the group was planning for the ‘end game’? The definition of an end game was left open – it could be retirement, or selling the business or emigration or even returning back to the (shudders) permanent employed workforce. Out of the 120 people there, only five or six hands went up (mine included).
Good grief!!! I was really shocked.
Pensions – Now and In the Future
Now I am not a financial expert, but let me throw some numbers are you. In the UK, the cost of the state pensions (that everybody gets) costs the UK government £1.13?trillion of public money (2011 figures). This is likely to increase every year by more than inflation. By 2020, the IMF has warned that Britain may have to find another £750billion to add to the existing pension payments – and this does not even include the padded public sector pensions (for doctors, firemen, police, etc). The picture is even worse in the USA. In the USA, those that qualify for a state pension (not many by all counts) cost the US tax payers $3.7trillion, with around $450billion being added each year. Frankly, these figures are unsustainable.
This means that if anybody is sitting back thinking that the state will look after them when they retire, they will be in for a shock. Any form of state pension which does exist in the future is likely to be very basic indeed. Phrases such as ‘token payments’ or ‘minimum life costs’ are regularly thrown around in pension discussions. It’s also why so many unions are fighting the pension changes being forced through – all countries have to do some major cutting back on future pension payments.
In a nutshell, if you don’t want to end up spending your ‘golden years’ eating cat food, you should be investing in yourself now.
FTSE, NASDAQ, CAC and DAX are all falling
But we all know that pension pots (be they UK type of stocks investments, or the American 401K type plans) just wrap your money in the markets. And we all have seen that since the start of the crash in 2008 (actually, since September 11th 2001 if truth be told) that markets are all over the place. Pension pots today are worth around 30% less than they were in 2008. So investing in pensions is a waste of money right? Wrong!!
First of all, it’s important to understand that markets should always be growing by their vary nature. Take the FTSE100 – the FTSE100 index (the figure that normally reads 5307.5 (as it is today)) – this is the total value of 1 share of each of the top 100 companies by value in the UK. So, for 5307p (or £53.07p), you would get 1 share in each of the top 100 companies.
But, the very fact that it is the top 100 companies means that they are the cream of the crop. If a company does badly, it looses value and drops from the 92nd most valuable company to the 109th – it no longer appears in the FTSE100, and is replaced by something with more value. Thus, by its very nature, the cream rises and the value of the FTSE100 (and all other markets) should be going up.
But here’s the thing – the value of the markets is only important if you are retiring NOW (when you have to cash in). If you were going out and buying shares in a company – would you want to buy them when they are at their highest value/cost, or when they are at their cheapest? If you had bought Facebook shares 24 hours after the float, you would have bought them at almost $42, whereas 48 later, they were worth less than $38. To make money – you buy when they are low and sell when they are high – not the other way around. Which is why having low prices now is great – more shares for your buck/euro/pound.
As I say, I am no money expert – but that is what pension pots are for. They are managed by somebody who does know money, and will invest the money in the right stocks at the right time.
Pensions – the advantages
Now apart from the obvious benefit of giving you money to live on when you retire, pensions have one other major advantage – they give you extra money from your local government. All of the European, UK and USA governments work their pension contributions in the same way. When you pay into a pension plan (be it employer based, private or 401k), they will pay in the personal tax value of your payment alongside your own contribution. So depending on what your own personal taxation percentage is (generally around 30% for most people in Europe or USA), for every £100/$100/E100 you pay in, your government will also pay in the equivalent of £30/$30/E30. All they are doing is paying back the tax you have already paid on the income, but back into your pension pot.
There is no other form of investment anywhere which could make you 30%. Yes, you are tucking your money away in a location you cannot touch it (until you retire), but you are getting your tax paid back to you as a form of additional investment. Note: I understand that in the USA, the 401k is more of a flexible investment, and under some situations you can take money out of your 401k in emergencies. More information here.
Also, having your freelance/small company making a payment into your director’s pension directly from your company bank account is another tax saving option. As long as you stay within the maximum payment limits (£50,000 per year maximum in the UK), you do not pay any additional personal tax on the payments, and the company can take it as a valid reduction on corporation tax. It’s a win-win-win situation – just get advice from your accountant or Independent Finance Adviser first.
What you need, when, and how much
Now, how do you know how much you need to save into a pension to know you can avoid the cat-food dinners when you want to retire. Well there are too magic numbers to bear in mind….
- Annuities – An annuity is the product you buy with your pension pot the day you retire. The annuity converts your lump sum into your yearly or monthly pension pay cheques which you can spend. The current magic number of annuities is 6%. You will receive 6% of your lump some saved every year as a flat-rate (wont change with inflation) every year from retirement till the day you die. So if you have a £100,000 pension pot, you will currently get £6,000 a year pension pay (£12k for a £200k pot, and so on). This annuity figure is based on life expectancy tables – so the 6% changes over time and your specific situation (smokers who are expected to die sooner will get a higher % rate).
