HOW TO MINIMISE & MAINTAIN YOUR FIXED COSTS OF LIVING AND RAISE YOUR STARTING CAPITAL
Living Like a pauper, or a poor man, will prepare you for self-employment. Why? Well you have to do all of these three things to get in to self-employment. You have to:
- Minimise your fixed costs of living prior to leaving your job
- Raise your initial investment to start your own business
- Maintain your fixed costs of living after leaving your job
To achieve all of these three things require you to live like a pauper.
- Minimise your fixed costs of living
The most important factor in business is cash. The less cash drains you have the more likely you are to succeed. The biggest cash drain anyone has is their cost of living. If we can control that and minimise it to the bear minimum then the easier it is to survive in the initial stages of self-employment.
There are really only two core ways of minimising your fixed costs of living:
A Going without i.e. not spending!
B Cutting costs i.e. spending less!
- A) Not Spending
I’m not going to bore you about how you should stop smoking, drinking, eating or just simply indulging. What you should do is when you get paid put a certain amount aside so you cant get at it. Put it in a separate deposit account, give it to a family member or put it under your mattress – what ever you do, don’t spend it! What will happen is that you’ll adjust to the new level of spending that you have at your disposal.
Always ask yourself – do I really need this item that I’m buying now or do I just want it? Is it a need or a want? If it’s a luxury item then its probably a want. When I was setting up my business I went without. Here a some of the things that I used to buy when I was at work but went without when I was starting self-employment:
- Newspapers & Magazines
- Use of a whole flat to shared accommodation
- Designer clothes
- Meals at restaurants
- Nights out in London visiting trendy bars and nightclubs
It was easy for me to go without. In the back of my mind I knew that if I went without now I would have in the future. This is now the case and I have a lifestyle that most will envy. I hope this inspires you. Remember, saving for a route out can be very rewarding. When you do actually save enough and start your own business the results are very immediate i.e. the labours of your scrimping and saving will result in you having enough time for your family, friends and yourself!
- B) Spending Less
There are really only five things you can spend your money on:
- Food & Consumables
- Entertainment & Clothing
- Loans & Savings Plans
Here are some tips on how to cut back on spending on each of these categories:
|FOOD & CONSUMABLES||Eat in rather than out||Its so easy to go to down to your nearest Burger chain, Indian restaurant or Chinese take-away. There’s no washing up, it tastes lovely and there is no preparation time involved.However, you do pay for this! I used to make myself sandwiches in the poor days. 2 slices of bread, a bit of lettuce and a chicken slice – total cost 20p! Compare this to an Indian take-away costing £7 at least. Now I’m not saying don’t treat yourself. I treated myself to one Chicken Biryani from my local Indian once a week – but that was it.Invariably the food you will prepare at home will be healthier too. The irony is that even though I can afford to eat out every night I now choose to eat in as it is healthier. I even look forward to those chicken sandwiches now!|
|Go round your Mums!||Now this may not be possible for everyone. It depends on whether she is still alive, you still see her or if you live close to her. The principle is – don’t be ashamed to ask for help. My mum quite enjoyed seeing me twice a week (or sometimes more!) and likewise – there’s no cooking like your mum’s cooking.Do you have a brother, sister, nan, cousin or good friend that loves to see you? If you let them know what you are doing – trying to start your own business, then you will be surprised, they are more than willing to help.Do not think you are a sponger! Always remember people who help you get to the top. As thanks my mum now receives an income from me that is in excess of her pension and she doesn’t have do a thing!|
|Try non-branded goods||If you understand how supermarkets work then you will try this. A lot of ‘own brand’ goods are produced by the branded good manufacturers. So sometimes the quality is the same. Now I say sometimes! I have tried some of the non-branded goods and they taste awful but there are some own-branded goods that taste as good if not better than the branded goods. So give it a try. The cost savings can be up to 50%.|
|Buy one get one free||Every supermarket does this. They sell goods at no profit or even at a loss to get you through the door. You can use this to your advantage. If you have the time you can go to every major supermarket and capitalise on all of their deals. I have to admit, I never had the time to justify the cost savings. But if you have a family and you are willing to stock up then I would estimate that you can reduce your shopping bill by 40%.|
|SHELTER||Rent a room rather than a flat or house.||Having your own living space is a costly thing. It can sometimes drain your monthly income by up to 70% when you take in to account the rent, rates, bills and insurances. Why not consider lodging. I did. It cost me £55 per week and I was able to preserve the cash that I had saved. I lodged with someone for 12 months, who is now a good friend, so I could put a deposit down on my first house.Do you really need all that space? Could your social life receive a boost from sharing with others? If you can do this then it will have the most dramatic impact on your level of savings out of all the cost savings mentioned in this table.|
|Switch utilities suppliers||It’s a competitive market out there when it comes to supplying gas, electricity and telephone. Due to deregulation you can save up to 40% on your bills simply by switching and it is an easy thing to do!Look out for new tariffs for your mobile phone. Prices have only come down since there introduction and so there will always be a new tariff being introduced that will trump your existing tariff sooner or later.|
