Budget Like A Pro – The Complete Guide To Budgeting The Lazy Way

The thought of budgeting is enough to make the eyes of most people glaze over in boredom. We hear you – it’s not the most exciting of subjects, which is why we’ve never covered it until now; and will be a big reason why so few people can commit to it.

But we think our approach is better than the usual penny-pinching approach touted elsewhere.

We suspect that the inability to stick to a budget is partly due to how you’ve been taught to do it. We’re guessing that previously you’ve been told that budgeting involves tracking everything you spend down to the penny.

You’ve also probably been incorrectly told that you must go over your last 3 months bank statements and also heard that you need to deprive yourself from everything you enjoy in life. It doesn’t have to be this way.

We’re not going to lie and say budgeting can be fun – it can’t! But hopefully in this article we can show you the techniques we use to keep it as simple as possible – and hopefully they’re ones that you can stick to as well.

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Why You Need To Budget

It’s no coincidence that those that don’t budget never have any money left at the end of the month. They live paycheck to paycheck.  We’d go further and say there’s a clear rich/poor divide between those who budget and those who don’t.

Many people might find this surprising, but it makes little difference how much money you make. We know many people who earn what most people would consider to be awesome salaries and yet they struggle financially.

Even in fields like accounting you would expect these people to have some financial sense, but you’ll be amazed just how many struggle – many of whom are counting down the days to payday just like someone who is on minimum wage.

Even premier league footballers and other celebrities who have earned millions end up broke!

Despite earning a massive £20m from his football career, famous England goalie David James declared bankruptcy in 2014, and ended up selling signed shirts to pay the bills.

Why do people have this problem? In many cases it’s because they fail to budget properly. You need to control your money, or it will control you.

When people earn more money what generally happens is their expenses quickly follow suit – bigger houses, faster cars, better holidays, fancier restaurants, private schools, horse riding lessons… you know.

Some lifestyle creep or lifestyle inflation is perfectly fine. It’s okay to reward yourself and enjoy the fruits of your labour.

But without a proper budget you are likely to let this get out of control and don’t really know what you can and can’t afford. This is where a budget comes in handy.

Pay Yourself First

A phrase you have probably heard us and every other financial commentator utter. It’s one of the most important things a person can do when it comes to managing finances and taking care of your future.

When we started paying ourselves first it really did change our lives. If you take away anything from this read, let it be this.

Paying yourself first means buying assets such as shares, gold, property and so on as soon as you get paid. Bestselling author Robert Kiyosaki calls these investments your asset column.

Paying yourself first allows you to spend the rest guilt free knowing that your financial future is taken care of.

How much should you pay yourself and what can you afford? This is what a budget will tell you.

By paying yourself first and then living on the remainder, you’ll know whether you can afford something or not. It will force you to tighten up in that month if you’re over-spending.

It’s amazing how simple this is and how effective it can be. It’s very important that you never dip into your investments – if you do it means your budget is failing and you’re stealing from your future.

Avoid Bad Debt

Sadly, a lot of people are not in the position yet to pay themselves first because in many cases they chose to use debt to plug any gaps between their income and expenditure. This means they have to pay their creditors first.

While this is not ideal it just means you have to clear this first before working on your own asset column.

Whether you’re paying yourself first or paying down your debts our budgeting techniques will help you take control of your finances.

Why Budgets Fail

We’ll get to the specifics of how to budget very soon, but first let’s look at why people usually fail with their budgets.

#1 – Tracking All Expenses

A lot of budgeting advice says that you need to track all expenses. This is time consuming and, in most cases, unnecessary. In theory this is the best way to budget and companies themselves do this; but they have entire accounting departments doing the work – you don’t!

For most people, this complex and time-consuming work is the cause of them jacking in the budget entirely. It’s better to focus on the important bits if it means you will stick with it and we’ll show you exactly how to do this.

The less affluent you are, and the tighter your budget, you will have to go into more granular detail than those who have a higher income. That’s because the cost of a coffee is more significant to them than for those with higher incomes.

You’ll work out for yourself the amount of granularity that you need to track to, but you don’t need to track everything.

#2 – Irregular Expenses

Another major reason why budgets fall down is because you’re often told to look at your last few months bank statements to work out what you spend.

This won’t work on its own because it does not include irregular expenses. A lot of what we spend is not monthly but is often yearly or even once every several years. At this point their budget fails and they quit. Our budgeting technique which we’re about to cover handles this.

Moreover, this often leads people to spend what they call their savings on these irregular expenses. Therefore, these people’s saving are not savings at all – they’re delayed spendings.

How To Budget Like A Pro

These are the steps that you want to take as soon as you get paid your salary:

1)            Pay yourself first i.e. Invest

2)            Transfer money for bills into a separate account (using a standing order)

3)            Transfer money into a provision account for delayed spending (using a standing order)

4)            Live on the rest

This means you will have a bank account that you get paid into, an investment account (probably a Stocks & Shares ISA), a separate current account for monthly bills, and a separate savings account (or accounts) for building up a delayed spending provision.

Budgeting is about looking forward. It’s about knowing what you will spend, so that you can avoid bad debt, live comfortably, and build a freedom fund or retirement pot – whatever you want to call it.

The best way to assess your current spending is to look at bank statements and also make reasonable assumptions about irregular expenses such as an annual holiday. Don’t forget that irregular expenses occur very infrequently, like a new car.

What we suggest you do is come up with a list of categories for your spending. This will probably include: Mortgage or rent, council tax, energy bills, phone and tv bills, food, clothes, entertainment and so on.

This list needs to be comprehensive. You should absolutely include things like Christmas spending, car maintenance, a provision for buying your next car, and new furniture such as a new mattress. It needs to include everything.

Don’t worry too much if you miss the odd thing. It’s not likely you will get it perfect first time, but do your best and always continue perfecting your budget.

How Much To Pay Yourself First/ Invest

This is the last part you can work out from your budget. Calculate what you can invest but make sure the action to invest on a monthly basis is done first. We use standing orders on pay day to automate this and we suggest you do the same. As long as you are disciplined you will make sure you never exceed what you put aside for living on.

You should aim to invest as much as you can here, but not to the point that you deprive yourself from having any fun.

If you calculate you can invest £100, try £150 and squeeze other areas tighter. It all helps Future-You.

Transfer Money For The Bills Account

Bills are usually consistent every month and are normally taken by direct debit or standing order. This usually includes the mortgage, utility bills, council tax, tv subscriptions, gym membership or sports clubs, and so on.

This means you should be able to budget for these with a great level of accuracy. Transfer the total spend into a separate bank account on the day you receive your salary and then you don’t need to worry about them not being paid.

If you could individually arrange for all of these to be paid at or near the day you receive your salary, then you can forgo the separate account. But you will probably have so many – with little control on the payment dates – that it’s best to have a separate current account for monthly bills.

Delayed Spending

Irregular expenses are not as straight forward. They need to be broken down into monthly equivalents. For example, an annual holiday costing £1,000 let’s say, should be split into 12 months, so that £83.33 is put into a separate delayed spending account. It’s what an accountant would call a provision.

The same should be done with Christmas. If you normally spend £600 on Christmas, then it makes sense to put aside £50 a month (£600 /12 months) to prepare.

You should do this with every irregular expense. These might be saving for a new car, new house furniture, a boiler replacement, redecorating the house, etc.

This exercise might highlight that what you thought you were saving before was actually just all delayed spending. It might be demoralising to have to set so much aside for expenses which won’t happen for another year or so, but you should feel proud to be finally getting a grip on your finances.

Over time you will build up sizable pots and you will also run them down as you spend.

For example, over the course of a few years you may have built up a large pot for a new car, and then you deduct from this pot whenever you buy one.

It’s the best way to remove any guilt from spending as you know it’s all been planned for.

We tend to record each category on a spreadsheet and record each time money is added or withdrawn from the category. You probably want to aim for just several different categories, so you don’t overcomplicate things:

Budget categories example

These might be Car, Holiday, Clothes, House, Presents, Big Items, and Other to mop up the rest. What we’re showing is just a simplified version of what it might look like.

Earlier we said that budgets often fail because they tell you to track all expenses. The method we are proposing only tracks irregular expenses, so is far less of a burden.

In the past we’ve tried to track all expenses and quit almost immediately and yet we’ve been able to track irregular expenses without fail using this method for years.

Some people with spreadsheet phobias might prefer to set up multiple savings accounts instead – one for each delayed spending category. Or there’s always the old-fashioned notepad and pen method! Do whatever works for you.

Live On The Rest

The remaining money in your main bank account is for you to live on. It means you can spend it as you please, as long as you don’t run it down to below zero before next payday.

Your expenditure here might include supermarket food, meals out, petrol or train fares, coffees, small purchases, nights out and whatever else you buy frequently.

What To Do If Your Budget Is Failing

Over time you will perfect this budget – and we expect it will take a few months of tweaking – but at first it might go wrong. In the first instance it would be okay to access your emergency fund or even your investments if it got to that stage.

If your boiler breaks and you had forgotten to put money aside for this in your delayed spending account, you do have a genuine emergency. Just make sure you replenish the emergency fund asap – and adjust your budget to add in future boiler breakdowns.

As this should be a planned for event, typically this would not be an emergency and so don’t get comfortable doing this. This is where your self-control comes into play.

We don’t normally advocate using debt for everyday spending, but if you have not yet built up an emergency fund, then using a 0% credit card might be a short term solution until you can plug the hole in your budget. Avoid payday loans and overdrafts like the plague!

How do you budget, and will you be adopting any of the techniques discussed today? Let us know in the comments below.

