What is Cash Flow? Find out how you can use it to your advantage

Cash, and more so the lack of it, can be a determining factor in whether you will achieve your goal of financial freedom. In short, cash flow is the net amount of cash that is flowing in and out of your accounts each month. Traditionally, this has been an important measure for business owners as they can keep track of how much money they are generating from customers that they offer their services to. It’s also important for them to know how much they are paying out each month for things like business loans, office rental and many other expenses.

However, the same cash flow measures can be used by individuals like you and me. Let’s say that each month you earn €2,000 net per month from your employment, €500 from your side hustle and €200 from your investments. But you need to live, so you can deduct your mortgage payments, car costs and any other expenses you have. The result of this will be either a positive or negative cash flow.

cash flow money

Cash Flow from P2P, Real Estate and Income vs Accumulation Funds

One of the most popular asset classes today is Peer-to-Peer lending, notably for the opportunities it gives investors to become the bank and receive a monthly cash flow. Let’s say you invested €10,000 across thousands of loans from a range of risk ratings, loan durations and countries. Every month, the borrowers will make their loan repayments which consists of principal and interest, you then have the option to withdraw this cash flow or reinvest your profits to compound your interest and maximize your overall returns.

Quite similarly, real estate investments work in a comparable fashion. If you buy a rental property for €100,000, each month you will receive a payment from the tenants (e.g. €600 per month). You might use some of that to pay the remaining mortgage on the property or add it to a growth account to save a deposit for another property. An important difference between this and P2P is risk, as previously mentioned you can spread your risks across thousands of loans where as you rely on the payment from a tenant in a single property – if they default then there is no other cash flow. Protect your cash flow by diversifying within your chosen asset class.

real estate investment

If you are familiar with investing in equity funds, it’s likely you have come across the accumulation vs income conundrum. Simply put, an accumulation class fund will reinvest any cash generated from the investments within back in to the fund, over time this can significantly increase the size of your total pot. On the other hand, an income class fund will pay any cash generated from the investments back to you to use as you wish. This is for those who are looking to increase their total monthly cash flow amount and are not necessarily focused on the long-term growth of their investments. Almost always, the accumulation fund will be the most profitable in the long run.

Take a look at the graph below:

income vs accumulation-en

The same principle can be applied to your investments with Bondora, as the only difference is the underlying asset (consumer loans rather than equities). In the graph above, we have compared the growth of a portfolio with the same interest rate, starting capital and duration, the only difference being reinvesting your monthly cash flow compared to withdrawing it each month. Using our Portfolio Manager, starting with €10,000, an outlook of 5 years and a respectable interest rate of 10% per annum, there’s a stark differential in performance.

In fact, by simply allowing the Portfolio Manager to reinvest your monthly cash flow, your account value at the end of the 5 year duration would be 33.9%, or €4,462 larger (€17,623.42) than if you did not (€13,161.42). This is literally how you can “Make your money work for you” with minimal effort.

Cash for thought

Cash Flow Quadrant

Do you recognize the quadrant above? If you do then you are most likely well accustomed to the benefits of having a positive cash flow, congrats! For those who are still puzzled, this peculiar yet simple diagram is the brainchild of Robert Kiyosaki, the king of cash flow. As the creator of the Cash Flow Quadrant, Kiyosaki divides the general population and their mindset in to 4 separate categories:

  1. E: Employee – This person values job safety and security over everything.
  2. S: Small business owner/Self-employed – An independent person who wants to do everything related to their business by themselves.
  3. B: Big business owners – People who create a large business run by intelligent people.
  4. I: Investor – Those who make money work for them.

His main theory is that people should learn how to become big business owners and learn how to become investors, as the people on the left side of the quadrant only have active income compared to those on the right earning passive income. Creating a viable and sustainable source of passive income is seen as a core principle of achieving financial freedom. Read more about this here.

What are your favourite books on investing and cash flow? Leave us a comment below and let us know.

Invest with Bondora today.

4 ways to save money for investing

Something we hear time and time again is “I would love to start investing, but I don’t have any money”. By human nature, we are at times reluctant to change, especially when it comes to parting with something we hold so dear such as our money. When you hear your friends or that rich uncle of yours talk about their investment portfolio, know that everyone has started somewhere and the most critical thing you can do is to get started. But how can you actually save money each month for investing?

If you’ve reviewed your monthly budget and you still don’t think you can start, here are 4 things you should consider.