|Shop around for contents insurance||The insurance market is a competitive one. Do not accept the premiums you have to pay just because you paid it last year. Get in contact with a good insurance broker to get you the best deal.Have you ever considered not getting insurance? Sometimes you can pay a hefty premium to insure not a lot – and even then you don’t get a pay out when you make a claim!|
|Consider purchasing second-hand furniture||What’s more important to you – owning a house or owning nice furniture? If you are serious about wanting to own your own house then you will do whatever it takes to do it. This may mean sitting on a second-hand sofa, sleeping on an old bed and eating off a table that your cousin gave you!There are many incentives retailers are offering such as 0% finance, buy now pay later, bank holiday one off sales etc. Do not get tempted! Save the cash now – get the new furniture later. Once you’ve bought your flat or house then you can start thinking of furnishing it properly.|
|TRAVEL||Sell the car||Owning and running a car is not cheap. You’ve got HPI payments, insurance premiums, road tax duty, petrol & oil costs, Servicing Costs and Repairs. That’s a lot of expenses! You could save a small fortune if you did sell the car.Do a feasibility test on the car. Work out how much you spend a month on the car and see if it is greater than if you walked, cycled, took the train or bus and took taxis. If it is - then its time to sell the car! Remember a car is a luxury item. Public transport is supposed to be getting better and providing better value for money so be brave – get rid of it!|
|Downsize the car||Okay, it may not be practical to get rid of the car but how about downsizing it.|
|Try walking or get a bike!||If you don’t have a car but get buses, trains and/or taxis then consider walking or cycling. You will save on the fares and it will keep you fit!|
|ENTERTAINMENT & CLOTHING||Shop in the sales, markets and charity shops||One of my good friend’s dad told me that he buys his winter suits in summer and his summer suits in winter. The key is to get value for money. If you’re shopping in a glitzy, air conditioned, fashionable part of town then you are paying for it! All their expensive rents, rates and décor they have to pay are ultimately paid by you because they charge you a high mark up on the goods sold.You’ll be surprised how well stocked some of the market traders are now. I still get most of my designer clothes from markets and superstores – not New Bond Street in London W1!|
|Think about if it’s a need or a want||As mentioned above you need to always ask yourself if it’s a need or a want? Do you really need to see the latest releases at the cinema or can you wait a year when they hit the Sky channels? Is the latest Kylie CD single with all the mixes really necessary or can you wait for her album? Do you really need the extra pair of trousers that are half price in the sale or are you buying them because they’re cheap? If you master this thought process alone then half the battle is won.|
|When you go out – don’t stay out late!||I find that when I stay out later I spend more. More on drinks, food, taxis and club entrances. Go home early! I’m not saying just stay out for an hour or so but try to arrive early and go home early. You’ll find out that you’ll come home with some cash in your pocket rather than having to revisit the cash machines on the night out and regretting it later!|
|Look out for the deals bars, clubs, cinemas and restaurants are offering||The entertainment market is a highly competitive one. Virtually every evening spot has an offer going on. Take advantage of this! Look out for flyers or leaflets available at their premises. Scan the local press for a restaurant trying to drum up a bit more business. Pay close attention to the TV ads when Pizza Hut and others are doing a promotion.|
|LOANS & SAVINGS PLANS||Switch credit cards and loans to obtain the best deals||0% APR for balance transfers – sounds familiar? I’m sure you’ve heard this so many times that it no longer means anything – but it does! It means that you can save a lot of cash as you pay no interest on your borrowing. Make sure you capitalise on these deals to save you real money. But don’t just be happy with saving money – make an effort to clear these balances! You will run out of credit companies eventually so you do need to clear this type of unhealthy borrowing.|
|Cash in or freeze payments to endowment policies and pension plans||Is the endowment policy you are contributing to really going to mature to its estimated value? You could cash it in, raise cash and save cash as you no longer need to contribute to it.It’s the same for pension contributions. You could freeze payments which will result in an instant saving. When I used to work I was tempted to contribute to a pension. But after careful thought I realised that under no circumstances was I going to hand over any of my hard earned cash to company that would ‘play’ with it on the stock market, be unsure of how much I would get back and never access it until I was of retirement age.If you want a real pension fund then invest in property, but that’s another story – or even a book!|
- Raise Your Initial Investment
Apart from saving your income that you currently earn now there are other quick ways of raising the initial investment required to start your business. How much you need to raise will depend on the business you decide to run but below is a list of inventive ways of raising cash fast. The following list ranks in order the ‘cost’ to you starting with the cheapest first, the cost being the effective interest rate being paid on the initial investment. BOE means current Bank Of England base rate in the list below.
