Financial Products Series: Annuities




The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the sixth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Annuities

What is an Annuity?

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An Annuity is a financial product that is bought  once a person retires. The Annuity then pays out a monthly (usually) income for the rest of that person's life.

Annuities are purchased with money saved up in a pension but can also be purchased with other types of savings.

The amount of income that a person will earn will depend on several bits of key information. Are they a smoker? Are they in good health? How likely are they to develop certain illnesses?

Annuity and Taxes

The income generated by an annuity is not tax free. Typically it is subject to the base rate of tax unless the person was a higher rate tax payer when they were in employment.

Pension holders have the option of taking out 25% of their annuity in tax-free cash but clearly this will mean that their future income from their annuity will be lower.

What are the different types of Annuities?

Conventional Annuities: Like all annuities this provides a regular income along with options to provide a loved one with an income for when you die and also could include clauses for dealing with inflation. The downside is that once this is taken out, there's no going back on your decision. It is for life.

Enhanced Annuities: This type of annuity has all the pros and cons of a conventional annuity. However, if you qualify, healthwise, you may be entitled to up to 40% more income from your annuity with an enhance annuity.

Investment Linked Annuities: This annuity means that your future level of income is linked to a particular fund. Clearly if the fund does well you will receive a higher income and if it does badly you will receive a lower income. These types of annuities are also subject to administration charges.

Purchased Life Annuities: These annuities are extremely similar to conventional annuities. They can be purchased so that the annuity provides you with an income for a certain period of time or for life. These annuities can be purchased with savings or with the tax-free cash taken out of a pension.

Drawdown Pensions: This financial product allows you to draw a pension without buying an annuity. The rest of the money remains invested in the pension fund. There are quite a few things to watch out for when drawing on a pension in this way. This sort of pension has administration fees. It is also suggested that you should have at least £100,000 in your pension to cope with falls in investment performance. However, this type of pension gives you flexibility in the amount you may wish to withdraw. Also if you die the remaining amount can be given to loved ones, subject to a 55% tax or used to buy an annuity. Alternatively you can bequeath the remaining amount to charity tax free.

Third Way Annuities: These sorts of annuities have in built minimum income guarantees if the fund falls below a certain level. They also allow for a rise in investments providing holders with an increased income. There are many different types of these annuities and you would need to speak to a financial adviser or search around to understand them all.

Overall conclusion

Everyone will need a pension at some point (the earlier the better) and hence an annuity is a good way to receive a regular income, after administration charges, movements in the underlying fund and taxes.

Score: 7


Advice: Speak to a financial adviser to see what sort of pension and annuity suits you. Furthermore, check if your employer has any sort of pension scheme and try to maximize it each month, especially if the company matches your contributions.

Readers, what are your opinions on annuities? Let me know what your plans are for when you retire.



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Savings Accounts


The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the fifth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Savings Accounts

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A savings account is primarily an account with which depositors can put their money, earn a return on their savings and be fairly comforted in the knowledge that their money is safe. There are many different types of savings accounts.

Instant Access and Everyday Savers Accounts: Depending on the particular account invested you can save anywhere between £1 to £5,000,000. Accounts fall into two categories with some paying out interest monthly and others annually. Rates of interest depend on current Bank of England Base rates and on levels of inflation. At the time of writing, in the UK, interest rates tend to be between 2% and 3.2%.

Monthly Savings Account: These sorts of accounts tend to be very similar to the Instant Access and Everyday Savers Accounts. These accounts commit the holder to drip feed a certain amount of money into the account each month for 12 months. Amounts tend to range between £20 up to £500. The rates of return tend to be decent but with hefty penalties for early withdrawal.

Notice Accounts: These savings account tend to offer slightly better rates of interest than the Instant Access account however they require a certain period of notice to withdraw the money. This could be anywhere between a week to 90 days.

Cash ISAs: These savings accounts utilize your £5,640 allowance for a tax free cash investment. Any interest earned in these savings are tax free. These sorts of account tend to offer better rates than all previously mentioned accounts. However, they may not be instant access and could require you to hold for a number of years. Currently the rates on offer vary between 3.35% for an easy access account to 4.25% for a fixed term arrangement.

