Sunday, 19 January 2014

Four steps to financial freedom.

Freedom is simple, but it is not easy.

The first step is to gain control of our own mind. This means that we should buy and do things that are useful to us and that progress our plans.

The poor are very poor at financial decision making as they often have little concept of the future. This manifests itself in unwise decisions such as buying lottery tickets or fast food. If fact it is very difficult to see far into the future when you have creditors breathing down your neck. In situations such as this all we all seek relief- just a moment of not feeling poor. It is this that results in the short term focus and not some moral deficiency. Having been desperately poor myself I am inclined to give poor people the benefit of the doubt and blame them less for their short term thinking.

I have done quite a bit of blogging about the evil tricks of the advertisers. At the time I did not even know why I had become so obsessed by the topic! In reality it was simply a reflection of my own desire to become a more rational in my choices. Fortunately I need not have bothered as all impulse purchases subsided once I had £3000 in the bank.

The second step is to gain control of our budget. We should examine each and every purchase we make and consider how it benefits us. It is quite possible for a working family to save £400 a month in this way.

One example. It is possible to save approximately 40% of ones food shopping bill by switching to Aldi or Lidl. In addition it is possible to reduce food waste by planning ones meals. It is also possible to make better choices by using a shopping list. Once all of these factors are calculated the savings are nearer 70% than 40%.

The third step is to develop a positive cash flow. This will occur naturally once the first two steps are completed. This will be your investment fund for the final step which is wealth building. I am talking here about share purchases, real estate and other income producing assets.


  1. One reason I find this subject interesting on a personal basis is protecting myself from the future.

    I am not that old at 43, but, I am also more and more thinking that "this is my last run" towards retirement, so I'd better make it count.

    My parents, for example, retired about a dozen years ago. At the time, they had done really well, amassing a net worth of around $1 Million. At the time, that was a lot of money, and invested at the 6-7% they were offered for bonds and other securities, they looked forward to a comfortable retirement with an income of around $5,000/mo without relying on any government assistance.

    Today, however, my mother the millionaire (my father has since passed), is collecting around 2% on her stash, and suddenly, retiring as a millionaire is not so appealing. She is living on around 1/3 the income they had planned on all their life.

    I guess my point is, that I would like to explore how to build a lifestyle that is not solely dependent upon interest rates or bulk-capital which can be inflated away with the stroke of a government keyboard.

    Can solar power protect me from price shocks in electricity?

    Can a garden & some chickens and goats keep me well fed, no matter what happens to the prices (or supplies) at the grocery store?

    George Washington wanted to have a society based upon the Gold Standard so that a person could figure out how much capital he needed to live out the rest of his days... and this works in a low inflation system such as the Gold Standard, but does not work in a highly inflationary environment such as we have now.

    How can I transfer the concept of a "Gold Standard" - the ability to plan out my expenses for the rest of my life - in a system such as we have now?

    I think energy efficient & cost saving homes and other devices/systems/ways of living is the answer.

    A goat does the same thing to protect you from food inflation as an ounce of gold does, because the cost of milk at the store is no longer an issue for you.

    An energy efficient home, completely off grid, protects you from unreasonable price hikes in electricity, and so on.

    How can one sidestep the pitfalls of fiat money and "the system" while ensuring a high quality of life well into the future? That's the answer I am looking for.

  2. Thank you for the comment- almost an article! You raise some very interesting points.

    First of all, the question of where to invest your spare cash only arises in Step Four. This is where you have a job that is easy and pleasant but that brings in a reasonable income. This, combined with low overheads means you have money to invest.

    Most people are not at this stage. I am currently transitioning from Step Two to Step Three.

    It is still possible to obtain more than 2% from income stocks. The government likes people to invest in government paper but quantative easing is pushing these rates down.

    The only way to make solar power pay in the UK is to get a government grant. I suspect the same is true in Canada. Remember that when you buy an asset you become responsible for its upkeep. I like to outsource all this hassle to the national grid!

    If you are at Stage Four I congratulate you. By all means buy your off grid home but it may not be an investment.

    Jim Rogers believes agricultural land will do well and may fit in with your off grid dream.

  3. Yes, it is possible to get higher return than 2% - by assuming higher risk. That's one of the major problems that is happening right now: in order to chase higher yields, everyone is forced to take on higher risk. The moral hazard of falsely lowering interest rates is enormous because it causes a misallocation of capital.

    My mother, for example, is living off of around $45,000/yr - not bad, but around $15,000 of that is her government pension which all Canadians receive, and she gets around $30,000 from various investments, of which only around 20% are invested in low interest term deposits and bonds (and which loses purchasing power each year). But... the rest of her money is now in higher risk assets in order to get yield. (Well, except that I have encouraged her to have a substantial amount of precious metals to counter her higher risk). If she could get the 7% interest that was available around the year 2000, she would take the "small risk" government bonds for all of it and stop worrying... although, I have to put small risk in quotes because it is becoming abundantly clear that the risk of holding government debt is growing each day.