1) What are you planning to invest in?

empty pockets

Firstly, you should think about exactly what you want to invest in as this will determine how much capital you need to get started and also how you can get there. For example, if you are choosing to invest directly in to real estate then you will need quite a considerable cash amount available. Not to mention, you will needed further capital available for repairs, maintenance and any related fees for agencies, insurance and legal.

If you’re investing in securities, P2P or something similar, it’s likely there will be a minimum investment amount required but significantly less than real estate. Once you know how much you need to get started, you can move on to the next step.

2) Refinance existing debt

idea of house

If you’re in a situation where you have absolutely no debt then you can skip past this one (and congratulations!), although statistics show that the average debt per person in the UK is £8,000, with the highest debt-to-income ratio in Europe seen in Denmark. Start with your largest debt, i.e. your mortgage, and check if you are getting the best interest rate available. Your property may have increased in value since you last checked and therefore your equity will have increased, this is usually the single most important factor for a bank when determining the rate they can offer you. Another common debt is a credit card; today there are a number of providers offering 0% interest rates for 12 months and over if you complete a balance transfer to them. Take advantage of these fantastic offers while they are available and use them to pay off your debt quicker, smarter and free up further income for investing.

3) Pay yourself first

refinance debt

Before you pay any bills (or anything at all for that matter), you should always pay yourself first. The day you get paid, you should set aside a minimum of 10% of your net salary to pay yourself and use the funds for investments, then you can focus on your bills and everything else. Once you get in to the habit of doing this, you may find that you choose to up your monthly percentage that you invest to 20%, even 30%, because it can be extremely motivating once you start to see your money work for you and generate interest.

4) Make some cutbacks

vault

You don’t have to give up your car or downsize your house, but we’re certain that you can think of a few things you pay for each month that aren’t really necessary. What about that gym membership that you never use? Maybe you have a subscription to a magazine or a set of TV channels? The little things add up, so make a list of all the discretionary expenditure you have each month and you’ll be amazed at what you find.

Invest with Bondora today.

How to start investing with less than €100

Contrary to popular belief, you don’t have to be a multi-millionaire to start investing, not even close. Unfortunately, that means that you no longer have any excuse to delay starting your investment journey and building up a portfolio of wealth for the future. If you are really committed to changing your life and taking that step towards financial freedom, an investment of €100 or less can be a great way to start a good habit. Over time, you will see the power of compound interest and monthly investments will become second nature.

Let’s take a look at HOW you can actually get started with Bondora, today.

1) Portfolio Manager

Bondora-net-return-example

  • Experience required: None
  • Time required and ongoing management: None
  • Management fee: €0

If you have absolutely no experience in investing, or you cringe whenever your friends mention the word finance then an automated option may be the best for you.

What is Portfolio Manager?

bondora-portfolio-manager-example

Quite literally, you make a couple of clicks and then you leave it to do the work for you. The Portfolio Manager is Bondora’s very own unique tool that allows you to pick a strategy ranging from low to high risk, then it divides your investments between different loans, countries and credit ratings in line with your chosen strategy.

If that all sounds too complicated, we give you an expected return range for each strategy so you know what you can expect from the outset. After that, you can set a ‘Spare cash balance’ on your account so any interest and principal payments you receive each month will either be kept on your account for you, or if you prefer you can set it to 0 and reinvest your profits in order to achieve the maximum profit. If you love statistics, you can delve in to these in great detail on your account or just monitor your performance from the summary figures on your dashboard.

Out of over 30,000 investors, this is our most popular option with approximately 2 out of every 3 using it.

2) Portfolio Pro

  • Experience required: Beginner/Intermediate
  • Time required and ongoing management: Slightly more than Portfolio Manager
  • Management fee: €0

Portfolio Pro is similar to the Portfolio Manager, with the exception that you have more control over where your funds are invested. For example, you may decide that you only want to invest in AA – C rated loans in Estonia, with a duration of less than 40 months. In comparison, the Portfolio Manager will automatically spread your investment across all risk ratings, loan durations and countries (dependent on the strategy you choose).

bondora-portfolio-pro-example-parameters

If you are completely new to investing and P2P, we would class this as an intermediate method of investing although it is very easy to use. As a side note, using Portfolio Pro does not mean that you will achieve higher returns than if you used the Portfolio Manager.