Advantages

  • Extremely low risk asset
  • Inflation meeting/ beating returns (most of the time)
  • Caters for specific needs in terms of access
  • Can utilize tax efficient ISAs
  • £80,000 covered by the Financial Services Compensation Scheme

Disadvantages

  • The rates aren't very impressive
  • The investment would not be considered exciting or interesting (although there's nothing wrong with that in my opinion)
  • It doesn't utilize your full ISA limit as it does not include the extra £5,640 allowance for an Investment ISA since the majority of savings accounts are cash only

Overall conclusion

A safe and secure investment. They do not offer big rewards as there is very little risk taken. 

Score: 8


Advice: I believe that 30% of your current wealth should be held in cash. I myself hold about 10% at the moment. This is because I am foolish and more of a risk taker. I believe I can afford to take risk since I am young and have no dependents. However, 30% in savings accounts (as cash) is a number that I have just read. I'm not sure what the optimal amount is. Please enlighten me in the comments section below.

Readers, what are your preferred methods for saving? What percentage of your money should be held in savings accounts? Should they be instant access?



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Current Accounts

The financial products series, to briefly explain and evaluate a wide variety of financial products. This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the forth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Current Accounts

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A current account is an agreement with a bank that they will house your money safely (they will obviously use some of this money in investments) but that you should be able to gain full access to your money whenever you need it. A current account is much like cash (in fact it is essentially a form of cash). It is a means by which people can make transactions in an economy.

Individuals can deposit money into a current account and can withdraw that money through various methods:

  1. By entering a particular branch of their bank and withdrawing the money from their account at the cash desk
  2. By using a debit card to take money out of an ATM machine
  3. By paying for things via a debit card that removes the money directly from your current account
  4. By writing out a check. A check is a written document that tells the banks to pay money from your current account to someone else. Most current accounts come with a cheque book
  5. By setting up standing orders or direct debits so that money is automatically taken out of your account to pay for something on a regular basis, such as a monthly mobile contract
FACT: The difference between a standing order and a direct debit is that a standing order refers to a regular payment between different people and a direct debit usually refers to a regular payment by one person who is paying a company for a particular good or service

Advantages

  • Immediacy of access
  • Use in emergencies e.g. if other assets fall in value or you lose your job and need to cover bills for a couple of months
  • Most businesses require employees to have a current account to pay salaries into
  • Can make transactions via a debit card
  • Small amount of interest - up to 3% depending on the bank
  • Perks for changing accounts such as cashback if you fulfil certain criteria
  • Can get perks such as competitions, special credit cards, access to certain savings accounts
  • Extremely low risk asset
  • Can automate payments and income through standing orders and direct debits
  • £80,000 covered by the Financial Services Compensation Scheme
  • Overdraft capability to allow for a little credit

Disadvantages

  • Loss of value due to inflation
  • Low rates of return

Overall conclusion

Score: 9

Everybody should have a current account. It makes transactions and life in general so much easier.


Advice: Set up direct debits within your current account where needed. They can help to build your credit score. Don't be afraid to change current accounts every 12 months or so. You can hunt for the best deals on comparison website and will usually be rewarded for your efforts with cashback repayments and higher interest rates. The whole process is much easier and more automated than most people would guess. I wouldn't hold too much money in your current account at any one time. You can get better rates of return elsewhere. Hold enough money in your current account to cover current spending (with a couple of extra hundred to be safe).


Readers, everyone needs a current account but how much should you be holding in there at any one time? How often should you change your current account?



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Cash

The financial products series, to briefly explain and evaluate a wide variety of financial products. This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the third in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Picture from freedigitalphotos.net

Cash

The word cash can refer to many things. In common usage it can refer to the notes and coins in your pocket. Cash can also refer to the more digital forms of money, such as the numbers on your bank statement telling you how much money you have available to spend, and thus available via debit card spending. Cash can also be held in multiple currencies at once.

The key to cash is that it is extremely liquid. This means that it is easily accessible to convert into spending power to buy different goods and services. It is the immediacy of ability to spend it that makes cash so desirable.

Why do we need cash?

One of the criticisms of cash is that there is very little, if any, return on cash. Furthermore, the spending power of cash is eroded over time by inflation. Some would argue that it is probably better to convert any spare cash into easily accessible investments. For example, you could move any spare cash into an everyday savings account (more on these sorts of accounts in upcoming posts).

However, the problem with not having cash is that you may need to go to the bank to take out a deposit, or else transfer funds online to a current account and then go to an ATM to take money out to be able to spend. Clearly, this is not ideal if you need cash suddenly.