    The entire market is in this fix. Think of the problem these low rates have caused for society. With a great big glut of Baby Boomers set to retire - many whom have a pretty decent net worth - but most of them will not be able to get low-risk investments that pay a decent enough yield to retire on.

    We obviously don't have the money to pay for the Boomer's retirement through welfare... thus, the smart thing would be to cut off government pensions for the wealthy - like my mother. But, if they are only paying a pittance of a percent on your net worth, you can't even afford to cut the wealthy off of government funding.

    At 6% interest, someone with $500,000 "could" get by ok on $30,000/yr - it's not living high on the hog, but it isn't living in an alley either, especially with a paid off home. But, at 2% or 3%? That kind of wealth just doesn't cut the mustard.

    The best way to address the coming Boomer Retirement Crisis is to raise interest rates and cut the wealthy ones off of social assistance. But then, interest rates would again have to represent true value (which has historically been 5% above the rate of inflation). But, given the massive amount of debt created in the past few years, they no longer have the ability to raise interest rates - it will cause the nation to default on its debt.

    Lol! Something has to give... and I don't want it to be me!

    Re: Things like solar not paying - I agree. The technology isn't there yet. I suspect the right way to approach these things is some sort of a hybrid solution - mix and matching the technology. (A Passive Solar house design, for example, is more about positioning your house on your land than any fancy technology beyond large windows and concrete building materials which store heat better than wood, but can cut your heating expenses significantly). Also, a lot of the things that we used to do 50 or 100 years ago which was labour intensive has gotten much less so with modern technology. Firewood, for example, is much easier with a chainsaw and a truck (and a mechanical wood-splitter) than with an axe and a wagon. Or, an old fashioned ice-house refrigeration system (for a back up) can be made much more efficient with modern insulation technology.

    1. I agree on the interest rate issue. They are being kept low right now to boost the economy but tend simply to boost consumption and debt. Over the longer term they encourage bad habits.

      I can see the appeal of this life. Physical, honest work, fresh air and so on but am a city lover myself. I like my animals on a plate and I like my environment nicely moderated by technology.

  4. Heh, forgive me for yammering, but I have this sort of concept in my head, and I haven't come across too many people to discuss it with yet - it's kind of helpful to put it forth before someone else and get some feedback.

    Here is an example of the type of home I am talking about. I don't mean this specific home, but something along this type of idea. It is not some wonky straw-bale or used tire design, but simple stack block brick construction, which is already widely used in building for its simpleness and low-cost - schools, commercial buildings, warehouses etc. already often use stack block, simply because it is cheap.

    There is nothing overly wild about the technology in that house, except that it is well thought out and utilizes nature to a far more extent than most homes. It is positioned south, to maximize exposure to the sun. It has a "flywheel" effect to store heat or cold, by use of concrete and dark tiling, and they positioned the windows on the front at an angle to maximize solar gains. There's nothing too wild about it, really, yet it yields substantial efficiency in energy for these simple design features.

    Also, you see the way the front windows have been converted into an indoor greenhouse, meaning that in such a house you could be growing vegetables year round inside your home... and also, this gives you another indoor hobby to do that is easy and cheap - money saving, actually, because of a bit of extra food.

    Since this type of home is not only cheaper to build than a traditional stick-frame home, but also stronger (the 3 pigs), and less prone to things like rot or bug infestation... plus, is significantly cheaper to operate... well... I need less money per month to be self-sufficient with such a home.

    Then I start thinking, is there anything else about a home that I could do to lessen the monthly expenses... and also, can I make a back-up plan so I have choices. An example of choices, what I mean is, back in the 1990's, natural gas came here in a big way - it was very cheap and everyone put it in their homes, with many people even removing their woodheat, and replacing it with gas. It was so cheap, why wouldn't you, everyone reasoned.

    Today, people are complaining that it is costing them $300 or more a month for their gas bill... in other words, it ain't so cheap anymore, and it would be nice to have a back-up system, like wood heat, so that you have an alternative, rather than be blackmailed by the gas company.

    I wonder mostly about how to turn the home from a place of consumption back into a place of production.

    In order to do this, one has to follow many of the same things you are discussing - lower your expenses, and build some revenue generating projects.

    (continued... I talked too much!)

    1. I like the house very much. In fact I had already imagined something quite similar. A sort of high tech hobbit hole with a glass sunroof.

      Temperatures underground vary very little and an underground house with a glass sunroof would be very warm indeed even in sub zero conditions while the sun was shining.

      I think a house like this would be self heating, more or less.

  5. As such, I don't really come at this from the viewpoint of a prepper or a survivalist or an environmentalist... but a capitalist! I am seeking the answer to the question of "Can I create a home that generates resources for me rather than consumes them?" In other words, can the concept of business be incorporated back into homes (and lifestyle), the way that it used be in the past?

    If it can, then that is a significant goal to work towards. Ie. If a person could create a home that was cheap to maintain and operate, and also a home where it was easy to generate some side income, it changes one's outlook of what is important in regard to "work" or not working.