Once you customize your settings, Portfolio Pro will give you an indication of the distribution of your investments, your expected return range and how much volume potential there is with this criteria each month. If the number of matching loans per month is showing as 0, try widening your criteria.

bondora-portfolio-pro-example-ER

Approximately 1/3 of our investors use Portfolio Pro.

3) API

  • Experience required: Advanced
  • Time required and ongoing management: High
  • Management fee: €0

The Bondora API is for the active, hands-on investors who want to take more control than is possible with the Portfolio Manager and Portfolio Pro. The API is an interface for accessing the functionality of the Bondora platform without the user interface. API investors benefit by having access to data and services that caters to their individual investment strategies and allows you to bid on specific loans that meet your unique criteria.

Unless you have the technical skills, experience or time required to manage this, it’s likely that the API is not for you. That being said, a great return on your investments is certainly not exclusive to the API users.

Only 1% of our investor base use the API.

Get started with Bondora today

P.S. If you’re new to Peer to Peer lending, click here.

How to earn 10% per year with no risk

Recently an investor wrote to our support team and asked a great question:“Hey, how can I earn 10% or more interest every year with no risk?”

Earn 10% with no risk - Bondora

Ha.

We would love to say earning 10% each year with absolutely no risk is possible, but the truth is that with any investment you should always be aware of the risks involved. This is applicable for all asset classes, with the level of risk being different for each.

But there’s no need to despair, plenty of people consistently earn 10% or more per year because they are aware of the risks involved and manage this risk appropriately in proportion with their targeted gain. This is actually not exclusive to an individual or retail level investor either. Investment banks have been doing this for centuries, even today, if you walked on to a trading floor on Wall Street or Canary Wharf you would see financial traders leveraging themselves with extremely high-risk high-return strategies.

Here are 3 ways you can easily and instantly start managing your risk today:

1. Diversify

It goes without saying that diversification is the golden rule of investing. That being said, many prolific investors are known for saying that concentration within a single asset class is equally as important. This means that you do not necessarily need to have a share of your portfolio in every single asset class that exists, but you could pick a few and become experts in those areas. Even within an asset class itself, there is plenty of room for diversification. For example, different stocks and bonds if you invest in securities or loans with different credit ratings, durations and country of origination in P2P.

Here are the top 7 asset classes worldwide:

  • Cash Equivalents
  • Equities
  • Bonds
  • Real Estate
  • Gold
  • Precious Metals & Commodities
  • Alternative Investments

Did you notice anything about this? P2P isn’t even listed here, mostly because the idea of the individual investor having access to the wider consumer credit market has only been possible for the past 10 years. However, with the rate of year-to-year growth in the past decade it’s more than likely this will gain a top spot in the future.

Anyway, the point we’re trying to make here is that it’s highly likely that either you or someone you know has earned an excellent net return consecutively without having exposure in all 7 of the major asset classes.

As Benjamin Franklin once said:

“An investment in knowledge always pays the best interest.”

So, like Benjamin, get to know a few asset classes extremely well, diversify within those asset classes, monitor your progress and adjust your strategy appropriately.

2. Check your maximum exposure

This is connected to the previous topic. First things first, take a look at your net worth (no, you don’t have to have tens of thousands for this to apply to you) and how much you plan to invest initially as well as on a monthly basis. Then, ask yourself, how much risk are you willing to take and how much do you need the money you plan to invest? If the amount you choose falls nicely within your monthly budget, and you know you don’t need this money each month for your committed expenditure and bills, then you’re already on the right track. If you’re looking for short-term gains (such as day-trading) to pay your bills at the end of the month, you might want to take a step back and review your monthly budget.

Once you’re confident in the amount you will invest, decide on how much exposure you want to have in different asset classes, companies if you’re buying stocks, platforms and credit ratings if you’re investing in P2P, geographical areas if it’s real estate and so on. This will allow you to manage your risk by allocating a specific percentage of your total investment portfolio in different places, so if there’s a macro-economic event then you can be confident that you have taken the steps to minimize the impact this will have on your investments.

The famous U.S. investor and entrepreneur Robert Arnott once said:

“In investing, what is comfortable is rarely profitable”

This is not to say that investing cannot be made simple, instead it emphasizes that you should step outside of your comfort zone to make the most of your returns. Seeing your strategy through to the end and not jumping ship at the first sign of volatility is critical.