Another reason that we need to hold some cash is because cash is generally less risky. Even with a run on the banks £80,000 (in the UK) of money held in assets such as cash are assured by the Financial Services Compensation Scheme. The rates on cash may not be as good but the risks are far lower.

Advantages

  • Immediacy of access
  • Use in emergencies e.g. if other assets fall in value or you lose your job and need to cover bills for a couple of months
  • Can make transactions with it
  • Least risky asset
  • £80,000 covered by the Financial Services Compensation Scheme

Disadvantages

  • Loss of value due to inflation
  • Low rates of return

Overall conclusion

Score: 6

As an asset to make your millions it is one of the worst, but at least it won't lose you much money (apart from inflation).

Advice: I would hold an emergency fund in cash. This is something that you will need to gain access to in case you lose your job, or there is a sudden leak in the house, or general financial disaster which requires immediate financial attention. Traditionally people are advised to have about 3 months salary saved up in cash. I would actually argue that you should have only a months. In that time you can be cashing in investments or savings to support yourself if needs require (controversial I know! - let me know what you think of this).

Cash only requires ease of access. Therefore if you can find an immediate access cash ISA account to hold your emergency fund then this is ideal because you can potentially try to beat inflation as well as having an immediate access emergency fund.


Readers, what's your opinion on cash? What percentage of your portfolio should be held in cash?



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Structured Products

The financial products series, to briefly explain and evaluate a wide variety of financial products. This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the second in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Structured Products

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A structured product is an investment that has a defined return linked to a defined underlying index such as the FTSE100 and is delivered at a defined date. They were developed as an alternative to defined equity, bonds, and deposits investments. Structured products will tend to form a combination of all three products. They befit from the exposure to the potentially high returns from the financial markets (e.g. Stockmarket) but with some downside protection in the event of a downturn.
You can buy structured products/ deposits through many Highstreet Banks, Building Societies, and Independent Financial Advisers (IFAs).

How does it work?

The easy answer to this is that it depends on the structured product. Each product is different. Some examples, to give you an idea of how they work:
  • Capital at Risk: A 5 year investment with Stockmarket exposure and some risk. At the end of 5 years if the FTSE is higher then the product will give you a 60% return, if lower you will get your capital back unless the FTSE falls below 50% in which case your capital will track those loses.
  • Deposit Based Contract: 200% of the rise in the FTSE 100 index over 5 years subject to a maximum return of 40%. Capital back if the FTSE falls in that time period. This would be covered for up to £80,000 by the financial services compensation scheme.
  • Kickout Contract: The contract could have a six year term and if the FTSE is at 6,000 points today (I wish!) then if the FTSE us up one basis point in a year from when the contract began then the contract ends and the investor is paid a set percentage e.g. 10% (the percentage is based on current market conditions). If the FTSE isn't higher, the contract runs for another year. If on the start date, 2 years later, the FTSE is higher (even by one point) then the investor gains 20%. If it misses again, the contract runs for its third year, with a 30% gain and so on and so forth until 6 years is up. If the FTSE is higher after 6 years you will gain a 60% return. If the FTSE is lower by less than 60% you receive your capital back, but if more than 50%, you track the FTSE's loses. This type of investment is not covered by the financial services compensation scheme.

Advantages

  • Better return than cash, without the levels of risk of shares or bonds
  • Many products cover the investor's capital for a fall of up to 50% in the underlying tracked product
  • Takes away some uncertainty of returns from the stockmarket
  • If the market falls 49% you can still get your capital back

Disadvantages

  • If the bank behind the product goes bust, you've lost your money since the product is not covered by the financial services compensation scheme
  • May miss the bigger gains from tracking the stockmarket point for point

Overall conclusion

Score: 8
I really like these sorts of investments and have a kickout scheme myself (see my current financial breakdown). However, I would offer a little advice:

Advice: Make sure that you know exactly how your structured product works. When buying a structured product be prepared to hold for the full investment term. You can get access to the funds before the term is finished but usually at a cost. Utilize your ISAs to make sure that the returns are tax free. Structured products should never be your only investment. It should be part of a portfolio.


Readers, what's your opinion on shares?



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Shares

The financial products series, to briefly explain and evaluate a wide variety of financial products. This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the first in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:

  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Shares

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A share is a claim on a single unit of ownership of a company. When buying shares you are essentially buying a part of a business, albeit a very small part.

