Archive | September, 2012

Investing for Income

30 Sep

In my previous blogs I’ve written about investing for income or investing for capital growth and how some people invest for both.  So today we are going to look at investing for income.

Property

With a deposit of around 15 – 20% and using a mortgage as leverage you can purchase a rental property.  In my region using my property criteria (refer to my book ‘How To Make A Living From Property’) you can buy a three bedroom house for around £70,000.  Assuming, you have a mortgage with a 15% deposit, £10,500 you would have a mortgage of £59,500 at an interest rate of 3.99%.  On an interest only basis monthly mortgage repayments would be £197.84.  Rentals in this area for a 3 bedroom house are averaging £590 a month.  Other compliance expenses are Energy Performance Certificate (valid for 10 years) and an annual Gas Safety Certificate along with insurance.  Monthly average cost of say £25.00.  Total expenses to run the property are £197.84 plus £25.00 equals £222.84 per month.  With rents of £590 per month you have created a monthly income of £367.16 per month.  The ROI (return on investment) is 42%.   Have several properties in your portfolio and you can see how property is a good income producing investment.

Shares

Shares offer another source of income through high yield dividends.  Using an ISA you can save small amounts until you have £100 and then buy shares.  You’ll be surprised how quickly the income will increase if you are reinvesting dividends especially when you have high yield dividends.  I have companies paying around 20% yield.  If you want to receive some of the dividend as spending income I would suggest taking 25% of the dividend as cash and reinvesting the other 75% back into more shares.  This way you are continually increasing your share holdings and your monthly income.

P2P

With banks reluctant to lend to the average person or business a new type of investment has come to prominence called P2P (Peer to Peer) lending.  There are several online companies offering this service with the biggies being Zopa for personal loans and Thincats for business loans.  How the system works is say you wanted to borrow £1000 then 100 people would give you £10 each.  Monthly repayments are split between the 100 people until their £10 is repaid in full.  The person lending the money decides what interest rate, within reason, they want for the loan and receive that as monthly income.  I have rates ranging from 6% – 18%.  You can start with £10 and invest up to a maximum of £25,000 for personal lending.  There is no limit on how much you can lend to business. You can automatically reinvest the interest or take it in cash.  As above if you need the cash I would suggest taking 25% and reinvesting 75% to keep your investment and income growing.

Business

I’ve included business as an income producing investment.  Although when starting a business from scratch it will take time before you can pay yourself an income.  But if you buy an existing business  or build a network marketing business income can start flowing almost immediately.  With a network marketing business apart from the initial joining fee usually around £100 the only thing you need to invest is time and effort to make the business work and the rewards can be quite substantial.

So there you have some of  my favourite ways of investing for income and worked on each month can grow to provide a large monthly income.

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What is the Best Use of My Money?

23 Sep

Being an investor is about asking one question ‘What is the best use of my money?’

But, although there is only one question there are can be many different answers.  To come up with the right answer for you, you need to know what type of person you are.  If you are in your 60’s and about to retire you don’t want to be putting your money into a high risk investment opportunity that will take 10, 15 or even 20+ years to come to fruition.  But if you are in your 20’s then you have plenty of time to allow the investment to work its magic.

Are you the type of person willing to lose money or will you panic if your investment drops? Nobody should be investing to lose money but it does happen occasionally that an investment may go down in value before it goes up.  We are in volatile times and property, shares, commodities etc. are up in price one week and down in price the next.  Do you have the patience and the nerve to hold on to your investment and not be paniced into selling because it is down in value this week?  Do you have confidence in your ability to chose the right investment for you?

How quickly do you want your money back? Or in other words what is the exit strategy and how easy is this investment to leverage.  Investing for me is about working out how quickly I can get my initial investment back and move on to the next investment because the longer my money is tied up the less it is working for me.  For instance, if buying property a deposit is needed and a mortgage is used for the purchase.  These days the deposit is around 15 – 20%.  So you own 100% of the asset by putting down 20%.  This is called leverage.  The next move is to get the 20% out of the investment so it is 100% leveraged and use your 20% to move on to the next investment.    

The next thing to consider is the type of investment you want.  Are you investing for income or are you investing for capital growth.  There is no point putting money into a capital growth investment if you want income.  Most people are looking for a combination of both income and capital growth. 

Being an investor is about research.  Do the numbers stack up on this investment? How quickly will I get my money back?  Can this investment be leveraged?  Will it fit in with my investment plan? An finally, what is the best use of my money?

 

ISA and JISA

15 Sep

When starting to invest or save for the first time everyone who is a resident of the UK should consider an ISA (individual Savings Account) for adults or JISA (Junior Individual Savings Account) for children under 18.

ISA is a product developed by the government to encourage savings.  Think of it like a sweet wrapped that goes around several types of investments and stops tax being charged on the interest earned or on capital gains.  You don’t need to declare the savings or any interest earned from them on your tax return.

There are two types of ISA.

  • Cash ISA – as the product says this type of ISA is a cash investment.  The maximum amount you can save for the year ended April 2013 is £5640. 
  • The second type of ISA is a Stocks & Shares ISA.  This investment can be in shares; gilts; bonds; mutual funds; ETF/ETC and partly held in cash.  The investments must be in companies or products approved by the government.  The maximum investment amount for the year ended April 2013 is £11,280 less any amount invested in a Cash ISA. 