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Should Debt Be Cancelled? Debt Jubilee

Across the pond, there’s been talk that the new US president Joe Biden could cancel or forgive up to $10,000 of student debt per borrower, and some Americans are even pushing for far more.

This might sound crazy but is it? Does the cancellation of debt have benefits that outweigh the cost?

Here in the UK, our student loan debt already has a ticking expiration date.

This date varies but if you took out a loan between 2006-2011 then it’s only 25 years before it gets written off.

But the topic of debt cancellation, also known as a debt jubilee, goes far beyond just student debt.

Since Covid decided to rear its ugly head there has been renewed attention for debt cancellations for crippling household debt, as well as the national debts of countries both rich and poor, including the UK.

The UK’s public debt is way over £2trillion now and growing fast and this will be a burden that our generation and our kids and grandkids will have to carry!

In this article we’re going to look at the possibility of debt cancellations for both UK household debt and the UK national debt, why it should and why it shouldn’t be cancelled, and how it might be done.

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Does Britain Have A Debt Problem?

Before we even look at the need or feasibility of a debt cancellation, we should first look at whether the UK has a debt problem in the first place. This debt problem can be split into 2 broad categories: national debt, and household debt.

National Debt

It’s widely believed that high national debt is bad for growth and most countries seem to be doing their utmost to keep a lid on the potential ticking time bomb, at least they were before Covid.

However, there are many interesting theories out there that say the UK national debt doesn’t really matter.

Jubileedebt.org point out that one-third is owed to the UK government itself – the Bank of England – and another 45% is owed to other people and companies in the UK, such as pension funds and savers.

Only 20% is owed to those outside of the UK, and the UK government’s foreign debt payments are just 3% of its revenue, one of the lowest levels of any ‘rich’ country.

So, based on this, it does seem that the debt problem has been slightly misreported on, but still we don’t understand the argument that debt is less important when it’s owed to people and companies in the UK.

If you lend money to the government in the form of a gilt, then you want your money back just as much as a foreign lender would.

Another argument that says the national debt doesn’t matter is the ability of governments to print more money.

The fact that a country like the UK can seemingly print money at will means it can always just pay off debts by turning on the printing presses.

We’ve seen this with the amount of Quantitative Easing that has occurred since 2009 and more recently in 2020. They’ve magicked £895bn into existence and this is likely to increase further.

Before Covid we had been told that Britain’s finances were at breaking point but clearly the magic money tree has been found – even if it was then stripped down to the roots in 2020.

National debt cannot be allowed to spiral out of control because debt enslaves countries as much as it enslaves individuals.

It places limitations on how a country can react to opportunities and threats. Would the UK be less willing to spend on infrastructure or education knowing it will struggle to pay for it? We think it would and therefore damages growth.

And then there’s the argument that it doesn’t matter how big the national debt is, as long as the interest payments can be met.

In this age of rock bottom interest rates, the government feels it can spend at will, because debt costs almost nothing.

Of course, governments that take this view are being short sighted – but this is a recurring problem in democracies. The Opposition, whoever it is at the time, can always clean up the mess when they are next in office.

Household Debt

The general public definitely do not have magic money trees, so arguably this is far more worrying.

According to the latest data from finder.com, total household debt in the UK was £1.7 trillion or almost £32,000 per adult. This debt could include a mortgage, credit cards or short-term loans.

These figures don’t tell the whole story because not all debt is created equal. There is good debt, which is when the debt is matched to a productive asset such as property or stocks.

Then there is wicked consumer debt, which is most commonly from credit cards, overdrafts, store cards and payday loans. According to finder.com this now stands at £206bn, of which £61bn is credit card debt alone. Per household this is round £2,200 of credit card debt.

Why Debt Should Be Cancelled?

National Debt

Quite simply, if the country wasn’t in debt, there would be more money available to pay for public services like the NHS, education, transport, police and everything in between.

A debt free nation would help to raise the living standards of everyone, as the money that was spent on interest could be directed instead towards the stuff that matters.

Household Debt

Debt acts as a vice, preventing the indebted from acting in a way that benefits them and society to the fullest. Large swathes of the British public struggle month in, month out to service their debt obligations and feed themselves and their family.

For each and every person struggling to look after themselves there is an opportunity wasted. They are little use to society if they can’t properly contribute.

A country benefits most when the most number of brains have access to the most number of opportunities. Opportunities – no matter how small – arise everyday, but have to be declined or ignored as the indebted cannot take risks.

A free man or woman who isn’t living pay-check to pay-check may take the opportunity to retrain and could end up inventing or doing something that changes the world – the next Jeff Bezos, Tim Berners-Lee, Elon Musk or Martin Luther King.

This may sound unlikely but when millions of people are liberated from debt, all it takes is one.

A cancellation of debt would close the opportunity gap. As it stands now, the poorest of people are likely to stay poor, and in many cases it can be a seemingly small sum of debt that entraps them.

To us, credit card debt of £2,200 might seem inconsequential, but to someone in poverty it can be the chains that enslave them.

Another argument for the forgiveness of debt is that some debt is, in a way, forced upon you without being properly educated about it, such as student loans.

There does need to be a level of personal accountability but student debt is practically given to kids without proper direction. Nowadays we consider ourselves well versed on money but at 18 we didn’t have a clue. Is that fair?

Another example of when debt is practically forced upon you is through mortgage debt.

We all need to have a roof over our heads and yet UK governments have allowed housing costs to spiral out of control.

Successive governments of both parties have not done enough to increase the housing supply, which would have kept the cost of a house down to more affordable levels.

As a result, people are enslaved to mortgage debt though most of their adult lives.

When everyone is indebted, they are unable to spend, forcing trade and the economy to grind to a halt.

How Can Debt Be Cancelled?

There are many ways that debt could be cancelled, both directly and indirectly.

The direct way would be that you no longer have to pay the debt and it is simply written off. It’s probably safe to assume that the lender would not be too impressed with this as they would lose out. We think this is a non-starter.

The immediate damage it would cause would likely destroy our economic system, which we’ll get to soon.

A more plausible solution would be to cancel the debt but at the same time have the government reimburse the lender.

In effect this would be a hidden tax, as personal debt would be lowered but public debt increased. Public debt is owned by everyone and the middle classes would bear the biggest burden through likely higher taxes.

On the other hand, if the magic money tree of Quantitative Easing can be sustained a little more this could be one way to do it – at least to pay off some of the debt. Let us know in the comments what you think about this.

An indirect way would be for the government to gift money to everyone to spend on what that want as they have done over in the US with their stimulus cheques.

Large numbers of people would choose to spend this on paying down household debt but like the previous idea, this has the problem of increasing public debt, which as discussed some people consider not to be a problem at all. We certainly consider public debt to be the lesser of the two evils.

Why Debt Shouldn’t Be Cancelled?

Someone will lose out. The borrower owes money to the lender. That lender expects to be paid. If the lender loses out, then they will never lend again, or expect excruciating interest rates when issuing loans, to factor in the additional risk of debt cancellation.

This would cause a collapse in our economic system, which is why it’s a non-starter. Without the option to borrow it would cause a momentous slowdown in the economy.

It’s the lenders who finance business and entrepreneurs. These businesses and entrepreneurs create the jobs and opportunities but if they lose out, the jobs go, the wealth goes and the opportunities go.

Even if the government reimburses the lender, the British taxpayer has to pick up the bill.

Why should someone who hasn’t incurred the debt and has not had the benefit of it be forced to pay the cost? In the case of student loans, why should someone who didn’t go to university pay for those who did?

Perhaps the most important reason not to cancel debt is because it would set a dangerous precedent.

Currently, we all know that if we dig ourselves into a hole we have to dig ourselves out. We all must take accountability for our actions. This might be a painful lesson but it’s worth it.

If there was one debt bailout, then people would expect it again. It would encourage wasteful and frivolous spending, and the forgiveness of debt would teach people all the wrong lessons.

Has There Ever Been A Debt Jubilee?

When doing the research for this article, most of the articles we came across were rambling on about debt jubilees that took place in biblical times, as if it had some sort of relevance.

What we want to know is have there been debt jubilees in the times since we lived in straw huts and traded 2 cows for 1 camel.

Well, there have been modern-day debt jubilees. According to moneyweek.com, one took place in 1948, when the Allied Powers replaced the Reichsmark with the Deutsche mark.

They wiped out 90% of government and private debt and paved the way for West Germany’s economic miracle.

Should debt be written off and if so, how? Let us know in the comments below.

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How Big Should Your ISA Be?| ISA Statistics

ISAs are the main investment and savings vehicle in the UK, and every year gov.uk publish a report that gives us some fascinating insight into the investing and saving habits of the UK as a whole.

Throughout the year, ISA managers send HMRC a wide range of data regarding ISAs and today we’re looking at what was last published by gov.uk in June 2020.

Reading the 33-page report is probably not the most exciting of reads, so we’ll forgive you if haven’t gotten round to reading it yet. But now you don’t need to as we’ve handpicked all of the most noteworthy points and put it into a digestible 10 minute video.  And of course, as we go through we will share our thoughts on each point.

We’ll look at some intriguing data on the number of ISA account subscriptions, the total amounts saved and invested, average amounts subscribed, market values, and how much people save based on their salaries.

We’ve also got savings data by age and gender and more. Let’s check it out…

If you’re looking for the best Stocks and Shares ISA, then head over to the Best Investment Platforms page. There you’ll find a full breakdown of all the major investing platforms in the UK to help you choose the one that’s right for you. Some like Freetrade are even giving away free stocks when you use our link!

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How Much Of Your Salary Have You Kept?

Over your lifetime how much of your salary have you kept? It’s a big question and the answer has a lot of implications.