People buy shares for two reasons. One, they buy shares in companies that they predict will grow, and/ or become popular with other investors. They hope that the popularity of the share will raise its price and thus they can sell for a profit. Two, they may invest to gain a source of income from the dividends (0% up to as high as 13% - the most I've ever seen but it could be higherpaid by many (not all) companies.

Fact: A dividend is a share in the companies profits that goes to it's shareholders usually paid twice yearly.

For a more detailed analysis of how to invest using shares why not check out my article on Value Investing, or else on some of the investing greats such as Warren Buffett or Benjamin Graham.

Advantages

  • Potential for large capital gains
  • Scope for clever tax planning and utilizing your annual £10,600 capital gains tax allowance
  • Possible income from dividends
  • Exciting and fun

Disadvantages

  • Potential for big loses
  • The potential for the company to go into liquidation in which case you would lose all your capital
  • Potential for fraud
  • Pay extra income tax as a result of dividends unless you utilize your tax free ISAs
  • Requires a huge amount of research
  • Potentially large transaction and/ or broker fees

Overall conclusion

Score: 7
If you know what you're doing, invest for the very long term, commit to large amounts of research, then there is huge scope for making some large gains. However, I feel that I must warn that those who don't know what they're doing could be in for large losses. I think that more people should be utilizing shares in their overall portfolio, if only to test out the markets with a bit of spare cash that won't be missed if all goes wrong. Obviously, even if you're an experienced investor you still don't want to be putting your entire wealth into stocks and shares.

Readers, what's your opinion on shares?



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

What to look for with a Savings Account


Savings accounts are numerous. It is hard to decide which one is best for you and your needs. This article should help direct your thoughts to the things that you should consider when choosing your savings account.

Why do you need a savings account

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As you will see in an upcoming series on Financial Products (starting next week!), one of the key financial products to have in your arsenal is a decent Savings Account.

A savings account is important because it is going to be the means by which you feed your other investments. For example, let us say that you wanted to invest in a particular structured product (explained in my forthcoming financial products series) that provided you with a decent return (with some risk) over the next 5 years. However, the financial adviser/ personal banker tells you that to invest in this particular structured product you are going to need a minimum of £1,500. Alternatively, you wanted to save up the money for a holiday.

For some people coming up with the money may take a little time. They would put aside money in their current account each month until they had the full amount. Since the money remains in their current account until they want to spend it, the individual is earning very little (or even no) interest on their money. The financial lingo here would state that this person is working for their money and not letting money work for them.

The obvious solution to this problem is to put the money into a savings account and earn a higher interest.

What should you look for in a savings account?

There are several important things to consider when searching for the ideal savings account:
  • Rate of Interest: Ideally you want the highest amount of interest available out there in the market. There is no point getting a savings account that pays a pittance. You want it to be worthwhile to put your hard earned cash aside. Ideally you want the rate to be at least a percentage point above the rate of inflation. This ensures that you are not losing money.
  • Ease of Access: There is no point having a savings account if you cannot access it when you need the money, or else there is a penalty on the rate of interest if you need to take your money out early. If you don't need the money for the next year then by all means lock your money away for 12 months in exchange for a higher rate of interest. Of course, if you need the money in a few months time then you'll want the luxury of immediate access to your savings. In which case, you want a savings account that satisfies this criteria.
  • Regularity of Savings: Do you want to put some money in a savings account every now and again? Could you commit to giving a set amount each(in return for a higher rate of interest)? Do you have a certain large lump sum that you can commit to a savings account? All these questions should be considered and will affect the type of savings account that's right for you.
  • Bonuses: Some savings accounts have bonus features that you may be interested in. For example some accounts may give you free travel insurance or a free rail card.

As you can see it is all very complicated finding the best account for you. To find out which account suits your needs best I advise that you compare savings accounts using online comparison and bank sites. Look out for my forthcoming Financial Products Series for more information on this and other types of Financial Instruments.

Readers, what are the important things that you look for in a savings account?


Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Student Life: The Quickest Way to Sell all your Books

Amazon Trade-In and its benefits. There are affiliate links on this page. I will earn some Amazon store credit if you make any purchases from Amazon once you have been on the page. However, just because they are affiliate links does not undermine the credibility of the post. I would only post about something that I actually believed in, not just for money.


Sell my books: Got Loads of Old Textbooks?


