Category Archives: Frugality

Stealth Wealth – How you can become the Millionaire next door

millionaire-next-door-coverThe millionaire next door is one of my top books of all time. This great financial manuscript was one of the reasons which got me serious about saving and investing in 2014. Even though this was a good thing, it is a shame that I had this awakening when I was just about 30 years old.

Had I discovered this text before this, things would been a lot better financially. Since there is no point crying over spilt milk, I will lay out some of the best lessons in the book and other useful advice in this post and on this site. Hopefully, this information will help others as much as it has helped me. This stuff is like gold dust and makes me want to keep learning more and more about personal finance.

The real millionaires are not what you think

diddy-millionaire

What is your idea of a millionaire?

In order to think like and develop the plan to be wealthy you need to acknowledge that the perceptions which most people have of the rich are baseless and often misleading. Wealthy people are often thought to be big spenders who splash their cash at every opportunity possible, for example by driving Chelsea Tractors (huge cars in an urban environment), owning McMansions or flashing shiny blinging jewellery.

Despite what it seems, these may be cases of “big hat no cattle” with the individuals drowning in all kinds of debt, just to look the part. It is important to build a solid financial foundation by living well within your means rather than trying to keep up with the Joneses.

Playing defence is great

One of the first things that people think of when they want to become wealthier is “How can I earn more money?”. Even though it helps if more income is available it is a lot more achievable to become wealthier but cutting expenses. The millionaire next door book describes the process of earning money as “offence” while “defence” is cutting down on expenditure. Employees would have to jump through a few hoops if they concentrate on the offence side. Getting a pay rise is getting tougher these days with earnings failing to keep up with inflation. Therefore it is more effective to be frugal where necessary to free up cash for investing.

Think Net Worth rather than income

In an income focused society, you hear more of “How much does that person earn?” than how much the individual is actually worth. Governments, politicians and other authorities are well aware of this obsession and they do their best to strike where it hurts. By this, I mean that higher taxes are usually aimed at the easy pickings of higher earners’ incomes rather than at accumulated capital which would be hard for them to deal with. This is how the rich keep getting richer. Highly paid professionals such as doctors can end up struggling financially when a loss of income is experienced as evidenced in the book.

uk tax bands and income 2

UK Income Tax rates and bands – from gov.co.uk

The table above illustrates the impact of taxes on income in the UK. In contrast, investments held in Individual Savings Accounts (ISA) are completely tax free. UK investors can put away up to £20,000 a year into these ISAs and therefore can build substantial assets in these accounts over time. Imagine all this being tax free for life, including capital gains and dividends! Income will appear overrated – the more you earn and harder you work, the harder you get taxed.

Avoid economic outpatient care for adult children

Other interesting insight from the book is the impact of parents providing excessive financial aid to their grown up children. This “economic outpatient care” is usually for things such as car purchase, private school fees and help to buy property (Bank of Mum and Dad). Such assistance can lead to lack of initiative and crippling the finances of the recipients.

An example cited in the book is when wealthy parents assist with a deposit on a house in an expensive area for their less well off adult children, leaving the children to struggle with high mortgage payments, fees and property maintenance costs. Living in such a neighbourhood would also leave the children to handle pressures of fitting in within a high status area. Indeed, the research presented shows that those who have not received financial handouts are more likely to be wealthier than those who did.

The millionaire next door is truly a great read and it is also available as an audiobook. The most important thing is to have a mindset of continually optimising you lifestyle choices, so that as much saving can be done to release cash flow for investing into the appropriated funds. Focus on building income generating assets and reducing liabilities. By following these steps, you may not become an actual millionaire but close to it and certainly be more prosperous than you would otherwise have been.

How to buy and run a car – the frugal way

buying used car bmw E30Saving money on buying and running a car can be a very important step to ensure financial freedom and bolstering your net worth. In the UK it has been on the news recently that car finance deals have soared to record levels.

Motorists have spent £3.6 Billion on car finance deals in March 2017 alone! That is a 13% increase when compared to March 2016. This is not surprising considering the number of new cars visible on the streets.

I find this quite shocking as I think that buying a brand new car is overrated and not necessary. A lot of people enjoy the smell of new cars and taking the plastics of the seats but it is the marketers, salespeople, banks and manufacturers that go smiling all the way to the bank.How to buy a car and save money

Do your research 

The first step to take before purchasing a car is to do as much research as possible. Find out what the value of the vehicle is expected to be at a certain age, mileage and condition. A number of free car valuation resources are available online for example the Autotrader tool. Also investigate any common faults which the car model has experienced in the past. Reviews and common faults for most car models are available on Honest John’s website.