Have you wasted hundreds of thousands of pounds over the years? Have you managed to convert much of what you’ve earned into assets?

If your goal is financial freedom like ours is, maybe you could be much further along the path than you are today if you’d made a point to keep more of what you made.

The average worker will earn well over £1million in a lifetime – and yet most struggle to get by. Does it really cost over £1million to provide food and shelter for a few decades?

Probably not if you stop and think about it. How much of your salary have you kept? Let’s check it out!

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Why It’s Important To (Consistently) Keep Money

Work is hard – it’s a struggle that you have to keep getting up for, day after day, week after week, month after month, and you should want to have something to show for all that work.

For us, it’s the knowledge that for every hour of work we do, we continue to get paid after we’ve earned it indefinitely.

We’re talking of course about investing what we keep. For any money that you’re able to keep from your job and invest, you’ll continue to make money from it for the rest of your life.

It’s the Work Once Get Paid Forever mindset that eludes so many people – most of whom work every day and spend every penny.

It’s also important from a practical standpoint to keep more of what you earn. The state pension is by no means guaranteed for our generation.

Planning for retirement used to be a breeze. Invented in 1880 by the Germans, the state pension meant people could stop work at age 70, having kept nothing of what they’d earned, and be supported for life by the state.

This worked well for the Treasury because the average person died at age 38!

State pensions have gotten less generous with time – it’s incredibly costly for the government to maintain and this cost is rising rapidly as people are living longer.

By the time we’re pensioners we expect it will be means-tested, available only to the very poorest of people.

Your Human Capital

We’re going to work out what your value is as a money-producing asset. This is your human capital – how much your time and energy has been worth over your working life.

You’ll might be annoyed with yourself at just how much money you’ve let slip away, perhaps with little to show for it in way of savings and wealth – but it’s largely been beyond your control, as we’ll soon show.

As an employee, the deck is stacked against you, but we’ll get to how you can reshuffle it to your advantage soon.

We’re not minimalists like much of the FIRE community are, but while our focus is on growing our wealth, it’s still true that we should be setting aside as much of it as possible.

That excess money should be being made to work hard for us as financial capital through our investments, so our human capital can put its feet up.

How Much Have You Kept?

Some money has entered your life. Quite a lot of it has left. What you have kept – your net worth – is what you have to show for your efforts.

Your net worth is the value of your assets, minus all debt (except UK student loan debt, which works more like a tax).

Most people have very little savings. The average 40-year-old only has £6,000 set aside. And only 4% of UK citizens invest in Stocks & Shares ISAs.

It should be fairly easy to work out the value of all your financial assets – your cash, your bank and savings accounts, and the current values of your stocks, bonds,  investment property, commodities, plus your private pensions and any other investments.

We looked at the average net worth in the UK and it’s component parts in this video, which showed that around 1 in 5 households shockingly have a negative financial wealth, with more debt than they have cash or investments.

In purely money terms, these people have sadly wasted every one of their countless work hours with less than nothing to show for it. Around the same number of households have no private work pensions either.

The ONS includes the value of all of your assorted junk in their definition of net worth too – your car, your phone, laptops, and everything that’s not nailed down in your house.

But we, and likely you, know better – these things are all expenses. Wealth is no more securely stored in them than it would be by just leaving your cash in the street.

The only physical possessions that represent money kept are items that hold their value like jewellery and art, and your house – which you can include at market value minus the outstanding mortgage.

How Much Have You Earned In Your Life

So, you can easily add up how much you’ve kept – but how much did you earn in the first place?

For most people, what they’ve kept will be a joke compared to what they made – outgoings have a nasty habit of catching up to income.

What You've Earned

Above is a very, very rough approximation of your total take-home pay during your career depending on years worked and headline salary, after deducting tax and student loans, assuming you’re employed.

There’s some pretty chunky numbers there – if you’ve averaged a 35 grand salary over 15 years, you’ll have had around 400 grand enter your bank account.

Where’s that money now? How does it compare to the amount you’ve kept – your money, investments and property?

If you do have investment income alongside a job, don’t include it in this exercise.

Hopefully you’re reinvesting all of that anyway if you’re still working, and we’re just interested in how your blood, sweat and tears from time served toiling the mine – so to speak – translates into saved wealth.

The Question Reworded – How Much Have You Spent?

What You've Spent

Above is what we think a fairly typical 30-year old’s workings might look like. Their after-tax salary, averaging £27,500 over 10 hard years of slog in the office has brought home £222k of bacon.

A 30-year-old might have just climbed onto the property ladder with their partner in an entry level home, with a claim to half of it – offset by a hefty mortgage, of course.

They’ll likely have a small cash buffer and the beginnings of an investment portfolio, if they’re sensible.

Their workplace pensions will have started to build, if only at a snail’s pace, and more than likely they’ll have some credit card debt too – hopefully at 0% interest.

This person would have held onto £30k of the money that they earned – the rest having gone up in a puff of smoke.

Total spending on expenses over the decade was £192,000.

Wow – it’s expensive being human. And to think a cat needs less than a fiver a week to live the dream life.

£192,000 translates to £1,700 per month. It’s not unreasonable to think that at least some of this could be being directed towards investments each month instead.

What You Really Make From Your Job

That imaginary worker on £27,500 a year gross salary has a take home pay of £430 a week.

But he doesn’t really make £430 – there are a whole bunch of work-related expenses that are only incurred as a result of having the job.

So how much of your income gets lost on maintaining a job?

Cost Of Jobs

Above is a reasonable example, inspired by the book “Your Money Or Your Life” by Vicki Robin.

You should knock off an amount for your commute – your petrol, wear and tear on car tyres, train fare, and the coffee you need to buy en route to make the journey bearable.

Then there’s your slave uniform – the clothes you only bought because you were forced to in order to comply with your job’s rules or culture.

Do you sit at your home computer in a full suit and tie? Probably not. But you might need to in the office.

You likely spend more on food when you’re at work – those Pret a Manger’s soon add up.

And the stress of work likely means you need more escapism, with extra holidays and meals out in the evenings to make up for the life you’ve not been living.

And maybe those long hours sitting at a desk are having health impacts that must be remedied with fitness classes and visits to the gym.

We can see that about a quarter of this guy’s earnings have gone on maintaining his job – £120 a week adds up to £62,000 over 10 years.

Think In Terms Of Hours Lost

Think of your outgoings in terms of the hours taken to earn it. Do this thought exercise before every purchase, and allow your default response to be to invest that money instead.

But you don’t just work 40 hours a week. All those job costs have a cost in time too, as well as possibly needing extra sleep on the weekends and time to recover from illness from overwork – like the example shown in the above table.

For this example employee, every £1 spent represents 15 minutes of their life that they had to sacrifice. Or put another way, every hour nets them just £4. Is that new BMW worth 7,000 work hours?

Slash The Biggest Cost

The largest controllable cost you have as an employee is probably your job maintenance cost.

It might be unreasonable to cut your rent or reduce your basic standard of living, but those jobs costs could be mostly eliminated by a permanent move to home-working.

Working from home removes the need for a commute, for a slave uniform, for expensive lunches, and getting rid of the commute alone will probably reduce the need for stress-induced spending splurges, and benefits your health by reducing the time you’re sitting in a vehicle each day.

Much of the country worked from home during 2020 and witnessed these improvements for themselves. It might be in your financial interest to keep this trend going if you can negotiate it.

Break The Time-Link

Your job probably pays you far less than what you’re worth. Are you willing to keep trading your time for a pittance an hour?

We weren’t – so we decided to start earning our money via an asset instead, rather than a salary, by which we mean a business that we own.

Every hour of work that you put into your business makes it a more efficient money-making machine, with efforts increasing scale, and value locked-in and built on.

You can’t do this as easily with a salary.

What’s your age and how much of your salary have you kept? Let us know in the comments below!

Also check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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A 10 Year Plan – School Leaver To Financially Free

Where do you want to be in 10 years? If we’d asked our 18-year old selves that question, the answer would have been “F-ing rich!”. But of course what we meant was Financially Free.

There are millions of pathways you can follow to get to Financial Freedom, but these mostly converge into 1 of just 2 super-highways. 2 very different journeys, but with the same end destination.

These routes can get you financially free after 10 years if you really want it. Most don’t, so don’t achieve it. At the very least you will improve your financial security allowing you to control your own life.

Which 10-year plan will you choose?

Route 1 – The Graduate

Overview

This route involves being at the top of your game as an employee, while converting all possible disposable income into investments that will support you financially.

Qualifications Are Everything

If you’re following this route, you want to be the highest paid employee you are capable of being, which means qualifications.

Like it or not, graduates get paid more than non-graduates. A lot more.

Statistics from the Department for Education show the average salary for graduates over their lifetime is £34,000. The corresponding figure for non-graduates is only £25,000.

But the qualification has to be relevant and targeted.

When Qualifications Aren’t Everything

You can’t be a Performing Arts graduate and expect to make decent money – well you can but know you are defying the odds.

All qualifications have a Cost to Benefits Ratio, and many UK degrees are unfortunately not worth the paper they are written on.

We can do some analysis to see which qualifications offer the best returns relative to the cost, essential if you’re to reach Freedom in just 10 years.

Seeing as the broken university system in the UK charges over 9 grand per degree, whether you’re studying Brain Surgery… or Knitwear… at least for starting salaries it’s as simple as looking at which career offers the highest wage.

Starting salaries by industry

Best Performing Degrees

Above is a league table of degrees by cash output from Graduate-Jobs.com.

There’s a £9k swing between the lowest and highest paid careers, though you could have chosen to do either and both cost the same to study.