- Savings Ratio – The other more important magic number is the savings number – how much you should be paying into your pension. The easy way to work this out is to take your age when you start your pension, halve your age, and that number is the percentage of your monthly income that you should be putting into your pension. So, somebody who starts a pension when they are 40 should be saving 20% of their pay into a pension. Now this can be a very scary number – but because the pension’s pot grows larger the longer it is working and saving, it is clearly better to start a pension sooner rather than later – the %s will be a lot lower.
Just for interest and information, I started my pension when I was 18. I was not so good at paying into it (some missed payments, some reduced payments) until I was around 24 (then I hit it big time). Now, I pay 20% of my salary into my pension – have done pretty much since I was 24 – so I am fairly happy I am on track.
All of this is then why I was so surprised about how many people at this freelancer’s day had not thought about retirement, and how few had pensions. I guess they were just hoping (and praying) that the retirement-fairy would come along and sort things out for them, or that their numbers would come up on the lottery. I was surprised – and a little scared for all of them (there were some jaw drops and white faces when the truth struck home).
More really useful information can be found (for UK readers) here. If you don’t have a pension, or don’t think you are paying enough into it – please, avoid the cat food, and take action NOW!
Over the weekend I met up with another small business owner and we got chatting over a few beers. He was slightly depressed about the state of his business, and that fact in the last two years he had seen no growth. Nothing. Zilch. Zip. His turnover and profits for 2011 and 2010 were almost identical to 2009.
This made him nervous, because everybody was talking about growth. New customers, new was of selling, new products, new price structures – grow, grow, grow was the key messages he was seeing. To stay static was to stagnate and die.
If your business is static – I congratulate you. If your 2011 figures were the same or even close to your 2009 figures – well done. If you are doing the same work as two or three years ago – have a beer to celebrate.
Right now, the world is in a pickle. Regardless of whether you are in the USA, Europe or anywhere else in the world, the economic picture is not so good. Greece is about to go bang, Spain will follow, which will hurt (maybe kill) the Euro, which in turn will hurt the US dollar, which will infect China and Japan.
The future looks bleak, but the past has been just as bad. The last four years have been just painful for most companies, people and countries. Cutbacks, no credit, recession – its been bad.
So if you are managing to stay static (both in your personal finances and in your business)– good for you.
After all, you don’t need to be taking steps forward when everybody else is taking a step backwards.
I have a confession for you: for the last couple of months, I have been having a real struggle to make both my company current account and my own personal account balance. At the end of both March and April, I have really come close to running out of money. For instance in April, I only had £12 left over in my personal account from the start of the month to the receipt of the April pay cheque.
But you know what…. I love it. These two months have caused worry, caused stress, and at times it has caused panic. But it has been really useful.
Broke By Choice
The reason I have been really stretched over the last two months is because I made a choice to stretch my finances. My company income is the same as it always was (good), my pay (from my company to myself) has been the same, and I have not had to deal with any massive unexpected bills. Yet still I made a choice to be broke.
You see, over time, I have found that money has become surreal. I happily pay bills on behalf of my business which would make me flinch if I were paying them personally. And with my own personal money, I have spent more this year on big ticket items (holidays, electronics, etc) than any previous year. My own view of money has become warped. Money is a tool, and its value (to me) has reduced over time.
How and why I made myself broke
First, let me say that I didn’t really make myself or my company broke. I didn’t just wake up and give my money away to strangers on the street corner or start burning notes. Instead, at the start of March, I changed a number of standing orders to investments to be a lot higher than I could really afford. When I say I could not afford these overpayments, that would be putting it mildly.
I paid a lot more into my pension, transferred a lot more into my various savings pots, transferred more company cash into bond accounts and generally took a lot more out than was going in. But because they were all transfers into investments, I wasn’t really throwing it away – I was just investing a lot more.
But the effect was the same; I was making the amount of cash ‘available’ a lot less than the previous 12 months. And of course that meant that I didn’t have enough to pay my bills. Which was the point of the exercise.
It forced me to take a long hard look at all the money coming out of my personal and company bank accounts, for bills and salaries and frivolous activities, and forced me to really weigh up the value of the spending. Without the money available, there was no soft decisions – if it wasn’t paying its way, the payments HAD to be cancelled.
A great exercise for added value, and working out Real Value
I guess I could have just gone through an exercise (as I do now and again) and reviewed my outgoings, but that would have been too easy. I could have looked at my various magazines subscriptions and decided, that yes, I did enjoy them and they would have stayed. But with the money gone, a hard decision was needed. Four out of my five different magazine subscriptions were cancelled to help with the balancing.
Services my company subscribed to were looked at in cold terms. If I really could not live without them, they stayed (some reduced in payment terms through haggling) whilst a lot more were cut. It was a busy review period, but now my payments are a lot leaner because of it.
I am going to keep my overpayments to my investments at the new inflated rate for the next couple of months, and will then reduce them slightly (to bring back 1 or 2 items that I miss). But the exercise has been really useful.
By taking away the money I need to pay for the frivolous, superfluous and ‘wanted’ (rather than ‘needed’) things, I have saved myself around 25% extra over the last two months. Plus, my money management is back on track and I have weeded out a lot of padding.
It has been a useful money exercise that I would recommend to anyone.