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As many of you know I recently left University and like many students I amassed a lot of books. These were textbooks and were hardly the type of books that I would enjoy reading in bed at night, in the bath, or at the beach in the summer. The problem with many textbooks is that they go out of date as new editions are released. Therefore I figured that it was best to sell them as quickly as I could.

I had a couple of options. I could wait until September (the new term) and try to contact students in the year below to sell my books to. I could try to sell them individually on eBay or Amazon. Alternatively Amazon also have a system whereby they take all your books an store them for you  and send them off for you. You receive payment as books are sold. If books are not sold after a year (I think) then you have to start paying Amazon money to store your books.

Why there is a better way to sell old books?


I didn't like any of these options. They all seemed too fiddly and I'd much rather have the money now than to muck about with sending one book off at a time and dealing with 18 different postage and packing tasks for each order.

I did a bit of research and found that Amazon have the Amazon Trade-In system that's really easy to use, doesn't cost a penny and allows me to get rid of all my books in one go.

What is it?

Amazon Trade-In


Well, the Amazon Trade-In service is a brilliant service. You go onto their page and type in all the ISBN numbers (usually on the back of the book) and it tells you what the book would be worth if you traded it in with Amazon. Once you're happy with the number of books that you have submitted and the total amount of money offered by Amazon then it is time to print off the free postage label, find an empty box (go to the local supermarket - they'll be willing to give you one for free), package up your books and take them to the post office. Make sure the free postage label is on the box and your books will be sent away. Amazon's partners then check the quality of books then give you Amazon store credit equal to the amount originally promised if the quality is good enough. If the quality is not up to scratch then they can send you the books back and you can try to sell them individually.

From personal experience, this was a great way to get rid of all my text books. I traded all 18 in at once and received £112 store credit. It really was as simple as I explained.

Readers, do you have any better ways of getting rid of old books? In my mind this is the quickest and easiest.


Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

How can I make money?

Short on cash and need quick money? Don't bother with a payday loan read on to find out my quick and easy tip for getting some quick money now.

Earn easy money

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In the next couple of weeks I have some big changes in my life. I'm starting my first full-time job, I'm moving to London, and I'm travelling for a month around India. All these changes in my life don't come for free. Whilst my income is going up (as I explain in my article Budgeting a Salary Increase) my expenses have/ will rocket as well. I could do with as much money as possible to make this transition easier.

For many of us (although I would urge you to reconsider if you think that this is you) we have neither the time,the patience, nor the entrepreneurial spirit to make extra money on the side.

Another idea to make money requires capital. For example you could gain rent through owning property or dividends through owning high yield shares. Clearly these forms of generating income are more of a long term  method of gaining income. Alternative interest gaining financial products will be discussed in a future series of posts starting next week. These other financial products also require capital.

Other methods of increasing current cash flow is through frugality and budgeting. I would encourage you to read some of the following articles if you are looking for that sort of method of increasing your cash flow:


Getting quick money

Clearly I am more concerned, as I'm sure many of you are with extra money here and now. The first thing I would urge you to do is to start by analysing your assets just as I did in my quarterly review. As you can see I have £100 just sitting in a building society account earning very little. It was some money left over from an account that I didn't want to close (and so was required to leave £100 in it) some years ago. It isn't worth placing this in any other account because it is relatively small amount. I would gain much more use out of this money by transferring it to my current account to help me out in the coming few expensive weeks.

OK so there's the answer. You can generate quick and easy money by dusting off those old accounts. I get the feeling that some of you aren't satisfied with that answer and may feel that I mislead you. You will claim: "That's not easy money as it was mine to begin with!" Your claim is a fair one but let me ask you this: Is your life made any better by the fact that the small amount of money was sitting there doing nothing? Probably not. It is time to consolidate your finances this summer and make sure that you're utilizing all that you have in some way, whether it is earning interest or spending it.

Readers, do you have any random small amounts of money floating about? You should check. What else would you do with an amount as small as £100? Are there better things that I can do with it?


Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Become an ISA Millionaire (Starting in 2012/2013)


How a person or a couple can use their ISA allowances to build a pot of money worth over £1,000,000 and details as to how long this might take. This is an updated version of the original article for the financial year 2012/2013.

Preliminaries - ISA to millionaire

ISA refers to the UK's Individual Savings Account. It is a tax-free package for savings and investments. For the tax year 2012/2013, UK residents have the option to invest £5,640 in a cash ISA and £5,640 in an  investment ISA. Alternatively, you could invest all £11,280 (or as much as possible) into an investment ISA. For the purposes of this post those outside of the UK will have to refer to any tax-free package that the government offers but the principles are still the same.