3. Cash and Cash Equivalents

Suffice to say, anyone who holds their money in their local bank will not earn 10% per year interest. In fact, you may be lucky to earn 0.01% depending on where you live. While it is important to have access to some cash with a very short maturity and near-instant liquidity, review how much is actually necessary so you avoid eating in to the absolute return (and the knock-on effect on compounding) in the long run. How do you review it? First, take a look at your emergency fund and make an assessment of how realistic the amount is; If you’re holding on to 2 years equivalent of your salary, you should think about whether you will ever need this much money for a rainy day. We talk more about this here.

Another tip

You should also consider the impact of tax and inflation on your overall net return, as this varies significantly between asset classes, your country of residence, current financial standing and more. If in doubt, always consult a certified tax or financial advisor.

There you have it, manage your risk religiously and you will have a realistic opportunity to consistently earn 10% interest or more per annum.

5 ways to teach your kids about investing

For many adults, investing is still a confusing pipedream that is rumored to lead to something called financial freedom. For those working outside of banking and finance, it may seem like those who invest are part of an exclusive elite club that have access to deals that are not available to the masses.

Teach your kids about investing

While this is of course not true, we recently thought that if adults still think this way then what about kids? By nature, kids are more open-minded and care free to the financial constraints of adult life (and they absolutely should be!). If you can reinforce the importance of investing and financial discipline from an early age, you will give them a valuable life skill which they most likely will not get from school.

Here’s our top 5 ways to teach your kids about investing:

1. Apps that help kids invest

With a variety of innovative apps available in the modern day, thankfully someone has created an app specifically for helping kids to learn to invest. BusyKid is an app that lets your child see the money they have earned from doing chores, manage their allowance and invest in to stocks. Investing can be intimidating for first-timers, but apps like BusyKid help simplify this experience so it becomes second nature to your children.

Apps that help kids to invest

2. Create an investment account for them

Start making monthly deposits to an index linked fund or a P2P account which you plan to set aside and transfer ownership to them in the future. Over time and once they reach a mature age (Say their mid-teens), you can show this to them with a comparison of the total deposits you have made and how much interest you have earned for them with virtually no effort. Understanding the power of compound interest is the key to becoming an intelligent investor.

3. Compare 0% returns to your own returns

Do you give your kids pocket money every month? If you do, you can tell them how much their pocket money over the past few years could have been worth today if they had invested it. You can compare this with the performance of your own investments or for simplicity, at a rate of 10% per year in monetary terms or something better…

4. Speak their language

What’s the big thing they have wanted for a long time? Talking in terms of something visual or physical is much more receptive to kids than saying your money could have grown by X%. If they have been saving up for that new games console or bicycle and are still short of some money, you can help them understand that they could have been able to pay for it already if this money had been invested in the meantime.

Teach kids to invest

5. Pay themselves first

If they are in their teens, maybe they even have a part time job at this point and you can help reinforce budgeting and paying themselves first for investing. If they have financial discipline from this age, they will carry this with them for the remainder of their lives and most likely be very thankful down the line when they retire 20 years earlier than their peers.

Tell them about the risks

It’s important to mention at this point, you should also inform your kids about the risks of investing and not putting all of their eggs in to one basket.

How to create a monthly budget

Setting yourself a monthly budget is a fantastic way to stay in control of your spending and move ever closer towards your financial goals. In reality, no one wants to spend the rest of their lives living pay-day to pay-day. To move away from this habit, you need to have discipline and determination while you’re getting used to it, after that it all becomes second nature and you will feel much better about your monthly budgeting.

If you’re paid once a month then a monthly budget is even more critical, even if you pay all of your bills at the start of the month can you honestly say you never find yourself short towards the end of the month? Luckily, this is completely in your hands and you can start to make a change today.

First things first

Calculate your base income each month, this could be from full or part time work and any other source of regular cash flow. Things you shouldn’t include here are:

  • Bonus payments
  • Irregular overtime
  • Volatile investments.

The reason being you need to know the absolute minimum amount of income you will achieve each month, thereafter you will avoid setting yourself an unrealistic (or unreliable) monthly budget.

After you have done this, pay yourself first! We discuss this in more detail in our recent Top 3 Money Saving Tips post, however the general idea is before you pay for anything you should immediately set aside a percentage of your net income and use these funds for your investments. Like budgeting, setting aside money each month for investments will eventually become second nature.

