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Introduction

In this edition of the newsletter we are going to take a look at some of the basics of financial planning. Buying property is a form of financial planning and it makes sense to understand the general principles involved before you start buying. We have already identified that the primary reason most people buy property as an investment is to achieve financial security in retirement. These days there is a lot of confusion about pensions, and even the state retirement age cannot be relied upon to stay the same. So let’s look at these principles of financial planning and try to make them simple.

Financial Goals

Before you can plan for anything you have to have a set of goals, things to aim at, like being able to retire at sixty and enjoy a decent lifestyle. When it comes to financial goals, these will vary over our lifetime but assuming you set them up at the beginning of your career they will be divided into three broad areas.

• Short Term Goals
• Medium Term Goals
• Long Term Goals

Short term goals relate to immediate lifestyle and commitments such as going on holiday, paying the mortgage and earning enough money to pay for day to day expenses. We all know the quote from David Copperfield where Mr Micwawber declares ‘Annual income twenty pounds, annual expenditure nineteen ninety six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery’. The point about short term goals is they relate to the here and now, and therefore feel most important to us; they are important because unless you can manage them effectively then medium and long term goals are irrelevant. If you can manage your short term expenses without going into debt then you are ahead of the game and can start to look at your medium term goals.

Medium term goals start to make sense once you have control over your day to day expenses, they relate to items which cannot be afforded in one go and have to be budgeted for, such as a new car, or an extension to the house. It sometimes makes sense to save for medium term goals and sometimes to borrow, but the most fundamental error most people make with their financial planning is to load themselves up with unbearable amounts of expensive short term debt in order to achieve their medium term goals. The result is spiralling credit card bills which turn into personal loans and eventually get converted to mortgage debt. All too often the result is you end up paying for that flat screen plasma telly for thirty years.

Of course for most people the area of long term goals never becomes an issue because they never sort out their short and medium term situation. As time goes by children come along, grow up, go to University and get married, all important events you would like to contribute to but you won’t be able to if you haven’t got the money. The opportunity of starting that business you always dreamed of passes you by because you never have the capital to get started. All too soon the far off dream of retirement becomes a reality and unless you have laid down your plans and set your goals then the chances are you will be stepping off a financial escalator into nothingness.

Without good financial planning the almost inevitable result of your labours will be poverty. Financial planning is an important issue and we won’t pretend it’s easy; that doesn’t have to mean it’s complicated either, the principals are really very simple, it’s all about managing two basic issues.

• Assets and Liabilities
• Income and Expenditure

Your net worth is all your assets divided by all of your liabilities, or put another way everything you own divided by everything you owe. If this yields a positive figure then that is your equity, if it’s a minus figure then you are in negative equity, we call this your capital account and the ratio between the two is called gearing. As an example if your assets are worth £100k and your liabilities are £50k then you have 50% gearing.

In the same way everything you earn minus everything you spend gives you your income and expenditure account; if there is money left over you have positive cash flow and you can save, if not you have negative cash flow and you have to borrow. So if you ever question how one of your friends manages to live a lifestyle you know they cannot afford based on their income, the chances are they are subsidising themselves from their capital account, which for most people means their property. Of course if you don’t have a property you can’t do this but more on that subject later.

The secret of effective financial planning is being able to balance your short medium and long term financial goals and the best way to accomplish this for most people is by making effective use of assets and liabilities. The reason for this is because in today’s society it is virtually impossible for the average person and even the supposedly well off person, to become financially secure through work alone, assuming you want to live a relatively affluent lifestyle and you aren’t a professional footballer or something similar.

Of course by it’s nature success has to be the exception not the rule and the number one thing that separates the successful few from the unsuccessful many is that they are prepared to do what the others can’t or won’t do to achieve success. It therefore stands to reason that in spite of being made aware of the problem that the majority of people will be too apathetic to do anything about it. The great virtue of this self evident truth is that it leaves the way clear for those who have got the self motivation and determination to achieve success. A great teacher of success theory was once asked by a student to tell them the secret of being successful in this ‘modern and highly competitive world’ and his answer is instructive. He said there were three things a person needed to do to beat the competition and become a success and they are as follows.

• Turn Up
• On Time
• Dressed to play

Now these rules may not seem very clever but nevertheless according to this wise man simply turning up is enough to beat off 80% of the competition who stay at home so can never even compete. Turning up on time sees off another 10% and being dressed to play just about does for everyone else.

What does all this mean and how does it apply to investing in property? Well just having an interest in property isn’t enough, if you want to build a property portfolio first of all you have to turn up. In practise this may mean going out and looking for property, reading books, talking to knowledgeable people. It may mean coming to one of our property investment seminars or listening to our free property tutorial. On time means acting in a timely fashion, not procrastinating and missing the boat. When is the best time to get started with buying property to secure your future? Why now of course, now is always the best time.

Finally we come to dressed to play. This means being equipped to do the job, having the right tools at your disposal, putting in the ground work and planning which will ensure success. It is in the area of being dressed to play that we can be of most assistance. Ultimately only you can decide if you are interested in buying property as an investment and if you are prepared to get off your backside and do something about it. Once you have made that decision we can provide you with the back up you need, the knowledge, experience and resources that on your own you may lack and may never acquire.

That’s it for this issue - hope it was thought provoking, it was meant to be. Next time we are going to look at the supply and demand factors that affect all markets and apply them to property, but remember in the meantime you can always call us up for advice or submit a question online.