Credit scores, credit histories and credit ratings may seem alien Continue reading
Employment was pretty much the theme of Episode 30 of the podcast, All About The Beer @ Ignition Brewery which was all about Nick O’Shea’s experience setting up Ignition Brewery. One of the things he seemed disappointed about was the lack of support from charitable enterprises, especially as many of their aims were similar. In particular, his experience was that although the people who run charities have a lot to give, they are probably not the best people to run businesses.
There are three main rules for running a business – something I’ve learned through experience over the past 18 years. The theory of these rules come to me from a variety of sources including John Davies a UK based financial adviser, but I’ve also come to know them through trial and error: the errors mostly coming from not sticking to them! And I wanted to share them in case anyone is thinking of starting an enterprise, like Nick did, to help our young people with additional needs.
Rule 1: Cash is King
Cash pays for everything. It pays rent for premises. It pays suppliers for products or services a business produces. It pays staff, even if some are volunteers not all will be. It pays for the water, electricity and gas the business uses. In short, if there is no cash, there is no business, because a business cannot survive without cash. Profit is neither here nor there if there’s no cash. No cash brings a business down immediately, whereas no profit brings down a business more gradually.
Rule 2: Always Cash is King
Everything needs to be converted into cash. Think of stock on the shelves as something that needs to be converted into cash. If it is sitting on the shelf it is not cash, it is a dust collector. It cannot earn the business money if it is idle, doing nothing. This means we need to convert everything into a cash value to remember that while anything is stuck on the shelf it cannot be spent. This could equally be said for services provided; while they are not being provided, they are not a service. At some point in every organisation there needs to be someone who can master numbers. Without numbers cash is just theoretical. Theory doesn’t keep a business going, cash does.
Rule 3: If in Doubt, Refer to Rules 1 & 2
Cash is always, always king. While these rules might be a bit flippant, everyone wants businesses that employ people with additional needs to succeed. The key points to setting up something to help is to remember that cash keeps businesses up and running. Every business needs someone who is more than good with numbers, someone who can master numbers. Having a business with stock on the shelf or a service that is not given is a disaster waiting to happen. Hats off to anyone as good as Ignition Brewery, not only getting their products off the shelves but also paying the London Living Wage.
Having a bank account is one of the basic access points to society. If you have income this is where it goes and, if you’re like most people, your expenses come directly out of your account either through bank transfers or chip and pin/contactless purchases. Many children get a bank account early in their lives for pocket money or for that birthday money from generous relatives. Often though children with additional needs don’t end up with a bank account, in part because maybe we feel they don’t have the skills to manage their own money.
I think this is a mistake because even if your child is not ready to manage a bank account they still need one. Call it insurance or planning ahead but if they are ever to have any degree of independence they will need a bank account. The reason I’m thinking about this just now is that my daughter is transitioning from Disability Living Allowance to Personal Independence Payments in the UK. In short, she’s moving from one type of benefit that was paid directly to us to a benefit that will be paid directly to her so she needs her own bank account.
Also as she gets older, over 16 years in the UK, the need for her to have a bank account and separate financial identity will grow. In the not too distant future, she will be issued with a National Insurance Number and a Unique Tax Reference Number (the equivalent to a tax file number or IRS number in some countries). These will be linked to her taxable income, and she will need a bank account if she receives any government benefits.
She will also need a bank account when she gains employment – yes I am an optimist and I am holding out for her to do proper paid employment. Salaries are nearly always paid directly in to bank accounts. She will need a bank account to access her money, as well as pay for her living expenses.
So let’s start this process now. Let’s get ready for adult life. Let’s make sure our children have their own bank accounts before they reach 16. The process isn’t hard, and in many cases it can be done online, but for us it was a quick visit to a local bank.
Since then we have discovered other benefits to her having a bank account with a card. She has seen, like most children she is always more observant than we give her credit for, how adults use cards to pay for things. She has seen her big sister use her card. And now, because she too has a card, she feels more grown up as she pays contactless for purchases she wants. Of course, we still need to help her with deciding if something is really essential but she is beginning to understand the idea if she spends on one thing that limits what she can buy another day.
Sometimes if she forgets her card and wants to buy something, she will ask us to pay and then transfer the money back to one of us via the banking app. This, very slowly, is teaching her how to use her bank account in a way we would expect her to use it when she gets older and has to pay bills.
Opening a bank account, I think, is helping my daughter to become more mature. At the moment it is the access point to small purchases, but in time it will be vital for her to live independently from us. A bank account is a necessity for her future without us.