How to create a monthly budget

Calculate and pay your bills

At this point, you need to calculate all of your bills (yes, including your gym membership and the subscription to that magazine you never read) to the cent and then total them up. Spreadsheets are your friend. As an alternative, there are plenty of innovative companies that offer budgeting apps completely for free.

Next stop, pay all of your bills remaining for the month so you’re not tempted to dip in to the funds reserved for them later on. If you do this manually, a simple yet effective way to make this even easier for you is to set up automatic payments. Most companies actually prefer this and the benefit for you is that it removes the possibility of forgetting to make your payments, especially if you are travelling abroad at the time or are occupied elsewhere.

calculate your bills

Divide your money for the remainder of the month

By now, you’ve paid yourself and all of your bills. Nice! Now you should divide your remaining funds per week for things like food, fun and socializing. We’re assuming here that you have an emergency fund in place for any large unexpected expenditure that may arise before your next pay-day.

Cash vs Card

So you’ve divided your funds for the remainder of the month, how are you going to make sure you stick to it? It works differently for everyone. Some prefer to have the cash and divide it equally for each week, others find it harder to manage this way. Find what works for you by testing both options.

credit-cards

Stick to it!

If you can stick to this for a least 3 months and ensure your monthly budget is accurate, you will find the following months far easier to financially manage. After that, you won’t even remember a time before you budgeted.

Maybe you are already budgeting each month but in a completely different way, leave us a comment below and let us know what works for you.

The Ultimate Guide to Buying a Car

Nowadays, having a car is a necessity in everyday life. Whether it’s for commuting to work, going to your local food store or visiting your family in another town, there’s no denying that having a car makes your life easier. Other than the expense of buying a home, owning a car is typically the second largest expense you will have in your lifetime and since it is a depreciating asset, you want to make sure you get it right.

Ultimate guide to buy a car

What car?

There are literally millions of cars out there and hundreds of different manufacturers, this makes it even more difficult to decide which car is the best for you. The good news is, most online car sales sites like auto24.ee, autotrader.co.uk and mobile.de allow you to enter your filters and search for vehicles across the marketplace. Even an extremely good car salesman might be able to help you in a similar way. A few things you should take in to consideration:

  • Type – SUV, Sports car, Van, Estate, Saloon? This depends on where you live and the terrain you will be driving on, your family size and the main purpose you will use your car for. For example, if you live in northern Europe then a sports car may not be the most practical option for the icy winter conditions, in comparison it might be perfect for those living somewhere like sunny Spain.
  • Mileage– Generally, this has a huge impact on price as it’s commonly said the moment you drive your brand new car out of the dealership it decreases in value.
  • Fuel– Petrol, diesel, hybrid or electric. If you’re environmentally conscious then the electric option may be your first choice, for others using a van for trade purposes you might find a diesel engine more suited with your daily routine. LV has created an excellent article comparing the pros and cons of each fuel type here.
  • Age – While older cars are likely to be cheaper, you should check a few things like the chassis, any evidence of rust and the engine to see if it has been taken care of by the previous owner.
  • And of course, price

Price

Before anything, you should first work out exactly how much you can afford whether it’s on a monthly basis or a full cash payment (We’ll get to this). After you’ve come to a figure, remember that when purchasing a car your emotions and impulses will often try to take over, especially if you are in the presence of a car salesman.

parked cars

Yes, you may be able to buy a new Mercedes for an extra €10,000 but think about how much you actually need it and what restrictions it might impose on your financial standing (and ultimately your personal/social life) if you were to buy it.

If you’re still not sure, a good place to start is by either looking at the total amount of your savings balance or the net free income you have each month after your investments, bills and social life. Decide on a percentage of this to put towards a car and stick to it.

Cash, lease or finance?

This is an interesting one. A small percentage of people will have the spare cash lying around to purchase a brand new car that’s priced at over 5 figures, and with this option you will certainly pay less money overall for the car. When leasing a car, your repayments will usually be much lower than financing because you are essentially paying for the value of the depreciation in the car. At the end of an agreed term, you then have the option to make a lump sum payment and buy the car outright or hand it back to the dealer and take out a new similar deal. If you choose to take out finance for the car, your payments will be higher than the leasing option but you will own the car in full once the loan term has ended.

But, even if you have the cash available this does not necessarily mean it is the most cost effective option. Why? Well, if you have a good credit score and can obtain a low rate of finance on the car (e.g. 3%) and you know that you can make 10% per annum when you invest that large lump sum, this option works in your favour and pays for the interest due on the loan with some left over for you to compound.