If something keeps on cropping up as a major fault, that should be a red flag. However, in some instances you may want to factor in the cost of the potential fault when buying the car or negotiating a price if you are really after that particular model. It is better than getting a nasty shock in future.

Buy used and avoid leases

According to the Millionaire Next Door book, more than a third of real millionaires tend to buy used cars. Of those that buy new cars, the majority buy their cars outright and do not lease. New cars lose their value by thousands of pounds the moment they are driven of the forecourt. Car finance companies take advantage of consumers’ needs for instant gratification and unwillingness to save upfront by offering car finance products such as Personal Purchase Contract (PCP) or Hire Purchase (HP) at high interest rates.

With these so called deals, the buyer “rents” the vehicle for a high monthly fee over several years. Although there may be no initial payment, many strict rules of use are applied for example the driver may be penalised if they exceed a certain annual mileage. This is not my idea of owning a car.

After the period of payments options available to the driver are to own the car by paying a very large “balloon” payment on the heavily depreciated vehicle, leave with nothing or continue on the payment treadmill by leasing another new car.

The following table shows a comparison of costs for buying a Ford Fiesta 1.25 Zetec petrol using HP, PCP or simply buying a 4 year old used one.

 Hire PurchasePersonal Purchase Contract4 Year Old Used
Cost of car (new)£14,839£14,839 £14,839
Deposit£500£500 None
Monthly Payments 36 x £325.57 37 x £423.06 None
Annual mileage limits9,000 (6p a mile surcharge) No limit None
Balloon payment£4,293 None None
Cost of buying car outright £16,513 £16,173 £6,000

Clearly the third option is best for those willing to save money as the car would have lost 60% of its value but be still in good condition. It is difficult and unreasonable to pay about £400 a month for a depreciating liability that you do not actually own. Save upfront and make the purchase with cash.

Most cars lose value over time. You do not want to be the one to take the biggest hit! Even if the older car has problems, these would be rectified for relatively low cost. A thorough inspection prior to purchase of the used one is critical.

classic carA great tip is to source the car from the manufacturer’s approved used vehicles as these will have all necessary checks carried out and a reasonable warranty.

Another benefit of buying used is that you will be able to acquire a more prestigious better engineered vehicle which would otherwise be unaffordable when new. I used this strategy to purchase a fuel efficient BMW which has had a few faults in more than 5 years of ownership.

How to keep running costs low:

Keep up the maintenance

“Prevention is better than cure”. It is vital to maintain the vehicle regularly to prevent  any major problems occurring. Ensure that the oil is changed every year or at most within 10,000 miles. Oil is the lifeblood of the car which ensures that all the mechanical moving parts are well lubricated.

Other fluids to keep an eye on include brake fluid, coolant, power steering fluid and screenwash. Also change other service parts which are expected to wear out such as the timing belt, filters, brake pads and clutch.

Check the tyre treads and pressures for safety and improved fuel efficiency. Use of high quality tyres by Michelin, Bridgestone or Pirelli is ideal. It is also important to not ignore any fluid or oil leaks, strange noises or movements from the car. This is usually a sign that something may go wrong and needs to be looked at before things get worse or costly.

Use specialist independent garages 

You can purchase car diagnostics tools which plug in to the car’s OBD port to try and resolve certain issues. For any work that you cannot do yourself, I recommend using local specialist independent garages for any repairs instead of the main dealers or fast fit centres. Main dealers are very expensive and not worth it if the car is no longer new.

From personal experience, fast fit centres tend to be incompetent and want to rip off customers by recommending additional unnecessary work.

Independent garages specialising in particular car makes deal with common problems all the time and have superior knowledge while offering dealer level service at much lower prices. UK drivers can also use the council run centres for their annual MOT test. They have no incentive to fail the car and can be relied on to give an honest assessment.

These are the top tips for getting the most benefits from car ownership while ensuring that is does not impact your finances significantly.

Top tips for cutting expenses and saving more

money saving tipsIt is essential to control spending if you intend to save more and accumulate wealth. Lifestyle inflation is the enemy of a good savings plan and detrimental to any plans for attaining Financial Independence. A simple definition of lifestyle inflation is when a person expands their expenses to match increases in income. I will use myself as an example of how lifestyle inflation was one of my biggest financial mistakes.