|Personal Assets||0%||Assets that are no longer being used but have some resale value. This may be jewellery, cars, furniture, pieces of art, electrical equipment etc. The cost is nil as the assets are not being used but they could be used to realise some cash in order to invest. Look in the garage or attic - you may be surprised! Think about it like this – you’re trading in your Ford now for the Ferrari in five years time!|
|Savings||BOE Base Rate||You may have savings in a deposit account or cash ISA. If you use this money the cost will be the lost interest that would have been earned if you had left it in the account.|
|Endowment Policies or Company Shares||BOE Base Rate + 3%||You could surrender an endowment policy or liquidise a current share portfolio to raise the cash. I recommend you talk to your financial adviser and stock broker before taking this action as you could be better off holding out on some of these policies or shares. But it could be time to let go of some poorly performing stocks and enter the property arena as so many of the share market investors are doing now.The cost of this on average is equivalent to the average return the stock market delivers. This, of course, will be different depending on the type of policy or stocks you hold. You could be better off if you do sell now as they could result in a loss in the future.|
|Borrow from Family||BOE + 4%||You may have a family member who has cash sitting in the bank and is willing to lend it to you. You can offer them a better rate of return than any deposit account could. If he or she is a close member of the family they may lend it to you for 0%, but if you proposition a family member offering BOE+4% you might get quite a few more positive responses than expected.You could access your inheritance early, as many families do, to avoid inheritance tax. As long as the donator lives seven years beyond the date of the gift there is no inheritance tax to pay and is thus beneficial to both parties. A family member may be more willing to give you assets if you are proposing to invest it further rather than to just simply squander it on a new car or holiday.|
|Secured Borrowings||BOE+2-7%||To do this you must already own a property. The cheapest way to do this is to remortgage the whole property and release the equity tied up in your home. It pays to shop around. A good mortgage broker could probably beat the current rate that you are paying now and even reduce your monthly payments whilst still raising you some cash on top.The other way is to get a second charge loan where you keep your existing mortgage and borrow on the remaining equity on the house. You’ve probably seen the TV ads promising you a new car or holiday just from one phone call. Well forget a new car or holiday – we’re going into business!|
|Unsecured Borrowings||BOE+2-15%||The cheapest way to do this is by transferring a current credit card balance to a new credit card with introductory rate offers. You draw out as much cash as you can on your current credit card and then apply for a credit card that has a low introductory rate for balance transfers until the balance is cleared. Once your new credit card has been approved you transfer your existing balance on your old credit card to the new credit card at the introductory rate, typically BOE+2%. This rate is fixed until you clear the balance.You may, however, not get this new credit card. The other way is to draw down the cash on your existing credit card at the credit card rate. This can be expensive but if the business has guaranteed customers lined up then you could use the cash on a short term basis, say one to two years, and use the profits to clear the credit card balance over that period.You may be able to arrange an overdraft with your bank or a personal loan at around BOE+6%. You need to speak to your bank manager.You can also go to other unsecured lenders but there are high arrangement fees and the interest rate can even go up to BOE+35%! You need to shop around but I would advise steering clear of anything with an interest rate higher than 25% unless you are really desperate and the business idea is a dead cert.|
|Get a partner||Dependent||The other way to raise the cash is by taking on a financial partner. This means that the financial risk is borne by the partner but you end up doing all the work. The partner will be entitled to a share of your profits and you will not be free to do what you want with the business. Equating the cost to you will depend on how successful the business is as the cost will be the share of profits made. Even though this is the most expensive way to finance a business it can also be the cheapest way if the whole project fails as your partner has taken the full financial risk. If this is the only method you can use to get into business I would still advise taking on a partner as you will still be freeing yourself from the rat race.|
This is not an exhaustive list. You may have other good ideas for raising finance but if you can’t raise the finance the project can’t go ahead. It’s as simple as that. I raised my initial investment by saving as much of my salary as I could. While my colleagues were spending everything they earned on high rents on apartments, expensive holidays and designer clothes I saved my money by living in one room in a shared house, holidaying in the UK and wearing unbranded clothes. After five years I live in a large detached house with swimming pool, holiday abroad three times a year and wear only designer clothes. You need patience and a medium to long-term vision if you truly desire to have enough wealth to live the lifestyle you want.