Insurance and tax

It’s surprising how much the price of insurance varies significantly between providers. Based on their internal models and data, one insurer may quote you a price 3 times higher than another and offer pretty much the same package. Similar to taking out a mortgage, we suggest you use a comparison website to get an idea of which providers can give you the best price and overall cover. Usually, you can find some providers that will give you free extras like breakdown cover, legal cover and even unique quirky offers like theatre tickets. It’s important to point out here that when it comes to renewing your policy, it’s likely that your existing provider will not give you the best price out there since you are already a customer so make sure to shop around.

insurance and car

In most countries, the tax payment due for your car is heavily influenced by the age, type of fuel and the level of emissions it produces. If you have an old diesel SUV that pumps out Co2 emissions like there’s no tomorrow, prepare for a hefty tax bill. On the other hand, if you have an electric car then some governments have imposed a rule of no tax due on these cars. You should get an idea of the insurance and tax payments you will be responsible for before finalizing the purchase of a car and review this against your overall budget.

Beware of the extras!

So you have decided on the car you love, you’ve found a dealership and you’ve agreed on a (hopefully discounted) price, congrats! At this point you will be introduced to the ‘After Sales’ manager who is responsible for closing the deal and ensuring you buy as many optional extras as they can cram on to a piece of A4 paper. A typical extra might be a warranty offered by the dealerships themselves, this will be presented in gold wrapping paper and sprinkles but the truth is it’s not any different to the warranty already in place that the car manufacturer offers on a complimentary basis.

You can also expect a number of gadgets to be thrown your way as luxury options, such as three 12V sockets in the boot of your car that only cost an extra €499. Unless you are a frequent camper or the type of person who carries around a portable kettle for emergencies, then you probably don’t need it.

Drive away happy

Now you know the facts and you’ve done your research, you can feel confident in your decision knowing you have a great car that won’t negatively impact your financial well-being.

If you’ve recently bought a car, add a picture in the comments section below :)

The Ultimate Guide to your mortgage

Mortgages. The word itself comes from the French ‘Mort-gage’, which literally translates to ‘death-pledge’. On a lighter note, having a mortgage has for many decades been viewed as the first step into the adult world for many people as you move away from your family home or rented accommodation. While a mortgage is not for everyone (especially those who relocate often or have other commitments), financially it is indeed a fantastic way to reap the rewards of capital growth over time and create a nest egg to leave to your relatives in the future.

So other than finally being able to turn your basement into a miniature bar or build that greenhouse you’ve always wanted, there are a few things you should know to make sure you’re not paying any more than you need to and what to expect over the long-term.

ultimate guide to mortgages

Applying for a mortgage

If you’re reading this, you might not even have a mortgage yet and you’re thinking about how you can get started. While there are several new alternative finance platforms cropping up who offer residential mortgages, it’s highly like that most people will still go to their local bank (for now). Trying to break through the jargon and ancient systems used by the banks can make applying for a mortgage feel like trying to solve a Rubik’s Cube. To get started, try using a comparison site to filter a few potential mortgage providers for you. Enter your income and expenses details as well as the price of the property and your deposit, then most should show you an indication of what interest rate and product you can expect to get.

After that, you can either fill out an application online or set up an appointment either via video link, phone or face to face if there is anything you are unsure about. This is most likely going to be the biggest financial commitment of your life, so make sure you take the time to understand the financial provider you will be using to help you with it.

Repayment type

In general, one of the first things a bank will ask you when applying for a mortgage is what type of repayment option you want. Huh? Don’t worry, in general there are only two separate options that you need to know about:

  1. Principal and interest (Repayment) – Each month you pay the principal that you borrowed on the property plus the interest that the bank charges, at the end of your loan term you own the property outright with no extra payments due.
  2. Interest only – Each month you only pay the interest that the bank charges (Meaning you have a significantly lower monthly payment than you would on a principal and interest repayment basis), the whole principal amount is due at the end of the loan term. Overall, you will pay significantly more interest over the loan term with this option.