At the low end are jobs that you don’t traditionally associate with needing a degree, except surprisingly Law, which we’ll come back to soon.

At the top end you have science and finance type jobs. League tables like these were the reason we chose Accounting for our degrees instead of pursuing careers in Knitwear – amongst other reasons.

Keep Going – Professional Qualifications

As well as a good starting salary, you also need speed. For this 10-year plan, you don’t have time for gradual pay rises. This is where professional qualifications come in.

This is a 10-year plan, not a 40 year one, so you need to ramp up that income fast. Best to choose a career that balances a good starting salary with lightning-fast progression.

Jobs in the 3 traditional professions – Law, Accounting and Medicine – typically offer structured routes up the career ladder with further professional qualifications, and a few other careers do too.

It’s why Lawyers all end up loaded, despite starting out as the tea-boy.

Converting Wages Into Assets

You might have built up a killer wage at this point relative to your living costs, but you need to be converting that disposable income into financial assets. This is the exit lane on the Graduate Route.

Most high paid graduates convert their large disposable incomes into a bigger house, big new cars, big holidays and big lifestyle choices.

You can’t afford any of this if you’re shooting for an exit from the rat race. Instead, you need to be buying big investments.

You don’t have much in the way of spare time for compounding in a 10-year plan, so a stock market portfolio of ETFs and index funds won’t be sufficient; but they should do fine for a 20-year plan.

You need big cash-flowing investments with 20%+ annual returns.

Why Property Works

Investment property leveraged with an interest-only mortgage can yield cash returns of 10% per annum, and a further 10% of return from leveraged capital growth – totalling that elusive 20%.

These huge returns are only possible with leveraging by using a mortgage. The property returns mentioned are for carefully selected properties. You won’t achieve this on any and every property.

You might be able to get similar overall returns from picking individual stocks, though these are far more volatile than property.

We use Stockopedia to give us the best analysis and screening tools available for stock picking. It’s how we try to get market beating returns.

Check out the link on the MU Offers page for a 25% discount!

The Snowball Effect

The ideal scenario for someone on the Graduate Route is to buy a rental property with a deposit of maybe £40,000 from their incredible salary, and then set aside the rental profits each month towards the next deposit.

By reinvesting all of your cash profits, each subsequent house purchase should be a few months quicker to save for than the one before it.

Route 2 – The Entrepreneur

Overview

This route shuns formal education and instead involves starting-up and owning a business. You build your own assets, which eventually run themselves.

The Hard Way

Respect to people who go down this route from the start. It’s harder than the Graduate Route, in the sense that it’s unstructured and goes against social norms.

There’s no roadmap to success like you get with exams. You have to chart your own course.

The Plan

Being an entrepreneur usually involves a couple of years or more of zero or negative profits while the business is established, and followed by expansion hopefully into a successful organisation that pays for your lifestyle and then keeps growing.

Expect years 1-2 to involve scraping by on the breadline, after which things hopefully pick up significantly. You should be aiming to outsource all tasks to employees that you hire by the end of the 10 years.

Where the Graduate Route ended in a big pile of investments that were propped up the whole way by salary income, the Entrepreneur Route can build assets from almost no initial capital.

You’re building assets using your time rather than your money, though it helps if you have some capital to put in too. It is both your job and your Freedom Fund.

If this business also produces excess cash, then that can also be invested into such things as stocks or property.

Getting Out

Unless you can sell your business for a fortune and reinvest the winnings, the most likely exit lane from this route is hiring employees to run the business for you.

10 years should be ample time to turn a start-up into a small business run by 2 or 3 employees, though we’d hope for bigger success than this.

The trick is to only choose a business model which has significant expansion potential. It doesn’t really matter what the product is, what matters most is that the delivery method must be scalable.

Most people will class owning a single shop that you run yourself as a business.

But do you own a business, or are you the business? Can the shop be run without you? Do you own a shop, or a job?

If you were interested in retail, instead of opening a shop you might open an online retail store, or make it easy on yourself by selling your designs through established networks like Teespring or Etsy, like we do below our YouTube videos.

You don’t see us selling mugs in a high street boutique, stood behind a till!

In theory we could sell 100,000 mugs by having an online presence, with zero overhead costs. Maybe on the high street you could shift 20 a day, while paying crippling rent and business rates.

Thinking of a business idea is too hard, people always say. It’s not really – it’s implementing it that’s the challenge, and committing to it every day.

You just need to look at the world and find a product that needs improving on, or a problem that needs a new solution.

If an idea can’t be scaled up using the internet, forget it and try again. You’re only making it harder on your future self for trying to find the exit lane.

Any business idea for Financial Freedom in 10 years must be capable of removing you from the driving seat.

Other Considerations

Location

Whichever route you take, you want to make sure you’re following the path of least resistance. Where you choose to live does have a big impact.

You don’t want to be tossing all your disposable income on bills and living expenses when you could be investing them into your property portfolio or business instead.

Using your biggest living expense, your housing cost, as a proxy for earnings power, there is a clear North/South divide.

According to CompareTheMarket.com, while the average salary for Southerners at £26k is a little higher than those of Northerners at just over £21k, the disparity in average house prices is far scarier; £144k for the North vs £328k for the South.

Better still, some entrepreneurs manage to lower living costs by living in a more affordable place, and yet sell products and services in affluent parts of the world.

Mission Accomplished – What Next?

If you’re committed we believe 10 years is all it takes to turn your life around; from a school leaver with nothing to being either financially free, or free enough so that your life isn’t controlled my money decisions.

Your next steps for an Entrepreneur could be growing that business further until you reach millionaire status, or if you followed the Graduate Route, starting again down the Entrepreneur Route – made far easier now by having passive property income to fall back on.

What other routes to financial freedom are there? Let us know in the comments below.

Also check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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Your Opportunity Fund – Career, Investing & Side Hustles

Everyone gets opportunities to make more money. But most people either aren’t equipped to take them, or don’t see them. Missed opportunities keep you poor.

Money opportunities can be small and incremental, like buying a stock when it’s cheap or changing jobs. On their own they won’t make you rich, but taking your opportunities day after day will soon add up.

The problem is, to take advantage of most money opportunities you need to already have some money to fall back on – enough cash and investments to give you the balls to take a risk.

This is your Freedom Fund, which looked at through a different lens is really an Opportunity Fund.

This article should help you to capitalise on the opportunities that life throws at us, and tell you why you need an Opportunity Fund – and why having one of any size makes the difference between being too afraid to make money, versus having the confidence to get rich.

Your Opportunity Fund

At its heart, the Freedom Fund that you hopefully have stored under your metaphorical mattress is there to pay you an income and also to allow you to take advantage of life’s opportunities.

If you see an investment worth buying, or a career or business opportunity worth taking, the fear of loss will stop most people.

A Freedom Fund – or Opportunities Fund as we’re calling it today – is there to be used to pursue opportunities. Not risked recklessly, but used in a targeted way.

Opportunities to make or save money come along daily and can compound to make you much better off, but you need to be zen enough with your cash situation to risk putting some on the line to make more.

With our own Opportunity Funds, we’ve found we grow more relaxed about making money the bigger it gets.

What An Opportunity Fund Buys You

#1 – Better Jobs

At the smaller end of the scale, your Opportunity Fund gives you the confidence needed to change jobs or change careers, as you have assets and maybe even investment income to fall back on.

It’s all about being able to politely tell your boss that you no longer have need of their employment, and will be going off to pursue better options.

Finding a new job is a chore, and finding a good one that’s worth trading your life in for should be given some serious effort to find. It’s not something that’s easy to do whilst already in a job.

In our view, with jobs it’s best to first quit, then give 100% of your time and brain power over to the search for a replacement, climbing higher up the career ladder as you do so.

We’ve only been able to do this because we had Opportunity Funds to catch us, and genuinely believe our strong career paths were made possible by the comfort of having that cash buffer.

#2 – Better Investments

You want to be in a position where you never again have to turn down an investment opportunity because you’re living on the breadline.

It’s not just poor people who live like this – half the middle class families that we know are living pay check to pay check.

It can take time to learn how to start investing, and it would be disheartening to not be able to put theory into practise.

If the FTSE 100 falls to 10-year lows, like it did in 2020, you know in your bones that you should be putting some of your spare cash into buying a FTSE 100 index fund while it’s cheap.

But if you don’t have an Opportunity Fund, you can’t do what’s necessary to help yourself – in this case reallocating some resources into the FTSE 100. It’s just another chance you missed out on to get ahead.

With a decent sized Opportunity Fund you can also take advantage of riskier investments like small-cap stocks and property. Those with a small or non-existent Opportunity Fund must take safe harbour in less volatile and less rewarding investments instead.

With property, it’s more about the investment being expensive to buy in the first place, and that it may need funds to maintain.

If you go through an untenanted period, or the roof leaks, you need a pile of cash to fall back on. It’s the type of investment you’d only buy if you also had some spare cash set aside for (possibly quite literally) rainy days.

#3 – Better Side Hustles

Side hustles are becoming more popular as a way of making extra money in these troubled times, with the Independent reporting that 20% of people already do things like dog walking and selling old clothes and gadgets to top up their bank balances, and a further 25% wanting to start a side hustle.

These are the types of hustle you might do if you had no capital behind you. After all, anyone can walk a dog or sell some junk.

But side hustles are not limited to the financially challenged. If you’ve first built up a decent sized Opportunity Fund, you could start a far more profitable side hustle.

With a bit of investment into monthly web-hosting fees you could open an online shop to sell your bits and bobs – by buying a van with a nice paint job, some equipment and paying a helper or 2, you could have a dog walking business catering for hundreds of dogs.

Essentially, if you commit yourself and your finances to a side hustle, it can turn into a business that replaces your job.