- Maintain your fixed costs of living
In an ideal world as soon as you go in to business it will make a profit and these profits will maintain your fixed costs of living. However, we live in a less than ideal world and it is likely that you will make a loss in the first year - but your fixed costs of living still have to be met! So how do we raise this short term cash requirement? Well it can come from three sources, in the order from which to seek from:
- Family & Friends
Lets look at this in more detail.
|YOU||Go part-time at work||Leaving the rat race could be a two stage process. If it is possible to go part-time at your current employer and implement your business in the other time then you can see how well your business does. Once your business is up and running and providing you with a satisfactory income then you can leave work completely.|
|Get a flexible part-time job||If you can get a job that doesn’t require you to be in at a certain time or can be done during hours that won’t affect the setting up of your business then your fixed costs can be maintained. Examples of these type of jobs are proof reading, handcraft jobs or parcel deliveries where you get paid on success or flexible jobs where you can work for burst of periods at a time such as temping, strawberry picking or taxi driving.Do not get on your high horse and say these jobs are beneath you. You only have to do these type of jobs while you are setting up. Once your business takes off you can take pride in the fact that you did these jobs.Around three years ago, when I was setting up, I took on 2 weeks work for an accountancy firm even though I was escaping from the rat race of an accountancy firm. But I knew this job was necessary for me to pay my bills! It was only for 2 weeks in the year and in fact I quite enjoyed my time with this firm. I got paid £100 per day which at the time was quite needed. Now I charge £100 per hour but I would of not been in this position if I had been too proud to take on this ad hoc work in the past.|
|Get a complimentary job||What better way to find out what it would be like to run a business as than to go and work for that type of business. If your idea is to run a restaurant then go get a job in a restaurant! You will acquire certain insider tricks and tips and also get a real feel to what it would be like to run that type of business.This strategy has double benefits. It pays your bills and helps you establish whether that business is the right one for you.|
|FAMILY & FRIENDS||Gifted||As I’ve mentioned earlier you will be surprised by the support you may get from the people around you. Now I’m not saying go round all your family and friends with a begging bowl but if your family and social circle know of what you are doing they may well move forward certain cash gifts they were planning.A family member of mine gave me £5,000 in cash to invest as it was going to be left to me upon their death anyway. They equated that it was better to give it to me now rather than when they die as they knew that I needed it and that I would turn it into double that in a short period of time. In fact it can be very tax efficient if your family members do give you your cash early as you can avoid inheritance tax in certain circumstances, usually when the deceased has more than £259,000 to leave. Please seek professional advice for more detailed advice.|
|Loans||In certain cultures, such as the Jewish and Asian cultures, it is common place to borrow off friends. Personally I have never done it even though I am Asian but if you are part of a tight knit community and you know people that trust you then why not ask? They can only say ‘no!’.|
|Ad-hoc work||Use your contacts. If you can get a family member or friend to get you a short term job in between setting up your business then get it! Its essential that you keep up with your bills and knowing that you can get quick income by picking up the phone and doing an odd days work.|
|OUTSIDE||Loans||This is not the most ideal way to fund your fixed costs of living but it is one way. If you are thinking of taking a loan try and get 12 months worth of your shortfall and try and pay it off over the longest period possible. This way your monthly loan repayments are kept to a minimum.If you can try and get a loan that does not penalise you if you pay the loan off early. This means that if your business takes off earlier than expected you can redeem the debt when you want thus saving on interest.|
|Overdrafts||Overdrafts are more suitable as they can be paid off as and when you wish to. Apply for an overdraft facility BEFORE you leave work as they are unlikely to give you the facility once you’ve left work as you have no provable income. The great thing about overdrafts are that you pay interest on the balance outstanding only and on a daily basis. If the business does well at the start the overdraft can be redeemed sooner than planned.When I left work I had a £10,000 overdraft facility in place. I let it run up to around £5,000 before business picked up but I was thankful that I had such a facility.|
|Credit Cards||I don’t care what people say about credit cards – they are great! It’s the cardholders that don’t know how to use them that give them a bad name.One of my current credit card providers offered me £10,000 in cash at 0.7% APR for 4 months – so I took it! I will use it to fund property purchases and then redeem it in time when one of my remortgages come through.As long as you have a plan to repay the credit card company within a set period of time there is no other way you can beat a credit card in the speed of raising cash – precisely when you need it.|
As you can see from above you have to mature in the way you handle cash, be active in raising cash and be inventive when it comes to raising cash fast. This is crucial to running a business and ensuring that it survives. Many business gurus will tell you this one phrase: CASH IS KING! It doesn’t really matter where the cash comes from just as long as you can pay your debts when they fall due then you remain in business. The definition of insolvency, or in other words bankruptcy, is when the debtor is unable to pay his or her debts in full and on time. So to remain in the black you always have to have access to cash – fast!
So you’ve learnt how to preserve, earn and raise cash – what are you going to do with it? Well you need to invest it! You need to identify what business you are going to do. Step 3 helps you to do just this.