Buying a property is the goal of most of us but it seems so daunting – huge price, mortgage, debt. As parents we might feel even more daunted because we face extra costs looking after our child with additional needs. Added to this, we are also likely to be trying to figure out how we can leave our child something, anything so they are not completely reliant on the government to live their lives. Quite frankly, it all seems overwhelming.
So buying a property can sometimes feel like another massive hurdle. In the UK prices seem to rise continuously, and this is also true for other parts of the world. But if it’s feasible, leaving an asset like a property is one brick (if you pardon the pun) of many in the plan to leave our children financially healthy.
Yet a figure like £200,000 is a big number, many more times than average salaries. The question is: how can we make this number smaller? I don’t have an answer to that, but with a bit of knowledge about inflation it will seem smaller if you intend to live in that property for a long time. With inflation, in real terms, that £200,000 value will half in value over the years. That is, inflation can make it easier to pay off your mortgage.
Before we look at the maths, let’s think back to when our parents took us on our first holiday
when we were children. I don’t know where you went or what it cost, but let’s say it was two weeks wages. Let’s say it was £200 back in the early ’80s. That £200 bought a week’s worth of fun for the whole family. Today that £200 would barely buy your same family a day out with a meal at the end, let alone a whole week. Getting the picture. As prices rise and wages go up, money is worth less.
And so it is with property. To buy a property in the beginning is more expensive than rent. You not only have to pay the interest costs of the mortgage but also pay some back to the original loan. You have to stretch yourself to buy insurance and do whatever repairs yourself, out of your own pocket. But once you get in to the property, and with a little time, it starts to pay dividends.
Rents rise with inflation. Mortgages rise with interest rates and fall when interest rates fall. But the actual cost of that property, in real money terms, falls with time. Inflation makes that £200,000 seem like only £100,000 in actual cost out of your pocket terms.
Let’s talk about inflation more. Inflation is the percentage that prices increased as an average over the year. There are several different ways of measuring it, depending upon how politicians want to make the figures look good for their own ends. But let’s agree that inflation is a simple measure of how much prices when up in a calendar year. Let’s say from the 1st January to the 31st December of that same year.
If they went up by 5% that means a loaf of bread that cost 1.00 when you made your New Year’s breakfast (assuming it wasn’t in the January sales!), then come the end of the year when you’re planning your New Year’s Eve party that same loaf would cost 1.05.
Providing you got a pay rise of 5% you’d be no worse off. However, if your pay only went up by 1%, as it has for many public sector workers in the UK, you’d find prices are going up faster than your income and there only so much belt tightening we can all do.
But inflation can be our friend too at least when it comes to property. In financial terms there is a rough rule of thumb called the Rule of 70. This is a formula to determine how many years it takes the value of money to half in real terms. It is:
70 divided by the annual rate of inflation = number of years value of money halves
70 divided by 5% inflation = 14 years for the value of money to half
To relate that to a property purchase of £200,000, this would mean in 14 years the money value in real terms would be £100,000. This means that when you think of how much you owe on your house it’s no longer the original sum of 200,000 but actually closer to £100,000 – half in real terms. Why because in 14 years time what we think of today as £200,000 is only worth £100,000 in terms of what we can purchase with it. This means that your mortgage payments although they may still be around the same amount, but in real terms when you look at your total income they will be an awful lot less.
And of course the actual value of the property would have increased, quite a lot if current house prices keep going up as they have at least in the UK and Australia and some parts of the USA. So your house might be worth £300,000. So the key is to get on the property ladder and hang in there.
Now obviously i’m not suggesting that anyone should buy a property just because inflation is rising. There are many other considerations and of course higher inflation also means higher day to day living costs which may impact on the ability to meet those mortgage payment. You should take independent financial advice from a regulated advisor.
But why tell you all this? Well many people, at least in the UK, have been put off purchasing a property because the prices seem crazy. Yes, they are but you have to balance this desire not to join the crazy people with the knowledge that if you can afford to get that deposit together and meet the monthly repayments, then in the long term buying is still a good option. Your home can also be one part of the financial legacy you are planning to leave to your child with additional needs so they are assured of a secure financial future.
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Every once in a while life dishes up large, one-off expenses that can de-rail all our plans. If my plans were de-railed, then it could well affect the future of my daughter with additional needs.
Things that she needs might not happen. In the next few years she will leave full time education and move towards an adult life, with the challenges and expenses that might bring.
I’m not suggesting that her independence is a given , but it can only be a realistic option if I start the planning now. For her to grow as a person she might need help from me to see her into an independent or assisted living situation. I discussed some of the pitfalls of this a while ago in House To Rent, No Experience Required. Indeed, if this is to be the case I should take my own advice in Zero Credit Score to Hero Credit Score.