Avoid lifestyle Inflation

Upon finishing university, I got my first job, working for an engineering consultancy in Manchester, UK. Since I had no savings, I moved into a shared house near the city centre and rented a room. At £300 including bills, the monthly rent was very affordable. I also hopped on to a cheap bus every morning to get to work. Life was simple and very affordable.

However, within a year of being on the job I was given a 10% pay rise. Imagine that, I had never earned so much money before and I felt like a king. Instead of maintaining my lifestyle and saving more, I decided to rent a one bedroom flat located further away from the city. The monthly rent alone went up to £400. On top of that there were bills to pay: council tax, electricity, internet and heating and water. These amounted to £170. At a total of nearly £600, I had managed to double my accommodation expenses after just a 10% pay rise!

More mistakes

As if the wastefulness mentioned above was not enough, I went on to purchase a car which I really did not need as I used to travel to work on public transport. The car turned out to be a nightmare, requiring regular expensive repairs and was very expensive to insure since I was a new driver. I eventually left the job after three years at the height of the recession in 2010 and was astonished to realise that I had managed to save nothing in that time and had nothing but a rusty car to show for it. The car eventually died and got scrapped for pennies not long after.

Turn your financial life around

Following this forgettable episode in my life, I moved to the south of England to look for new employment while living with family. I landed an engineering role and was determined not to repeat the financial mistakes I had made with my previous job. My basic financial literacy improved and i was able to start saving money effectively, which laid down a good foundation for investing wisely. From personal experience, here are my top tips for cutting expenses and saving more money.

1. Shop at discount supermarkets

Logo for Aldi discount supermarket

Aldi discounts

Shopping at discount supermarkets like Aldi and Lidl can have a noticeable impact on your finances. If you want a bit more variety you can use the savings made to treat yourself and buy other goods at speciality shops like bakeries or butchers.

2. Keep mobile phone costs to a minimum

We often hear stories about how millennials are blowing loads of money on iPhones and holidays. In the long term it is cheaper to buy the phone separately (SIM free) and shop around for the best sim only contract. Money can be saved by buying a refurbished phone, I managed to buy a virtually new refurbished iPhone from a leading retailer for a third the price of a new one.

3. Make your own work lunch

This tip is so underrated. A lot of people have a habit of buying lunches  during at work. This can turn out to be costly over the long term. It only takes a bit of planning and a few minutes to prepare a healthy tasty lunch. You will know what is in it and make it your own way while saving cash along the way.

4. Get your car MOT done by the Council

If you own a car, I recommend that you have the annual MOT test done by the local council rather than a regular garage or worse by a fast fit centre. The council has no motive to fail your car for repair bills and therefore will be impartial. You can use this link to find your nearest UK council MOT test centre.

5. Buy a 3 to 5 year old used car

Avoid car finance at all costs. Most cars depreciate at astonishing rates and lose more than half their value in a few years so to me it does not make sense to buy a new one. It is best to save upfront and pay cash for an approved used vehicle from a reputable source. I find that the sweet spot is a car that is between 3 and 5 years old. Also ensure to carry out basic maintenance like regular oil changes and tyre care to avoid massive bills or breakdowns in future.

6. Always haggle for the best deals

This tip is crucial for ongoing savings year after year. Always make sure to haggle for a better or the same deal when the contract for a service is coming to an end. This can be done for services including gas, electricity, car insurance, internet and mobile phone contracts. Stand your ground and threaten to leave if the company does not offer a good deal. Top haggling tips are provided by Money Saving Expert.

7. Always pay upfront and avoid instalments

Car insurance renewal options

In most cases it is more efficient to pay for goods or services upfront as a lump some instead of paying by instalments. When paying buy instalments it may seem like it is not a lot due to the small monthly payment but often you will pay a large amount in total.

Banks or service providers know that most people are not willing to pay the total amount at once, therefore they apply exorbitant fees and interest rates. Examples for this are purchase for cars, household goods such as TVs, clothing, mobile phones, electrical goods and car insurance. This point is illustrated by the image above showing the options I was provided with for renewing my annual care insurance premium. Needless to say, I went for the first option and saved over £120.

These are my top tips for cutting expenses to save more money. Let me know below if there are any other tips you would like to share.