Over the past couple of decades, a lot of people using the interest only repayment option have got in to financial difficulty at the end of their schedule and ultimately had their home repossessed by the bank. A lot of banks and financial regulators are now imposing much stricter regulations for people who request an interest only repayment due to this. In contrast, it can be an extremely lucrative option for people buying a property to rent it out.

mortgages

Mortgage Term

Another important thing you need to decide is how long you are going to take out your mortgage for, known as the ‘mortgage term’. 10 years? 20 years? 40 years? The answer really depends on you and your personal and financial circumstances.

If you’re expecting a few life events over the next 5 years, such as getting married or having children, then you might consider extending the mortgage term to keep your monthly repayments lower. Or maybe you are in the middle of a training induction period at work and you know you are going to receive a considerable pay rise in the next 12 months (Lucky you!), in this case you might choose a lower mortgage term with higher monthly repayments.

Bear in mind, the length of your mortgage term has a significant impact on how much interest you will pay overall.

Product

Possibly the most crucial aspect of your mortgage is the product that you choose. In general, this can be separated in to two types of products; fixed rate and variable rate.

  1. Fixed – Your monthly repayment will remain the same for an agreed period of time, for example, 2 or 5 years. This can be very useful for budgeting and for the risk-averse person who does not want to take any chances with rising interest rates.
  2. Variable – A variable rate can change on a monthly basis, either in line with the banks own rate, EURIBOR or the rates issued by your national bank. You may benefit from lower rates especially in a booming economic environment, however it can be harder to budget on a monthly basis.

The length of time you can have one of the products for completely depends on your bank, ranging from 1 year to a lifetime product offered by some providers.

If you’re thinking you don’t have either of these products, you may be on the standard default option product issued by your bank. This is usually the rate you roll on to after your fixed or variable rate ends (and if you don’t arrange a new one), it is usually much higher than the other products available and most people see their payment increase once and completely forget about it. If this sounds familiar, check with your bank immediately because you have the potential to save yourself €100’s per month!

Overpayment

One of the most valuable tips we can give you is to make the occasional overpayment on your mortgage, it has the potential to save you a colossal amount of interest over the term of your mortgage. Money Saving Expert has a fantastic overpayment calculator you can use to test the impact of making an overpayment, we’ll add an example below for you.

Let’s say you have a mortgage of €100,000 on a repayment basis with a 35 year term at 3.5% interest. Each month, you give the bank €413 which pays back the principal and interest. Let’s also say that from your investment portfolio, you are generating a very realistic minimum figure of €100 per month in interest for yourself. You then decide to put this €100 to use and make a regular overpayment each month on your mortgage, this is what happens:

  • Overpaying would save you €25,594 in interest alone
  • You will pay off your mortgage in full 10 years and 11 months earlier than originally planned

mortgage-debt-over-time

Wow! For some, that means retiring from work over a decade earlier and having a nice amount of savings each month to spend on whatever you want. Go ahead, test it yourself and play around with the figures.

Remember, this is all realistically possible by generating a cash flow from your investments and setting yourself a goal.

Now you know

Hopefully this guide will be of use to anyone who has a mortgage or is looking to get one in the near future, make sure to read over these points a few times and take it all in, it could save you €€€’s.

If you would like us to write a guide on another financial topic, let us know at investor@bondora.com

5 ways to increase your income today

We’re going to make a prediction that the majority of people reading this have no more than 2 sources of income, namely from employment and your investment portfolio. Have you ever considered yourself as an entrepreneur? The English Oxford dictionary defines an entrepreneur as “A person who sets up a business or businesses, taking on financial risks in the hope of profit”. The part of that definition that sings to us is the first half, and the good news is that you don’t need to start a multi-national corporation or an innovative tech company to create an alternative income source for yourself.

One of the most important rules any seasoned investor will tell you is to diversify, diversify, diversify to manage your risk. It’s the same with your income. With all of your commitments, family and future goals on the line, should you really only rely on the money you receive from your day job to support that? Other than the obvious benefits of having more money in your pocket, an alternative income stream can act as an insurance policy in case your employer makes some unexpected changes. And if you think you’ve got even a little bit of an entrepreneurial spirit in you, you can do it for the outright fun.