Maybe this purposeful saving needs some defining as to how it is different from an emergency fund and three months living expenses. For me, purposeful saving is consciously saving to spend on a large ticket item that is coming up in three to seven years. In other words a clear plan to save money for a date in the not too distant future where the money saved will be spent; whereas an emergency fund and three months living expenses are essentially disaster funds, just in case, which hopefully I never actually need.
Purposeful saving is saving for a larger, one-off expense. An obvious one is to help my daughter with additional needs move into independent living accommodation or semi-independent accommodation whichever suits here at the time; I imagine this would take quite a few thousand where I live, and possibly more once the extras are included.
There might be countless other things I might need to do for my daughter with additional needs, but there is also my other daughter to consider too. In the next three to seven year period she will be going to university and we will be contributing to her living expenses and accommodation costs. This trickling effect each month could be a real drain if I haven’t planned for it, and started to save for it.
So the obvious question is how do I save for the larger, one-off expenses? Exactly the same way as I built up my three months living expenses. Decide on the time when I’m likely to need this money, and add up roughly how much I will need. Then count how many months between now and when I will need this money by, and divide the amount of money I will need by the number of months I have to save this. Again, the simple solution is to save via an automated payment into a separate savings account. If I have to make the payment manually each month, there will be months when it doesn’t happen. That’s not just my nature but human nature.
The benefit of doing this early and planning for larger, one-off expenses is that it saves stress. If I know it’s coming up in the back of my mind, then there’s no point in putting my head in the sand. To not do this would mean that I would then have to take the money from a place I shouldn’t: my emergency fund or those three months living expenses. Doing this would jeopardise my long term plans, and in my position with a daughter with additional needs I can’t afford to let that happen. Far better to cut back on one budget item a month for long term peace of mind than not planning.
Next week, in part six of this Planning Ahead series, we will talk about long term savings, which will provide real financial security for our children with additional needs.
When I held debt, debt actually held me. It held me pretty tight actually. Each month I had my living expenses and right next to that was my debt repayment. Perhaps it should have been called debt burden. That’s how it felt like to me.
As I mentioned before in My Biggest Budgeting Mistake, I was in my early twenties when I hit my credit card a little too hard. I was fortunate enough to be young, free and single, and so it was a matter of six months or so of watching what I spent and not using that bit of plastic until I had got myself back to a zero balance.
But today I know my ability to pay off any debt has changed. I have children and they are not cheap. Getting out of debt now is so much harder than it was then. Budget cuts are harder to find; it’s not a case of a few less nights out, especially as like many parents we don’t get that many nights out anyway. In simple terms, £100 per month spent on credit card interest (or other debt interest) is £100 that I would not be able to spend on securing our families’ future.
I would rather that £100 be used by me than given to a bank. Of course I’m not saying banks are bad. Without banks we wouldn’t have got a mortgage to buy the home in which we live. But I’m not keen on giving banks interest payments for anything but a mortgage. Dead money spent on interest payments harms my long term financial security
In Why Compound Interest Is Sexy I talked about the positive benefits of rolling over interest on the interest on the interest. That is, we get extra money on your interest, and then we get even more extra money on the interest each year. The same also works in reverse. If I had a credit card debt that I couldn’t pay off each month, the interest on the debt compounds each month, and I keep paying interest on the debt each month over and over again until it is finally paid off. Before I know it, I could be paying anywhere between 18% to 25% on whatever I owe. No wonder financial institutions allow easy access to credit cards, and keep sending me letters in the post wanting to extend my credit limit and offer 0% balance transfers… and I thought it was just me they liked!
But the banks aren’t to blame because I know what’s happening. I know that using a credit card or taking a loan isn’t a good idea. So the obvious answer is for me to not have debt, and to get rid of any I do have to take back control of my financial life and financial future.
There are two ways to approach paying off debts according to the experts. The first is logical. The second, psychological. The logical approach is to pay the minimum balance required on all debts and then put extra money on the debts that charges the most interest. The psychological approach is to pay off smallest debt first (while still paying off the minimum amounts on all the others). The idea is that we get a quicker feeling of success by seeing a debt disappear quite quickly. Personally I prefer the psychological approach as I like to see tangible progress and feel like I’m moving forward.
I genuinely believe that paying off all debt, except for mortgage debt, is the first thing I need to do to secure my and, more importantly, my daughter’s financial future. There are other family benefits too. The money I would have spent on interest payments can be spent the things that the whole family enjoys.
Next week, in part five of this mini-series, I share some ideas on how to save for the medium term to enable the longer plans become a reality.
I would love to hear your views on debt – I’m sure I’m not the only one that’s been there. Please do this on our Facebook page. Journey Skills is a resource hub where we love to start conversations and learn from each other.