    How many expenses can be reduced or eliminated is therefore as important in this equation as revenue that can be generated. Ways to build things like a garage and such are also important, because so many small businesses can be run out of your home if you have a garage - it is definitely worth the investment... and there's another thing to do with passive solar. Most people when they build a house, attach the garage to the house on the same slab of concrete - but this causes a massive heat drain on the house. So, it is much more beneficial to have a separate slab for the garage - even if you do attach them by a walk-way.

    I think all of these kinds of things are important in trying to build a "life plan" for the future.

    Heh, don't know if I really got my concept across there, but...

    1. I think the problem here is that you are emulating an African subsistence farmer. Every African farmer who can escape from this life does so- even if it means moving to a squat made of corrugated iron in the tropical sun where people shit in the street and there is no safe water to drink. Even this is better than subsistence farming.

  6. Lol! No, I'm not talking about subsistence farming. I actually left two comments (it was too long) and it appears the first one didn't come through - it had two links in it, perhaps that's why. Although, I suppose it does sound like subsistence farming when I'm talking about goats and chickens and ice-houses. Forgive me. I have been reading up on that subject over the past week, so it's on my mind. In fact, of all the ways of being self-sufficient, I think reliable food production is the most difficult. Yet, it can be done. Where I was born and raised, further up north from where I now live, many people reliably cut $250+ per month off of their expenses merely through gardening and hunting.

    What I am more considering is hybridization of strategies - lower living expenses, while creating small business opportunities. This is why I would like a small garage and a small piece of land.

    I can see my way clear to making money on many small projects or business ideas, but not "good money" on any particular one. But, if I add all the things up together, I think I can see a way clear to living a good lifestyle, with a diversified income.

    I used to be a professional beekeeper, for example - we used to manage 1,500 hives with the two of us, and there is good money it. I have the skills to do this work, and with say five acres, I could easily run around 50 hives with needing to only expend perhaps an hour a week of labour from April to October, with perhaps 3 full days of labour to harvest and bottle honey. When I minus my expenses from what I could sell the honey for... I could see my way easily to creating $5,000/yr in income from perhaps 50 or 60 hours of work a year (and it likely could be done under the table).

    I could see having a small pressure washing business that is busy in the spring and makes $10,000/yr, and a small house-painting business that makes another $10,000 in the summer. I have been exploring getting certified as a chimney sweep, as such work can easily generate $20,000/yr income from September to November. I've also go lots of experience importing and exporting used cars across the Canada-US border, and could easily make another few thousand a year brokering used cars this way. Perhaps a guy can even manage to finagle a few hundred more per month from some sort of online business.

    In other words, lots of small dreams put together, creating a decent income from varied sources, each within their own season.

    So, my general idea is - how can one minimize living expenses as much as possible while at the same time owning a property that gives me the flexibility to try several business ideas and diversify my income streams into several sources.

  7. Thank you. Yes this makes a lot more sense- particularly in a rural community. Cities tend to encourage specialisation but the countryside favours the generalist. In fact I have even been thinking about the pigs and goats aspect again and realise that these industries should either be very large (10,000 animals or more) or very small (1 or 2). This is because goats can 'help out around the house' by keeping the lawn short while pigs can eat waste and forage in the woods.

    Small scale and low capital industries can also save on transport costs. You can offer local honey that will be produced at a higher cost but will cost little to bring to market. There is a move in the UK towards farmers markets. These tend to be expensive but customers are willing to spend more to feel they are somehow connected to the earth.

  8. Yes, if I were to keep animals, it would only be for a personal basis, aside from bees. (Another nice thing about bees is they are good for keeping people off your land). You don't need a lot of pigs to keep you in bacon - they give birth to a litter twice a year. Same as chickens, too many and you are over-run with eggs, so you only need a few. I think goats are preferable to cows because you don't need to have a large pasture that produces hay - goats eat anything. So, animal wise, I would never keep more than two goats (and butcher the kids for meat each year), a couple of pigs and chickens - for personal food consumption, certainly nothing to make money off of, but more to ensure there is supply of food, regardless of whether you make it to the grocery store or not.

    The thing is, when I stand back and look at it, and compare it to money making ventures, saving money is actually as important as generating revenue.

    Every expense that I pay, like food or the utility bill, comes from my net income - after I have paid income taxes on the money I use to pay those bills. If one can save $250/month on utilities and another $250/month on food, that is $500/month in after tax money... in order to create enough money to pay this expense, I need to create $750 month in the workplace, pay 1/3 to tax, and THEN pay the $500 bill. Thus, if I want to go into the workplace to pay these expenses, I need to create a full $9,000/yr before taxes to pay them.

    When comparing to ways that I could create an annual income - via pressure washing or painting or whatever else in small business, it becomes apparent that cutting expenses is extremely beneficial. Simply cutting $500/mo off of my living expenses is the equivalent of creating $750/month in pre-tax income. That's the difference between earning $60,000/yr and $51,000 - which is a significant difference in income. It is actually worth about two full months of labour per year!

    A person with $5,000/mo income and $4,000 in expenses is doing no better than someone with $2,000/mo income and $1,000 in expenses. Controlling your expenses can be as effective as creating income through other means.


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