Junior ISA

In November 2011, Junior ISA’s were introduced by the government as a way to encourage savings for children.  The sum of £3600 can be put into an ISA per year for a child.  The money can come from parents, grand-parents aunt and uncles.

Sadly, the high street banks have not supported the Junior ISA but they are available online from various organisations.

A Powerful Investment

In my blog of 22nd July ‘How saving £2.73 a day can make you a millionaire’ and in my book ‘Surviving 2012’ I explain the effects of compounding interest.  By having regular savings and reinvesting the interest within a few years interested earned is more than the savings you are contributing.  ISA is the perfect investment to take advantage of the compounding effect because there is no tax deductions on the interest earned.  This allows maximum reinvestment and maximum returns.

Example

My daughter has a cash savings account with a high street bank.  She currently has around £1300 saved and last month she earned 89p in interest.  The interest is reinvested and she adds £2 a week from her pocket money this account.  After a year the interest received is about £10 to £11.  A year ago the same account was paying her around 30p a month.  Compounding interest has increased the return. But, she has to pay tax on the interest earned.

She also has a self selecting stocks and shares Junior ISA.  She pays a regular weekly amount into her account and we match her savings and she has roughly £1300 in this account as well.  This is where the similarities end.  By selecting shares with high yield dividends and having a variety of companies in her portfolio that ensures she receives dividends every month, her portfolio has grown quickly to the extent that she is earning around £200 a year on the same amount of money as she has invested in her savings account.  Compare that to the £10 a year received on her cash savings.  A little knowledge and regular savings in a tax free ISA is providing her with steady growth.  Imagine what this account is going to be worth when she leaves school/university.  She should be earning sufficient interest to pay herself a wage from her investments and have the freedom to do whatever she wants with no money worries.  Wouldn’t you like to be in the same position?

 

Believe In You …..

8 Sep

Over the past few months we’ve looked at the four main reasons, in my opinion, why 8% of the population achieve financial success and why only 1% become wealthy.  ‘Believe in you’ is one of the main reasons people fail to succeed.

Let me ask you a question.  How many times have you had an idea for an investment or a business and after talking to the family or friends decided not do it?  You trusted your family and friends more than you trusted yourself.  It was easier to listen to the 92% who fail financially than to trust yourself and become part of the 8% who succeed.

For me being an investor and entrepreneur is about finding ways to overcome the negatives.  When I wanted to invest in property and the banks kept saying they wouldn’t lend me any money I just kept going until I found the right broker who found the money to build my property portfolio.

When it comes to shares I read lots of broker recommendations, share magazines and share tips but in the end I do my own research and invest in shares based on my own decisions.  The result has been for the last five years during a very volatile period for shares my portfolio has continued to grow and so have the dividends.

In business, I regularly share my ideas with friends and family and then totally ignore what they say.  When I was looking at a network marketing business and got all the usual negatives about MLM I took my own counsel, found a business that suited me.  Today that business grows month by month and provides a steady monthly income.  No matter what business I have set up (I currently have 7) I always have somebody telling me not to do it.  I ignore what they say and trust in my own gut feeling and set the business up.  It doesn’t mean I have the midas touch and every business is a roaring success because they aren’t.  I’ve had my fair share of failures.  But, hopefully, I’ve learned from them.  When I have a failure I pick myself up, dust myself down and start all over again.

Investing has its ups and downs.  You can’t control the markets but you can learn to use them to your own advantage.  By educating yourself, having a plan, working on building assets rather than liabilities and believing in your own abilities you can become part of the 8% who succeed financially.  Don’t let anyone tell you differently.  Believe in you.

An Asset or A Liability

4 Sep

In the Investment World it is important to understand the difference between an Asset and a Liability.  Get the two confused and you are broke.  Concentrate on buying Assets and you are wealthy for life.

Robert Kiyosaki, the author of the ‘Rich Dad, Poor Dad,’ investment books describes an asset as something that puts money in your pocket.  A liability is something that takes money out of your pocket.  Most people spend their lives buying liabilities thinking they are buying an asset.

How many times have you taken out a loan to buy a car?  The car may be worth £5000, you go to the dealer pay a deposit of £1250 and have a loan for the remainder of £3750.  Each month making your payment the loan is reduced and after 5 or 10 years the loan is repaid.  But, you haven’t repaid £3750.  By the time you add interest and administration fees you have probably repaid about £10,000 depending on the interest rate which on many car loans is about 29-30%.

After 10 years you have paid £10,000 for a car now worth £100.  It’s time to get a new car and the whole process starts over again.  This is an example of buying a liability.  It’s something that takes money out of your pocket.  It also continues to drop in value until you have nothing to show for your money.

Now, lets say you decided to use your £1250 to buy an asset.  In this case you buy shares in an investment trust paying a quarterly dividend.  £1250 would buy you about 2100 shares paying a quarterly dividend of £30.   This equates to an annual income of £120. 

I’m not saying don’t buy any liabilities as we all need some form of transport or want those luxuries in life.  But if you buy income producing assets they produce the money you need to pay cash for the liabilities purchased.  Wouldn’t it have been better to pay £5000 in cash for the car instead of paying £10,000 on a loan?  The additional £5000 spent on interest payments could have bought more assets producing more income.

So, next time you are thinking about buying something stop for a moment and think, am I buying an asset or a liability?  What would be the best use of the money?