“But a new business is not guaranteed to make enough money to live on”, most will say. Exactly. This is why the confidence boost of having an Opportunity Fund is essential for taking the leap.

A lot of money management is psychological. You might have the best business idea in the world, and a plan for how to implement it, but if there’s a slight risk that it won’t make money immediately you probably wouldn’t do it.

Fear of potential loss always takes priority over excitement of potential success. It’s just human nature.

#4 – Better Business

At the larger end of the Opportunity Fund spectrum, a successful small business owner might be too scared to hire their first employee.

Do they wait to hire someone later when they can more easily afford it; or do they hire someone now while they can’t, but trust that the value created by the staff member will mean they pay for themselves?

It could be the difference between a business that grows fast versus one that stagnates.

If you have some small amount of cash set aside so you can survive for say 6 months without any payback on this employee, it’s a different decision from if you were living hand to mouth without any savings.

#5 – Better Experiences

It doesn’t have to all be about making more money. A big Opportunity Fund gives you better opportunities to have fun.

Perhaps you’re given a once in a lifetime chance to sail the world, or a mate asks you to tag along on an excursion to Antarctica to see the penguins.

Or maybe you’ve got the chance to go to the World Cup final, or your favourite singer is doing one last tour.

How Big Your Opportunity Fund Needs To Be

The answer is that any size is better than nothing. A small Opportunity Fund of £10,000 might give you the confidence to change career.

A pot of £100,000 might give you the confidence to move 30-40 grand into a rental property to leverage some of your returns by using mortgage debt.

A pot of £500,000 might kick out enough passive income that you never have to work a day again and can spend your time starting or investing in businesses.

While a pot of £10,000,000 will have people coming to you to throw equity at you, Dragon’s Den style.

Getting Started

The hardest part can just be getting started building that initial fund. If you were able to just save aside a few extra hundred quid a month it could soon make all the difference.

You’d be able to start taking advantage of small-scale money opportunities which further compound your wealth.

One thing we’ve both been trialling is matched betting, a step-by-step process of scooping up cash bonuses offered by bookmakers by placing bets on both outcomes of an event. We’ve each made around £500 per month from it, but some people put more time into it than we can and make over £1,000 monthly.

To do this we’ve been using OddsMonkey – they collect all the bookie bonuses in one place, hold your hand while you scoop them up, with specific walk-through guides and tools for all offers.

For instance at time of writing, one bookie has an offer for £100 in free bets – OddsMonkey will walk you through how to grab this free cash, plus hundreds more offers like it.

Check out our matched betting page to read more about it and get discounts for matched betting services that you won’t get by going direct.

Other Ways To Grow Capital

Other than taking advantage of easy income enhancements, you can build up your Opportunity Fund by keeping more of what you make, which can often be done by just making better spending decisions.

Even saving up a few grand will get the ball rolling, which can then grow itself by investing it, as well as using it to grab opportunities as they arise.

Most people we know waste money on frivolous crap – it’s fine if you’re happy to take that enjoyment now, but accept that it removes your ability to take advantage of lifestyle enhancing opportunities in the future.

One of the best arguments for paying down your mortgage early is so you can free up money each month to spend on opportunities without fear.

We’ve countered this argument before by saying it’s better to lower your mortgage payments by extending your term, and use the money saved on opportunities while you’re young.

But both are better financial decisions than blowing that money on a new Range Rover.

Having an Opportunity Fund is a choice. Some people have big cars – others conservatories, holidays in California, or designer handbags.

The people who get ahead can have all of these things too, and more. They just get them later… after they’ve first built up an Opportunity Fund.

Money Leads To More Money

The old saying that you need money to make money isn’t true, but it certainly makes it easier or perhaps more accurately, makes it faster.

Money leads to more money – if you allow yourself to take your opportunities as they come.

What have you been able to do with your cash that made your finances better? Let us know your stories in the comments below!

Also check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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Do It Yourself Or Pay Someone Else?

The Financial Independence Retire Early Movement or FIRE as it’s often known preach doing almost everything yourself with the intention of saving money faster, but we on the other hand believe that outsourcing is the key to freedom, happiness, and growth.

But it’s not just the FIRE community that have this ‘better to do it yourself’ mindset. From our experience, we’d say that most people would rather save a few quid and do soul-sucking work themselves, than pay someone else. You can’t build an empire on your own, and even if you’re not setting out to conquer the world, outsourcing chores will give you more time to do the things you love.

The FIRE community wish to free themselves from wage slavery, but their ambitions don’t go as far as freeing themselves from mundane chores. We agree that chores are the lesser of the two evils but they’re still grim tasks that can be outsourced. Why settle with doing anything you dislike?

In this post, we’re going to look at outsourcing from both a business and an individual perspective. Should you do it yourself or pay someone else? We’re going to look at the reasons to outsource, the types of outsourcing, and when to outsource. Let’s check it out…

No Respect For Time

We all know that our time on this earth is limited and yet the vast majority of people will squander it, whilst behaving in a way that worships money as if it’s a limited resource.

These people are doing it all wrong. We all need to treat time as if it’s precious and treat money as if it’s endless. You can’t create more time but both high street banks and central banks can and do create money at will. This is the frightening truth.

People all around the world are trading their limited youthful time today for small sums of money that governments can create freely and seemingly without restrictions.

Saving Pennies Is A Losing Game

Those who do not outsource any tasks because they’re trying to save a few quid are playing defensively. But you’re playing a losing game and have no chance of winning when all you do is park the bus.

Playing defensively doesn’t work because you’re not growing income at a fast-enough rate. The only way to win is by going on the attack. You need to bring in more money and convert it into wealth – that is, assets that are likely to grow in value rather than shrink.

Focus on Increasing Income

You need to focus on growing your income. Just as businesses are forever looking to grow profits, so should an individual. The reason to grow income as a priority is that it will buy you more time.

Most people recognise that if they build their income higher, whether that’s through a side hustle, business or even through progressing in a job, they can afford to outsource tasks, thereby freeing up precious time. But almost all of them say they’re too busy to put in the additional work.

They’re not lying – their schedules are chock-a-block. The problem is that their schedules are jam packed with other people’s priorities and low value tasks.

So, what are the Reasons To Outsource?
Number 1 – Outsource To Free Up Time To Reinvest

Outsourcing tasks will free up time, so you can be more productive elsewhere. Say you spend an hour a week doing the gardening. For the sake of this blog post, we’ll assume this is a mundane chore that you hate.

If you were to outsource the gardening to a professional could you reinvest that spare hour each week, maybe into drafting a business plan or developing a new skill, so that it increases your income above and beyond the cost of paying someone else?

In the home, you probably have a chores list longer than your arm. In addition to the gardening, you could outsource the cleaning, the cooking, the washing up, the ironing, food shopping, window cleaning, DIY, managing bills and whatever else springs up.

You can take this outsourcing to the extreme if you wish. Many wealthy people, especially successful business owners, choose to outsource all parts of their life.

Don’t underestimate just how much time many chores swallow up. Just the other day I (Andy – MU Co-founder) was thinking I need to do Christmas shopping but it’s a pain – if only I had a personal assistant to delegate this to. Well every successful CEO would just delegate this to his or her PA, so they can focus on what matters.

This leads us to reason number 2:

Number 2 – Outsource To Free Up Time To Enjoy

The end goal is to have fun, so outsourcing tasks to free up time is another great reason to do it. As we said, time is our most precious resource, so our actions are best spent in a way that maximises our free time.

The danger is that you set out to outsource chores with the intention to reinvest the time, but then laziness or distractions cause you to slack – we are all human after all.

It might be okay to outsource to free up time just to enjoy life if you are financially comfortable, but before doing so ask yourself whether your financial position is strong enough to justify it.

Don’t forget that the biggest drain on your time overall is wage servitude. So, from our point of view the priority should be on outsourcing chores to reinvest the time into a side hustle, to the point that you can at least free yourself from a job. Then you can outsource to find more time for fun.

Number 3 – Outsource For Expertise

When it comes to expertise such as a car mechanic or tax accounting, most people will happily pay for it. Here, the risk of doing it yourself and getting it wrong carries a cost that outweighs the cost of outsourcing. So, it’s a no brainer.

Say that you were buying a house. There’s a lot of expertise needed. You don’t want to get this wrong, so prior to buying the house you could go to University and study surveying, property law and banking, all of which would take years and cost thousands and thousands of pounds. This would be ridiculous, so instead you could just pay experts – saving you time, money, and reducing risk.

Types of Outsourcing

At its highest level there are 2 type of outsourcing – you can hire people or pay for automated tools and products that do the jobs more efficiently.

Hiring people is the type that usually springs to mind first. In the home, people dream of paying someone to do their chores, and businesses often first think about expanding the workforce before considering the second type of outsourcing – paying for automation.

We suspect that this order is due to a lack of imagination. In every job we’ve both had, the employees would whinge that more people are needed to do the work. Rarely do they think of ways to automate a solution to the problem. In most cases, a simple tool is available that will rapidly resolve the issue for a fraction of the cost of labour. People typically cost more than automation and are usually worse at doing the job.

In the home, rather than do the vacuuming yourself, you could hire a cleaner, but this would get expensive over time. Alternatively, you can buy a robovac, which will save you a small fortune. Likewise, we would never not have a dishwasher. The time it saves is a lifesaver, literally, as it saves us from wasting precious life-hours washing up.

When To Outsource

There are three trains of thought when it comes to outsourcing.

The first is that you should never outsource, and you should do everything yourself. Earlier we alluded to the FIRE community and most of the general public who think this is the best approach.