Let’s talk about 5 alternative income sources you can get started with today.

jump-high-sunset

Side hustle

What are you good at? What do your friends and family come to you for when they need a favour? What has been a lifelong hobby of yours? The truth is, most people don’t realise they have something unique to offer and will cross off the possibility of a side hustle almost immediately. You might be a fantastic swimmer; adults and children alike both want to learn how to swim and you could be the person that leads a class to help them once a week. Or maybe you have more technical skills than most, we’re sure if you walk down the high street in your local town you will find some independent businesses in need of a website, social media presence and help with SEO. If you love to paint, try selling some of your beloved pieces of art online. There are literally 100’s of side hustles you can start up today with little to no cash required.

paint-in-public-hipsterilly

Affiliate Programmes

Since the dot com boom, millions of people all over the world have started blogging about a variety of different topics and industries. In finance, some make a comfortable living by blogging about their experiences in investing in different types of assets and platforms. Most companies have what is called an Affiliate Program, which compensates people for referring others to their business whether it’s through a blog or even just to your friends and family. This is the same for most industries including fashion, transport and accommodation to name a few.

increase income streams

Sell your stuff

Introverts might shudder at this, but fear not. Traditionally people went to markets, festivals and events to set up a stall and sell a variety of things to those in attendance. Thankfully, a few bright sparks had the idea of setting up companies like Ebay, Shpock, Gumtree and Osta to sell anything from the comfort of your home. Take a look around your house this weekend, are you going to hold on to that smoothie maker you’ve never used for the next 10 years or sell it to get some cash?

yard-sale-sign

Sharing economy

Airbnb, Uber, Task Rabbit, you’ve heard of them all. Despite this, most of us stay on the consumer side of the transaction and let’s face it, they are great services. It’s a great opportunity for anyone with their own place to become a host, even if it’s once in a while when you’re planning a weekend away. Business Insider has compiled a list of 25 places you need to visit in 2018, do you live in one of these places? If so, then this year might be a great time to start and capitalize on a growing number of tourists in your area. With companies like Uber and Taxify, you could try working only the busy periods like Saturday nights or the morning rush hour to make the most of your time.

taxi-strike

Invest

We expect most of our readers to already be doing this, but it’s worth mentioning. Whether it’s in P2P, real estate, stocks or something else, generating a monthly income from your investments is a very real possibility that you should take advantage of. Recently, we wrote a post on how this is possible in the miracle that is compound interest and the importance of setting goals in achieving financial freedom.

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If you’re serious about increasing your income, you could even try putting all of these sources together and make a significant change to your financial standing. If you’re already doing this, we’d love to hear how it’s working for you. Leave us a comment below and let us know how many alternative income sources you have.

Achieving financial freedom

This is a term that gets thrown around a lot in financial blogs, there’s no doubt that on the surface it sounds great and something that we all want to be a part of, but what does it actually mean?

financial-freedom

It’s a common misconception that to have financial freedom, you have to be the next Bill Gates. You might be surprised to know that an income of €30,250 is in the top 1% worldwide. Let that sink in for a minute.

So next time you are giving yourself a hard time for not being a billionaire, think about how you can use your existing income to set and achieve your financial goals. Below, we’ve outlined 3 example goals that will help you define what Financial Freedom means to you and how to achieve it:

1. Short term goal (3-5 years) – Using your investments to pay for that big purchase

It’s important to note firstly that you should always take a long term view with your investments, looking at a minimum of 3 years to let your money grow and for the compound interest to start to kick in. Maybe you have your eye on that new Jaguar that’s currently in production and will be released in a few years? Maybe you want to pay a nice chunk off your mortgage before your next big birthday? Or maybe you are planning to pop the question to your significant other? Whatever it is, write down your goal on a piece of paper and keep it in mind to motivate you along the way.

big purchase

2. Medium term goal (5-20 years+) – Earn the same monthly amount from your investments as you do from your work

For most this sounds like a fairy tale, can you really earn the same amount of money from your investments as you do from your work? The answer is a resounding yes. All it takes is dedication, persistence and a forward looking plan. We will talk more about how this is possible in our upcoming ‘The miracle that is compound interest’ post.

3. Long term goal (20+ years) – Having the option to work

You might love your work, and if you do then you probably have no intention of giving it up any time soon despite how much you earn from your investments. But what would be nice is if you could have the option to work or pack it all in if they’ve gone one step too far in the office and removed the coffee machine.

Stick to it

Once you set these goals, you absolutely must stick to them because you will no doubt be tempted to change them a few months down the line to make them a bit easier (It’s human nature). So, write them down and do whatever it takes to make sure they are set in stone, stick them on your mirror and tell your close ones about them.

Good luck and let us know how you get on with your goal setting at investor@bondora.com, we would love to hear from you!