Let me introduce myself
My name is Dr Nikki Ramskill, otherwise known as the female money doctor.
I run a blog to discuss all things personal finance and help to teach the good money-habits and concepts that I have self-taught over the past 2-3 years. I’ve made A LOT of money-mistakes in my time, and have worked hard to try and undo the damage and work on a path towards true financial security and freedom.
Firstly, I want to thank senecarooms.com for inviting me to guest blog. When I was thinking of what to discuss, it occurred to me that this readership may already be quite savvy with their money – especially if they are considering investing in property.
Compartmentalising
However, this is not true for all investors. Humans have a great ability to compartmentalise things we observe in the world – it is so we don’t become overwhelmed by all the thousands of bits of information there is out there to take in. The “filters” through which we do this process are shaped by numerous factors, including our upbringing and experiences through life. During this process of compartmentalising and screening, we filter out the bits we don’t want to see, and zone out the things that we do.
So how does this fit in with a discussion about money?
For many of us, investing seems exciting and scary all at the same time, and property is a great asset class to be in. If you’re one of the determined ones, you WILL be successful in it.
But what happens if you’re so focused on MAKING money, that you IGNORE how to KEEP money.
Losing out
Like an unfortunate lottery winner, any new money you make will simply leak right out of your hands into the pockets of those who know how to look after it.
I remember once encountering an HMO owner who was desperate to sell up and move away. He had two problems:
No money to buy somewhere to move into (so HAD to sell the HMO he was now reluctantly running)
Charging so little for his rooms that he was now losing money rather than turning a healthy profit (hence why he wanted to sell)
Quite simply, he’d failed to budget his earnings properly, and this lack of planning is a BIG mistake to make, especially in property.
Budgeting is the answer
Not budgeting was one of the many mistakes I have made with money in the past. https://thefemalemoneydoctor.com/money-mistakes/ Investing is only one side of the equation to financial freedom. On the other side is having a tight rein on your money. Quite simply, and perhaps a little less exciting, is that you must learn how to budget successfully, and also be able to apply that to your business.
I use a 7-step budget in my personal finances that allows me to keep a lot of my own money, rather than paying out to everyone else. I firmly believe that could also work well if applied to running a business.
The 7 steps are:
Put 10% of your earnings into investing – so if you have property, but little equity, start building up a stocks and shares portfolio so that you have DIVERSIFIED assets.
Put 10% into an emergency fund – this should be initially the equivalent of £1000 to cover sudden expenses (even with landlord’s insurance, you will still need to fund the excess). Once £1000 has been reached, have 3-6 months-worth of basic living expenses saved up. This is in case of not having money coming in while you need to renovate, or if you had rouge tenants not paying their way.
Put 10% into paying off debt (when this is paid, this money goes into giving to others) – if you have any consumer debt at all, make sure this is paid off, then pay down the mortgages on your rental properties so you are able to buffer interest rate rises properly when they start to rise (and keep you in business!).
Save 10% for fun. In personal finance, having 10% of your income every month to blow on whatever you wanted might not be life-changing, but it would certainly keep you happy. Do the same in your business. If you have employees, take them out! If you have clients to woo – you have money there to do it. Failing that, if you’re a sole-trader, keep yourself happy, and use the money on yourself.
Put 50% into expenses – when you “do a deal” it should stack up in your favour before any money changes hands. There is no point running an HMO if the mortgage is so high you’re not turning a healthy profit. The aim is to try and keep running costs to a minimum. 50% is a great aim in personal finances, but understandably this may take some work to reach. https://senecarooms.com/2017/12/13/6-simple-tips-to-minimise-your-hmo-running-costs/ Getting the best mortgage product for your needs, and charging fair, but profitable rents will go a long way to making the project stack.
Next, 10% of your money should go into developing YOU. I know a buy-to-let investor who was blown away when she learnt how to invest in HMOs. She could only have done this after investing in herself and getting the skills she needed to achieve this. Put money aside to send yourself on courses, read books etc, so that you can reach your highest potential.
Finally, put 10% away to give to others (assuming you don’t have any debt that you wish to pay off). Investors are in a privileged position, so being able to give back to your community is a massive signal of your success. It also shows you that there is always enough to give away to others, and breaking out of a “lack” mindset, is the best thing a business owner can do to succeed.
These are only suggested percentages and spending categories, but the main thing is to ensure that the money you earn is being spread around in a planned and conscious way, so that YOU are in control of it, and not the other way around.
Final Thoughts
Budgeting might not seem all that exciting, but if you look at every self-made successful business owner, they will have budgeted in one form or another. Spending minimally, and saving maximally is the best way of remaining profitable. Using a budget will also help you to ensure that an investment “stacks up”. If it doesn’t cash flow enough for you, it might be disappointing, but it’s probably not the right investment and you need to move on.
Good Luck in your investing journey!
Take care,
Dr Nikki