“Why pay someone else to do it, when you can do it yourself” is what they tend to say. You’ll find these people installing their own new kitchen, changing their own car brake pads, and when they book a holiday, they will painstakingly piece together all the parts rather than pay extra for a packaged holiday.

Yes, they will save a few quid but at the cost of their time.

The next thought process is to do it yourself until it hurts. This certainly has its merits when it comes to the hiring of people but if there’s a piece of software, product or an automated service that can help to avoid this pain, then we would be inclined to use that before it hurt.

The third and final idea is that you should outsource as soon as possible, as not doing so hurts business growth and you. For example, if you can outsource a task for a thousand quid and it brings in two thousand quid, then it’s a no brainer.

We quickly worked out that we could improve the quality of these YouTube videos by using supporting footage, known as b-roll. We could have shot the footage ourselves, which would have been extremely time consuming and expensive, or we could pay for stock footage.

We didn’t wait until our profit covered the expense. We knew the sooner we improved the quality the faster our audience and profit would grow. If we had waited until it hurt, then our business would have suffered.

In other words, outsource in anticipation of future growth.

When To Outsource – Other Considerations
Should You Outsource Investing?

As a money channel we felt this particular question might be of most interest to our audience.

When it comes to investing there is multiple levels of outsourcing. You could delegate the entire process to a financial advisor. If this saves you time to reinvest elsewhere in your life, then it might make sense. You will pay more for the privilege.

Likewise, you could build your own portfolio of funds or use a robo advisor, and these are also a form of outsourcing as they do most of the work for you. The cost here is negligible, however.

And finally, you have individual stocks, which is the do it yourself approach. There’s no better way to learn than doing it yourself. Picking stocks does carry with it a lot of risk but equally if you are good at it you can make much greater profits.

Investing is one area where you might benefit from taking a more hands on approach, and if you have the skills to pick individual stocks you can outperform the market.

The Stake platform for instance is one of the cheapest ways to access the world’s largest stock market, the US, so if you are considering buying stocks yourself, you could check them out – they’ll give you a free stock worth up to $100 if you use the link on the MU Offers page!

Is Outsourcing Worth The Cost?

If you have a patch of grass that needs cutting but it’s just a few square meters, it may mean the job is too small to be worth being outsourced.

Rather than get a gardener who would charge you the same price if your garden was 10 times the size, it might make sense to eliminate the job entirely. In this case, you could lay down a lower maintenance patio and be forever free from this nagging chore.

Though, it’s worth considering whether you hate the chore or just the time it takes. Can you cut down your work hours at your job instead?

What do you outsource and why? Let us know in the comments below.

Also check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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What Is A Good Salary And Net Worth – UK – Income and Wealth Percentiles

Where do you sit on the scale from poor to rich? How does your income and net worth compare to your neighbours?

 

These comparisons matter, because it is not the pound or dollar value of your wealth that matters, but what that wealth can buy you relative to everyone else.

 

You don’t need “X millions” to be rich – you just need more resources than most other people in the same economy.

 

Is a squirrel rich if it has 20 nuts? Well, he’s richer than his mate who has 5 nuts – the big squirrel next door is richer with 25 nuts, but you’d still say that our squirrel had a lot of nuts.

 

In this article we’re looking at income and net worth percentiles, and where you sit on the scale. Is your wage good, or not? Does your pension pot set you apart?

 

In theory, you only need to be doing better than most other people to live a comfortable life and retirement.

 

If you’re between the 50th and the 99th percentile it means you’re above average, and have a larger slice of the pie than most.

 

Between the 1st and 49th means you’re below average, and have some work to do to set things right!

 

So what is a good salary and a good net worth for someone in the UK?

 

What’s A Good Salary?

The Institute for Fiscal Studies has a handy calculator on their website for calculating your Income Percentile.

 

To qualify as above average, a single person would need to make £20,000 a year after tax – the equivalent of a £24,000 salary.

 

This would put you in the 51st percentile, just above average. But is that really enough to live comfortably?

 

According to RecruitmentBuzz, to be able to start saving just £100 per month you’d need a salary of £28,000 – or £22,700 after tax.

 

But to stand a chance of saving up for a house deposit, or a good-sized investment portfolio while you’re still young, we think you need to be saving at least £500 a month.

 

Extrapolating from the RecruitmentBuzz figures, we calculate the salary that allows this level of saving in the UK is £35,000, or £27,400 after tax, and this assumes the individual is not prey to lifestyle creep or lifestyle inflation.

 

This puts you in the 74th Income Percentile – the top 26% – meaning that to get ahead in life you need to be doing better than nearly three quarters of the population.

 

Not All Income Is Created Equal

You might be tempted to pat yourself on the back right now if your income puts you in a high percentile.

 

But is income from a job the same as income from dividends, or from rental property that you own?

 

Of course not. You might be in the bottom 40%, but if all your income was coming from passive sources, like stocks and property, you’d still be better off than someone in the 70th percentile or top 30% who gets all their income from a job.

 

Why? Because your passive income means you can probably retire whenever you want, or have unlimited free time to pursue more income if you chose to.

 

The guy making a decent salary in the 70th percentile – the top 30% – might still be chained to his desk for another 40 years. We’d say, it’s more important to own financial assets. Which leads us to: what is a good net worth.

Wealth Percentiles from 0 (worst off) to 100 (richest)

What’s A Good Net Worth?

Above is a “UK Wealth By Household” chart which uses data from the ONS, which we’ve adjusted for inflation to 2020 as ONS data is typically out of date by 3 or 4 years.

 

This orange line is Total wealth, which is made up of the 4 underlying wealth types: Financial Wealth (investments and savings); Property Wealth (the value of your home); Physical Wealth (shiny things you own like cars, jewellery and fridge freezers – what Rich Dad Poor Dad refers to as “Doodads”); and Pension Wealth (the value of your private work pensions and SIPPs, not including the state pension).

 

The graph gets a bit mental after around the 65th percentile – the top third of people having so much wealth that it’s difficult to even see what’s going on below that, so let’s now zoom in on wealth up to £500,000.

Zoomed in to £500k: Wealth Percentiles from 0 (worst off) to 100 (richest)

A household – whether that’s just you, or as a couple – with Total Wealth of £300,000 would find themselves on the 51st percentile – better than average.

 

That may sound crazy to a 30-year-old audience, but bear in mind this chart includes older people who have paid off their mortgages and built up significant pension pots.

 

We’re not fans of this focus on Total Wealth. Again, not all wealth is equal, and someone whose £300,000 is made up of highly depreciating Physical Wealth like new cars is obviously not as well-off financially as someone who owns £300,000 of Financial Wealth, like an investment portfolio that generates an extra £30,000 a year.

 

Let’s now break down the types of wealth that make up a Net Worth, and see which ones really matter.

 

#1 – Financial Wealth

This is your stocks and ETFs, your investment property, your cash and savings accounts, peer to peer lending accounts, gold, bonds, businesses that you own – all your money and things which substitute for money like investments.

 

Put the kettle on and tot up all your financial assets, then find your household on the chart – and we’ll zoom in again as most households will have less than £100,000 of Financials.

Zoomed in to £100k: Wealth Percentiles from 0 (worst off) to 100 (richest)

Your Financial Wealth is net of any debt, meaning the worst-off 25% of people have zero or negative Financial Wealth.

 

If you have a stocks and shares ISA or even a bank account with £8,000 in it, and no debt, you are above average.

 

The ONS data does not subtract your Rainy Day Emergency Fund from these numbers though, which should probably be around £8,000 for most people – around 6 months wages.

 

So what the chart is really saying is that half the country don’t have any spare cash for investing.

 

If you have built up any kind of investment portfolio alongside your emergency fund, you should consider yourself winning!

 

Financial wealth has the potential to generate more wealth, and can allow you to retire before age 55 if it’s large enough, or allow you the freedom to start your own business without having to worry about paying the bills in the initial years.

 

Passive income generated from it may even improve your standing in the Income Percentiles.

 

It can be difficult to value at the more affluent end of the population as rich people tend to own businesses which have no obvious market value, but generate them an awful lot of money.

 

Furthermore, income producing investments held within an ISA will be part of the Financial Wealth category, but a noteworthy point is that the income produced doesn’t actually classify as income in the eyes of HMRC.

 

It is unclear from this data whether this is counted as income or not, so it might be ok to be on the low end of the income percentiles, as long as you are on the high end of the Financial Wealth percentiles.

 

For most people, working out their Financial Wealth is as simple as looking at the balance on a savings account.

 

For a lot of people, their Financial Wealth will be held entirely in cash, and while this could be used to buy passive income assets with, most people won’t, and will instead convert any temporary Financial Wealth into Physical Wealth.

 

#2 – Physical Wealth

Physical Wealth is wealth that has been trapped in “stuff” – cars, coats, cots and other crap. To further quote Rich Dad Poor Dad, these are Expenses, not Assets, and typically decrease in value – by around half on the very first day of ownership in many cases.

 

Tot up your physical wealth and see where you land relative to your fellow countrymen – it’s the blue line.

 

What’s sad is how much more value people place in Physical Wealth than Financial.

 

A majority of people happily place tens of thousands of pounds into doodads, while utterly neglecting their finances.

 

#3 – Private Pension Wealth

Let’s now look at Private Pension Wealth.

 

It’s obvious in from the charts just how much more of a priority is given to pensions investing (the green Pension Wealth line) over accessible investing (the grey Financial Wealth line).

 

If you don’t know where you fall on the line, you are not alone. Barely anyone of working age has a clue how much money is invested in their work pension pots or what it’s invested in.

 

Maybe you don’t even remember how many pensions you have?