Click to download ISA Millionaire spreadsheet (.xls)

Millionaire Theory

In theory it is very easy to become a millionaire, we will discuss the practicalities later on. To get the most out of this post it would be a good idea to download the free spreadsheet I have created. You can do this by clicking on the picture above.
The first column in the table assumes that you are one person saving to become a millionaire. You invest your full ISA investment limit (£11,280) into an index tracker, well picked shares, fund or share related product. You reinvest your full ISA allowance each year, topping up the total pot. As you can see in the cell labeled "growth", I have assumed an annual rate of return of 7% per year. This is a very realistic return (after inflation) from shares for an investor of average intelligence and relatively minor experience. As you move down column B you can see that the interest is compounded each year and you are topping up the amount saved. In cell I2, you can see that it has taken you 29 years to become a millionaire and from J2 you can see that you have only actually invested £327,120 of your own money to become a millionaire, the rest is from the magic of compounding.
Theoretically, you could become a millionaire even quicker. If you look in column C you can see that I have used a couples ISA allowance which is double a single person's allowance, at £22,560. A married couple could invest this each year and build up a pot worth over one million in 21 years time. They would have had to invest a total of £473,760 of their own money to do this, however this is only £236,880 each.


Why would you want to become an ISA millionaire?

Other than the fact that you can boast about how you're a millionaire, there is a very important reason to do this. Imagine a couple both aged 25 who do this. They save hard and invest intelligently and patiently. After 21 years they are both aged 46, they can retire. Why? Because they are earning a household income of over £70,000 per year and it's all tax free. Furthermore, if the couple were patient enough to save for another 8 or 9 years they could be seeing return of £140,000 per year, tax free, for the rest of their lives and they would only be 55. This would be a very comfortable retirement. It's so simple, why isn't everyone doing this? Because it's simple but not easy.


Millionaire Practicalities

There are many things that can get in the way of becoming an ISA millionaire but there are some solutions to some of these problems:
Returns: You may not be a shrewd enough investor, the market might collapse, there is no way to guarantee those returns? On the contrary I believe I have been stingy with those returns. Firstly, I have not assumed any reinvesting of dividends (if investing in shares). This would give a huge boost to savings each year and hopefully reach the goal line faster. Secondly, if you take a long enough time line, say 20 plus years (which we are), shares yield a historical average of at least 7%. Even if you're not very good at picking share you could simply choose to invest in an index tracker to track overall markets, which should yield you this return.
Fees: These refer to the fees that you pay your broker or fund manager and can be considerable, eating away at the compounding effect. To avoid large fees choose an on-line share dealership that you manage yourself or choose an index tracker which tends to be relatively cheap.
Savings:  A legitimate worry would be that a person cannot hope to save that much each year. If you have dependants to bring up as well it can be even harder to find the spare cash to invest. An easy solution would be for a couple to invest together in one person's ISA allowance. This is very realistic. If you assume that the average annual income in the UK is £26,000 a year which means that a combined household income of £52,000 would be investing about 20% of their income into investment ISAs. 20% is what people should be saving anyway making this goal extremely plausible.
Some of you will retort, "but I don't have a spouse/partner?". This shouldn't stop you reaching this goal. There is no reason why you can't pair up with some friends to reach the same goal. It would be a little bit more complicated and would require a lot more care when setting up contracts etc, but still it is possible. I will write a post on this another time.
If ISAs change: I believe that now that ISAs have been in existence for a while, the allowance will not go down in value. It would be political suicide to do so or to remove them without replacing the with something equally as attractive. This is because it would be viewed as anti-poor as the original idea was to encourage the poorer members of society to save. A country needs to encourage saving to grow (I will not go into the economic explanation here, message me or comment if you would like to know more) and all governments know this.

Conclusions
In theory anyone can become a millionaire. The only question is whether or not you have the patience or are able to make the sacrifices.

What do you think? How plausible is this scheme? What other schemes exist to make this sort of tax-free income?


Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Disclaimer

Information on this site is not appropriate for the purposes of making a decision for carrying out a transaction or trade nor does it provide any form of advice (investment, tax or legal) amounting to investment advice, or make any recommendations regarding particular financial instruments, investments, or products.
Always seek advice of a competent financial advisor with any questions you may have regarding a financial matter