I met my brand new financial advisor this week. Well, I’d met him several times before, but this week’s meeting made the arrangement official. About 10 minutes before he was due to arrive, I wracked my brain to create a list of the specific calculations I wanted to him to explain to me. But then the doorbell rang. He’d arrived early.
The idea that there are certain very important calculations to understand with respect to my personal finances is one I’ve been carrying around for about three years. I attribute this awareness to my friend Dave.
In the past it was Dave to whom I would turn with questions about my finances. I’d take him for dinner at Balan’s and after we’d eaten, he’d examine the crumbled spreadsheet he’d asked me to compile. One that contained a list of my debts and the interest rates I paid on each, plus things like how much my flat was worth. A balance sheet, he’d explained politely.
I’d watch Dave scribble his calculations on the piece of paper I’d handed over to him. Math he would then talk me through while I sat across from him looking at it upside down.
It was thanks to Dave that I didn’t “consolidate my debt” by accepting what turned out to be a very disadvantageous offer from my bank. It was thanks to Dave that I met Brian, his mortgage advisor, who would prove himself gentlemanly several times over (by doing things like not selling me a mortgage and instead telling me to sit tight with the one I had. Contrary to much of the recent press, not all bankers or brokers are rotten, some are extremely helpful people.)
It was during one of these dinners with Dave that I’d witnessed the magic of whipping out the right calculation at the right time.
I’d been moaning about how stressful being a landlord was proving. Being unable to sell my flat (the global economy had just collapsed), I’d decided to rent it out so that I could move to a happier home. This decision had made me a landlord and becoming one brought all sorts of hassles that other landlords reading this can guess.
In the beginning I was avalanched by tasks better handled by people far more practical than me. Also, I had mistakenly assumed that the amount of rent I collected on my own property would cover the rent I needed to pay to live elsewhere. I hadn’t realized that I had to pay 40% tax on the rental income I received.
“That’s so unfair.” I’d said to Dave as I attacked my quesadilla. “Don’t they know I need that money to rent a place for myself?”
“Your property is no longer your home,” Dave had intoned. “Once you rent it out, your flat becomes a business and ‘they’ don’t care that you have to pay to live somewhere else. That’s got nothing to do with the fact that you now receive rental income.”
But before I got the chance to continue my wallow about the hardship of being a landlord, Dave put everything into perspective.
With a few click and clacks of his calculator he worked out how much my flat was making me in profit … not just after tax on the rental income, but how much money my original deposit had earned in the time I’d owned the flat — thanks to the increasing value of my property. These numbers revealed that becoming a landlord was the smartest thing I’ve ever done financially. My flat was creating more income for me than any other sort of “financial vehicle” was ever likely to.
Understanding this made me feel a lot less pissed off with the realities of being a landlord. It also made me squirrel in my head the notion that there are often significant calculations to keep in mind when it comes to personal finance.
Having said that, they aren’t always simple calculations and the idea behind this week’s assignment – that I might note down the important ones to keep in mind – hasn’t worked exactly as I’d imagined.
Instead what I learnt this week was to remember to ask the right questions when I have the benefit of a Dave or a professional in front of me. Questions like what are the tax implications of the choices I have? Are there other things I might do with my money that will reduce my debt? Increase my savings? Protect my assets better?
Yes, I need to follow the math and always remember the risks of following someone else’s advice, but that’s whole different set of calculations than the kind I originally had in mind this week.