 

We did a deep dive video on exactly what was in one of (MU co-founder) Ben’s workplace pensions, and were horrified by the inefficient and undiversified way his money was being put to work by incompetent pension fund managers.

 

Ben has since opened a SIPP to hold all his old work pensions in, so he can control them more directly.

 

Check out that video for ideas about the SIPP providers you could open with, and why it’s so important to take control of your own money.

 

And if you open a SIPP with Nutmeg using our link you will get the first 6 months without management fees when you either deposit or transfer at least £500 – the link is on the Offers page.

 

The charts tell us that the average person (50th percentile) has a pension pot of £68,000. If you have more than this, you’re probably either over 40, or you have a very generous employer, or you have focussed relentlessly on your Pension Wealth to the detriment of your Financial Wealth, necessary for retiring before age 55.

 

#4 – Property Wealth

Unfortunately, the orthodox view in the subject of financial security is still that your home is your greatest asset. This is absolute tosh! Poppycock of the highest order.

 

Far too much focus is placed by wealth seekers on non-income generating assets like your home.

 

You could be a millionaire on paper because of your house’s value, but have no cash in the bank, and no stocks or other assets paying you an income.

 

You still have to go to work every day to pay the bills. The value trapped in that house makes your net worth look good on paper, but is pointless for any real-world application.

 

Your home, once paid off, is kind of an asset, so far as it stops you from having to pay rent, or mortgage interest.

 

But while Financial Wealth and Pension Wealth are more clear-cut Assets that generate additional wealth, Property Wealth can be more easily likened to a Liability. Of course, we’re only talking about the house you live in. Property held as an investment sits in your Financial Wealth box.

 

Your home doesn’t do anything to generate more wealth, and it costs you a lot to maintain. If you own a big house, you’re going to need a big income to pay for big maintenance bills and running costs.

 

And it can’t be easily sold to get hold of the money. You have to live somewhere, so selling your house to live on the cash is pretty unrealistic as far as plans go.

 

Only by downsizing or moving to a poorer area can you get access to that trapped value.

 

Take a look where you sit on the yellow line – and this is only the part of the house that you own, not the bit the bank owns with your mortgage.

 

For a new homeowner with a 10% deposit on a £200,000 house, you would own £20,000 of that house, and be in the 34th percentile – or bottom 34% of people.

 

Below the 33rd percentile – the bottom third of the country – households do not own any property, and rent instead.

 

Age Matters

The big dividing line between the haves and the have-nots is drawn through the generations.

Household Wealth Percentiles By Age (Remember that Under 16s live with parents!)

This chart shows this divide vividly. The average over-65-year-old has access to at least half a million pounds of total wealth – we can see the 50th percentile hits the green bar, which represents £500k to £1m.

 

Meanwhile, down at our end of the age-spectrum, the average 25-34 year old can command somewhere between £85,000 and £200,000 of total wealth.

 

Compare and contrast to the first chart we saw on Total Wealth. While there, the average person in the UK may have £300,000 of wealth, for the 25-34 age range, the average is just over £100,000.

 

So don’t feel too bummed out if you’re not on the property ladder yet, or if you haven’t built up much in the way of investments.

 

There’s time to turn it around and grow out of average. Get there faster by focusing on the right types of wealth – and the right types of income!

 

Tell us what you think your income and wealth percentiles are below!

Also check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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Take Control Of Your Financial Life – You Can’t Rely On Anyone Else!

We see a lot of people whinging on social media and in some news publications about how the government is a disgrace and that they’re not doing enough. We agree that the government are making a pig’s ear out of everything recently, but is it their job to mollycoddle us?

The same people complain that their boss isn’t fair or that rich corporations are somehow dodging taxes. They complain about their wages, their commute, the tax they pay, the cost of a beer. They pretty much moan about everything. Everything but themselves of course.

People can generally be split into two camps – the Doers and the Do Nots.

The Do Nots are the complainers who want everything for free and done for them; and the Doers are those who take control of their futures.  The Doers know that nothing worth having in life comes for free and that you can’t rely on others to improve your life. You must take control to improve your own future.

Today we’re going to look at some of the things that too many people are foolishly relying on getting, and will be whinging about and blaming someone else when they don’t get them. These are all key areas where you can snatch back control and improve your life.

If you are one of these people that expects something for nothing and has a tendency to be easily triggered, we advise you not to read any further! With that said let’s check it out…

Reliance On The State Pension

Too many people put their wellbeing, security, and life in the hands of the state. This is especially true when it comes to retirement. Growing old is not a surprise. If we’re lucky it will happen to all of us.

And yet, millions of people in the UK fail to prepare – instead choosing to be saved by a future government. A government that will not be able to carry this burden.

A lot of people pay taxes throughout their lives and assume that the government must put some of that aside to save for their future state pension. This is not the case at all. Any taxes that you pay goes towards paying for the state pension of current pensioners. There is no state savings pot for you.

State pensions are really just a pyramid scheme on an epic scale. Pyramid schemes only survive for as long as new members can join at the bottom. Sooner or later the whole thing comes crashing down. This will happen in some form to state pensions.  There is no doubt about it.

When pensions were first created in 1909 it was only paid out to some people aged over 70. At the time, only one in four people reached the age of 70 and life expectancy at that age was about a further 9 years.

Nowadays, the age you can take a State Pension is set to rise to 68 from the current 65. But 68 is not high enough –from a “how we gonna pay for this” point of view – as too many people are qualifying for it and drawing from it for too long.

Children born today are expected to live until they’re 90 years old. That’s over 20 years of taking from the system, rather than contributing. The state pension relies on a large worker-to-pensioner ratio, but the problem is that the ratio is forever shrinking.

In 2004, there were approximately 4 working age individuals for every 1 person aged 65 and over. By 2056 this ratio is predicted to fall to about 2:1. Therefore our kids will be asked to pay the living costs of twice as many old people as we do today.

Despite all these problems, people continually moan that the amount paid out is not enough, and the age that you can claim at is too high. FYI, the state pension is currently over £9,000 a year. This won’t get you a lavish lifestyle by any means, but the state should never have been expected to do this in the first place.

State benefits should be an absolute minimum. People have 40-50 years to plan for retirement and need to take action now.

Reliance On Government Handouts

Worryingly, there seems to be a growing dependency on and expectation of government handouts. Ask 10 people what they think the role of the government should be and you will likely get 10 different answers.

We consider the role of the government is to run and manage the parts of the country that the private sector cannot or should not. This includes things such as a military defence, fire and police services, basic healthcare, the transport network, basic education, social services, environmental protection and ensuring everyone has access to utilities – water, gas, electric and broadband.

It’s now taken for granted that the government should be the wage payer of last resort. This was always the case with the benefits system, but has been significantly ramped up during the coronavirus response.

The need for a furlough scheme – whether an arbitrary 80% or 73% – is only there because barely anyone has taken the steps over their working lives to put money aside. It surely must be recognised that the country is so deep in debt that it cannot afford such expensive schemes.

There is a lot of noise that the current job support scheme is not enough, but we ask the question why do so few people not have an emergency fund? Instead, since the last recession many of these people have been splashing the cash on frivolous stuff.

While the exact timing of the Corona pandemic is unexpected, recessions are fairly routine, with history littered with them. The one before 2020 was only in 2009.

For the record we don’t think the government should be force closing any business in the manner they have, but why were the masses not financially prepared? This time it was Covid that sunk their finances, but next time it could be something else entirely such as a personal injury, or a war sending the country into a financial depression.

We all need to be prepared, so that we can fight off temporary setbacks, and it starts with having an emergency fund of at least 6 months of living expenses. Help from the state should only ever be sought as a last resort, not in the first instance. Why do so many grown adults depend on the state like a child depends on a parent?

Reliance On Chance

We’ve come across countless people who hate their lives and hate their jobs but do nothing tangible to change this. Instead too many people are relying on chance, such as a lottery win or an unexpected windfall from an unknown relative, to improve their lot.

Other than by a miracle this isn’t going to happen to you. The chance of winning the lottery is 1 in 45 million.

There is also ample evidence showing that many lottery winners blow their fortune because they didn’t learn financial literacy. Believe it or not, statistics show 70% of lottery winners end up broke and a third go on to declare bankruptcy, according to the National Endowment for Financial Education.

The problems they had with money before they had wealth carry over but on a much larger scale.

Reliance On A Boss

Why do so many people put their future in the hands of one person? One person who frankly doesn’t give two hoots about them.

Bosses are people too with their own lives to think about, and most people have enough problems on their plate to worry about yours as well. Sure, some bosses will genuinely care, but not a single one will care about your future and your wellbeing as much as you do. This means you must take control of your future and don’t rely on someone creating it for you.

Time and again people are hoping their boss gives them a pay rise out of the kindness of their hearts.

No! You must take what is yours.

Your boss’s performance and therefore his or her own bonus is probably measured against a department budget. Paying you more or sending you on an expensive training course will result in the department going over budget. Your boss is being incentivised to pay you as little as possible. They don’t have your best interests at heart.

This conflict of interest also affects the work you’re doing. Sooner or later most people get bored to death doing the same task over and over again. Trust us, we’ve been there before.

At this point your boss might dangle a carrot. It might include additional responsibilities or more interesting tasks. Rarely does it involve relinquishing the existing tedious work. Your boss doesn’t want the hassle and expense of having to find someone else to do your work. They will do whatever they can to keep things ticking over. This again is not in your best interest.

You need to stimulate your brain, which means you likely need to progress elsewhere, but only you can make this happen.

Businesses generally break down massive processes into small, tedious, repetitive tasks and assign one person to each. Think of a car production line but it happens in offices as well. If you’re screwing that same screw for the 1 millionth time, you are not developing yourself.

Reliance On The Crowd

By this we mean deferring our major life-decisions to society’s standard playbook.

This is most illustrative in the life path dictated by society. You know the one. You go to school, get good grades, go to University, get a good job, buy a nice car, get married, buy a nice house, fill it with expensive stuff, have children, have an annual holiday, work until old age, and then retire.

Too many people are not engaging their brains and instead just follow the crowd. They believe if other people do it, that means it’s right. Nobody ever stops to question why or whether they even want it.

When you think about it, maybe you don’t want this. Maybe you don’t want to work a crappy job for 50 years; maybe you don’t want to waste £30k on a wedding; maybe you don’t want to be a slave to debt repayments for your entire life.

Following the crowd doesn’t just apply to how society dictates your path, but also impacts every decision you make. For example, from our backgrounds we know that too many people don’t make their own investment decisions. They are looking for that hot stock tip, so they can get rich quick. Analysing the investment themselves is too much like hard work – far easier to follow the crowd.

Reliance On Family

A long time ago, Andy (MU Co-Founder) was talking to a friend of his about retirement planning and was shocked that she wasn’t contributing to her workplace pension, despite the company matching any contributions.

Andy could not understand why she would throw free money away and that she wasn’t preparing for old age.

The reason she didn’t contribute to her pension was nothing to do with her young age. She said that she expected her future family to look after her in her old age.

This is both stupid and selfish because it was passing over responsibility of her life into someone else’s hands. Even if her family did want to help her, they may not have the strong finances to do so. Life will throw a lot of curve balls and it’s very presumptuous of her to think that her family will bail her out. They themselves could die young, develop financial or health problems, move away, may have their own problems, or simply not want to be put in that position.

Our suggestion to you guys watching is to make sure that you take action today to control your own future, by first building that emergency fund and then investing. This is well within your power.

Are you independent or do you rely on the government and other people to get by? What are you doing about this? Let us know in the comments section.

It’s worth checking out the Money Unshackled Offers page as we have tonnes of awesome cash bonuses and ways to make money listed that are continually being updated, including how you could make £500+ tax-free each month from Matched Betting.

Also check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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How Companies Avoid Tax – If You Can’t Beat Them, Join Them

If we told you a legal way of slashing your tax bill would you do it? Of course you would.

There are very few people who are supportive of the punitive taxes enforced upon them by financially illiterate and inefficient governments. Those that do support tax increases almost always expect others to bear the burden and never wish to do so themselves. “Tax the rich” is frequently roared from low earners.

The more you earn, the more your aspiration is punished, and so it is understandable when individuals and corporations take steps to legally minimise their tax payments.

Unfortunately for individuals there isn’t that much you can do, but corporations can do way more to reduce that horrid tax expense. We’ve done a few videos previously on how individuals can legally dodge tax, but here we’re going to look at some of the more common ways a company can legally avoid tax.

Hopefully, this inspires you and gives you yet another reason to setup your own business empire!

Some sections of the media condemn and lament the corporations that avoid tax, but it’s a company’s management’s duty to maximise shareholder wealth. Almost everyone in the country will be shareholders in these companies through their pensions, insurance companies, and if they’re smart, investments, and so these companies are only acting in your best interest.

Just to be clear we’re not supporting tax evasion, which is illegal. There are plenty enough legal ways to avoid tax by using a company!

Whether you’re new to this website or not, it’s worth checking out the Offers page as we have tonnes of awesome cash bonuses and ways to make money listed that are continually being updated, including how you could make £500+ tax-free each month from Matched Betting. The link to the Offers page is here.

There Is No Need For More Tax

The UK is in deep sh*t as debt and spending are spiralling out of control and tax receipts are consistently below the amount being spent exacerbating the problem.

What individual or corporation wants to pay ridiculous sums of tax when the money is just squandered? Did you know the UK government’s Coronavirus Test and Trace system has cost £12 billion so far and still isn’t fully working?

Then there’s the issue that government departments are encouraged to spend their entire budgets. If they fail to spend it all, then the following year they get a reduced budget as it obviously wasn’t needed. The result is – they spend everything.

Moreover, a bigger department will probably mean higher wages for the management, so they are incentivised to be inefficient. A few years back the TaxPayers’ Alliance found that £120 billion of taxpayer’s money was being flushed down the drain every year.

This is your hard-earned money. Just think how much extra time you have to work each week to pay the government a cut of your wages – for most it’s around 2 days a week.

They found one council had spent over £5,000 on hot drinks from a vending machine, when the equivalent number of tea bags would have cost just £200, and another council spent £19,000 on a ‘motivational magician’.

The message of this is that the government needs to stop waste, rather than punish wealth creators. And also, that it’s very easy to spend other people’s money.

How Can Any Company Avoid Tax?

1. Earn, Spend, Pay Tax

While many of the major avoidance techniques are reserved for global multinationals, the most basic way to minimise tax is available to all companies, irrespective of their size.

This means you can establish a relatively small business and yet still benefit from the order in which tax is paid. Let us explain.

An employee earns money, gets taxed immediately, and then can spend whatever’s left. The problem with this is the employee is spending after-tax pounds.

For some expenditure that’s quite fair but you might be surprised just how much you spend on stuff related to work. Expenses that you otherwise wouldn’t have incurred. So, in these cases its highly unfair to be spending after tax income on work related expenses.

For example, the work clothes which were solely bought to wear while chained to that desk were unfairly paid for with after tax pounds. The overpriced work lunch you had was also paid for with after tax pounds, and so was the petrol or the train ticket used to commute back and forth. We could even stretch it to holidays that were taken as result of the stress piled on you by being overworked and therefore exhausted.

A company on the other hand only pays tax after expenses and quite rightly to. Companies first earn, then spend, then pay taxes on the small amount remaining.

There are rules in place to stop this system being abused but they have to be fairly loose because otherwise a company may end up paying tax on revenues, which would only disincentivise entrepreneurs from creating businesses – businesses which ultimately benefit society by creating jobs.

A company, also called a corporation, can be as small as just one person, so anyone is allowed to benefit by incorporating their small business. Through a corporation, your relevant expenses are now done with pre-tax pounds.

Suddenly a meal out with a business partner becomes a business meeting and is tax deductible. If your laptop or car is used for business, you’re able to claim costs as a business expense.

We both enjoy reading about money and entrepreneurship, and as business owners we can now put our money magazines, subscriptions and books through the business as an allowable expense, meaning we can effectively buy them cheaper than you. All associated equipment used such as expensive technology or office furniture can also be claimed.

2. Keep It In The Family

Your spouse and children aren’t just there to keep you on your toes. They also come with very juicy tax allowances. A business can deduct the cost of employees before paying tax, so it makes sense to utilise this if possible.

Whilst the salary must be sensible and reflect the work carried out, there is clearly room to extract money from the business in a tax efficient manner.

There are 101 different ways to take advantage of a company setup and if you’re in business, then we suggest speaking to an accountant who knows their stuff. And if you don’t own a business, then the game is rigged against you and hopefully this video will raise your awareness to the awesome power of corporations.

How Do Big Companies Avoid Tax?

Tax avoidance techniques for multinational companies are all about location. It essentially boils down to where a company chooses to record profits and expenses. These intelligent companies simply shift profits to subsidiaries where there is a low or zero tax regime – what is commonly known as a tax haven – and simultaneously record expenses in high tax jurisdictions.

So, when we hear that Amazon or whoever it might be is paying next to no UK tax it’s because our tax regime is too greedy, and they’re just taking advantage of their global size and their industrious accountants to pay their taxes in more forgiving countries.

The financially uneducated who don’t understand tax – which includes many MPs – regularly campaign for taxes on revenue such as the 2% online sales tax. This tax might be a political vote winner, but this is a tax that is ultimately paid by the customer and is only collected by the online retailer at no cost to them. It’s turkeys voting for Christmas.

Anyway, lets now look at some techniques used to shift profits.

1. Transfer Pricing

Large companies tend to have multiple subsidiaries that trade with one another. This provides an opportunity to shift expenses to the highest tax regimes to minimise taxable profits.

For example, if a UK company owned two separate companies in Cyprus and France; when the Cyprus-based company (tax rate 10%) decides to sell to the French company (tax rate 33.3 %), it has a strong incentive to overstate the selling price.

In this scenario, profits have been increased in the Cypriot company and reduced in the French company.

2. Relocate Sales

Multinational companies can choose to sell their products from countries where they make the most profit at the minimum tax expense. They do this by moving products out of a higher tax regime to subsidiaries that add ‘value’ to the products in lower tax regimes, after which they can then be sold for more.

For example, a mining company can extract ore and then export it in an unprocessed state to a country with low taxes. There it can be processed and sold for a much higher price. The profit has been easily relocated.

3. Cost Loading

Multinationals can inflate the cost of operations in higher tax regime countries. For example, and this is hypothetical, McDonalds could produce most of its marketing in the US to load up on cost there and then use it in countries around the world. This would lower its US tax bill.

4. Internal Borrowing

Multinational companies can lend money from 1 subsidiary to another. By doing this the company in the high tax regime can rack up a load of interest expenses, artificially moving profits into the more favourable tax regime.

5. Intellectual Property

Multinational companies can choose to register patents and copyrights on things like their brand and logo in low tax regime countries.

The group’s companies based in higher tax regimes then pay a fee for the use of these items every time they make sales. Genius!

We’ve only just touched the surface and there is no way to stop companies from doing this, as there are too many loopholes and opportunities to reduce tax. If you can’t beat them, join them!

What do you think of companies that intelligently reduce tax? Geniuses or enemies of the state? Let us know in the comments below.

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