Introduction to Financial Independence
It’s great to see more and more martial arts coaches / instructors making a good living from their passion. It seems like every day i am hearing of instructors teaching from their full time venues and doing well getting new students though the door. In some cases i even have the privilege of helping these instructors progress from teaching as a hobby, to supporting themselves and their family doing something that they love. What i would really like to see is more instructors planning for their futures.
As a side effect of the recent success our industry is experiencing, I have also noticed a worrying trend for martial arts coaches to reward temporary success with luxurious holidays and expensive new cars using credit. While i do think it’s fine to reward yourself for a job well done now and again, buying a depreciating asset like a new car with credit is probably one of the worst investments you can make. While there now seems to be more options to help martial arts coaches develop the business side of their club, there is very little guidance on how to invest this money for the future.
This article is based around a master plan designed to help me move towards ‘Financial Independence’ or FI as it is sometimes called. This path isn’t for everyone but i hope in sharing my ideas, it will encourage other instructors to think about their own future. While i do want to move towards Financial Independence as efficiently as i can, I don’t want to live my life like a 20 year old student living off super noodles with £3.41 to last them the rest of the week. My happy medium is to be intentional about the money i spend and where possible, maximise value. I sum this up with my rule of ‘Buying for need or really want’ but not for just want (more about this later).
Mixing business and pleasure
I was quite late to martial arts and didn’t start training until i was about 16. When i was 22 i opened my own club and by the time i was in my final year at Uni i was studying full time, teaching Taekwondo twice a week, running my own IT company and teaching two nights a week at the Leeds College of Technology. Although i later took a ‘proper’ job as a network engineer, i only lasted around 6 years before i craved the freedom of working for myself again. In 2008 i left my IT job and started coaching full time while doing some event photography work on weekends. In 2009 i opened my first full time venue and in 2014 my second. At the moment we have around 500 students and a dozen members of staff.
In my early years i saw many good instructors struggle to balance the coaching, business, family and financial aspects of their life. In fact, over the years i have known quite a few good instructors that have unfortunately needed to file for bankruptcy due to taking their eye off the financial ball. I have lost count of the number of martial arts instructors i know that live ‘hand to mouth’. Lucky for me, by the time i started instructing full time I had not only run a business previously but I had also seen first hand how not to run the business side of a martial arts club.
When you teach martial arts as a hobby, you may sometimes dream about what it would be like to teach for a living or even open your own full time martial arts centre. When you do take the plunge you find that teaching martial arts full time can be tough. In the early years the pay is poor, the hours are long and anti social and you feel like you have 15 jobs and you don’t know where one stops and the next one starts. You also soon realise that if something needs to be done, you have to do everything in your power to make sure it happens.
The decision to take the journey to build you club to a level that it provides you seed income to then to build your other assets can be a long one. Speak to your partner and share your ideas and goals and see if you can get them onboard. Due to the commitment and front loaded work load require during the growth period of your club, it helps if you and your family are on the same page. There are often many late nights and weekends when you first start out but as you get nearer to the size you want, you can start balancing things out so you have a healthier work / life balance. If you have a family with young children i recommend that you only schedule classes on one weekend day. This will not only help ensure you have quality time with your family, but also to help you avoid burnout before you even get to stage where you are adding more income streams.
Looking after your future
“If you are under about the age of 50, there is no chance you will receive a government funded pension you can actually live on after retirement”Andrew Craig
These are the words of Andrew Craig, the author of ‘Owning the world’. Andrew is part of a movement that it’s followers call FI or FIRE. This stands for Financial Independence Retire Early. The aim of this movement is to invest enough cash in to assets that you can live off the passive income they provide. While i have no interest in retiring early, i am onboard with working because i want to and not because i have to. I would also like enough income to be able to look after myself and my family so we can live a healthy life in to old age while also providing us with a good standard of living and opportunities to travel more.
In the UK the current retirement age is 65 but this will soon be 66 and then 67 some time between 2026 and 2028. Average life expectancy for a male in the UK is 79 and 83 years old for female. If you are like me and a long way off from retirement age, you could potentially be working at least 50 years for around 12 years in retirement (using the average life expectancy for a male in the UK).
If you retired today with a full State Pension you would receive £168.60 per week. That is £730.60 a month, £8767.20 a year. Even though i enjoy my work, the prospect of working for 50 years to retire on £730.60 a month does not fill me with much enthusiasm. Maybe people have the vision of traveling or spending more time on a pastime when they retire but i am not sure how much of that you can do on £730.60 a month once you have paid for your regular living expenses.
The good news is that if you have accrued a big enough pension pot you can actually start drawing down your private pension at 55 years old and then draw the State Pension when you hit the required age. The problem we have in the martial arts sector is that most instructors are self employed or work for their own limited company and paying in to a pension pot is often the last thing on their mind.
Motivation for Financial Independence
Autonomy is one of the three elements of intrinsic motivation identified by Ryan and Deci as part of their work on Self Determination Theory. I only have 3 high level goals for my life and number 2 on this list is “Autonomy over time and money”. Many of us started teaching martial arts as a hobby and although many manage to make the transition to delivering martial arts classes for a living, some fall out of love with coaching when they have to do it too ‘put bread on the table’. Personally, i have never felt that pressure but i guess that is partly due to the fact that i have always tried to live within my means and even when i was running the clubs as a hobby, i still had support from other instructors at my clubs.
At the moment i am in the position where i coach 4 days a week (2 of those days i just have 1 class), develop systems for the clubs i work with, spent time with my family, work on my ‘side hustle’, learn new skills and improve old ones while still finding time for my own martial arts / physical training. On top of this i also give up a little time to help other martial arts clubs / organisations improve their sustainability. While i can’t think of a better ways to spend my time, it is also important to know that as well as having an impact in my area of specialisation, i am also able to provide myself/family with a comfortable income both now and in the future. In the future i would like to move in to a slightly bigger house with a little land but for the moment, i am happy where i am. Although i am in a position to be able to holiday a few times a year, in the future i would like to travel a little more. If i am going to spend my hard earned money, i think experiences with my family are a great way to do it.
My martial arts master plan for Financial Independence
What follows are details of the key areas i am focusing on to implement my Financial Independence master plan. Some of the points may sound obvious but are still worth highlighting for those that may not have necessarily considered them. I have to admit that i am still in the early stages of this plan. While i have pretty much paid down most of any debit and i have done the hard work to get my businesses to the position where they can provide me with an income to live and invest, i am no where near where i need to be for Financial Independence.
The purpose of this article is not to suggest that others should use the same blueprint as me but to prompt other martial arts coaches to think about their own futures and ensure they have something in place for the long term. When you’re young, i know this will not be a consideration for most but with some irony, this is the best time to start. As the popular Chinese saying goes ’The best time to plan a tree was 20 years ago. The second best time is now’.
I know there will be many martial arts coaches out there thinking that ‘I will never stop teaching martial arts. I will be doing it until the day i die!’. I feel the same way too, but i have also been around long enough to see coaches that have experienced life changing events that make it almost impossible. This could be for health reasons (yourself or your family), financial reasons or business reasons. It maybe that reasons like this don’t stop you teaching martial arts but just make it an ineffective way to make a living. If the least i get out of putting this plan in place is that i can still teach while not having to rely on the income to sustain myself and my family, i will be happy.
Before i published this article i asked a few colleges to proof read it to see if i have missed anything obvious and make sure everything i had included was useful. One of the questions asked was “Can mentors accelerate the learning or just zap your cash?”. I think the answer to this question depends on the mentor you have in mind. If they also have Financial Independence as a goal themselves and they are further down the track than you are, their input could be useful. Even if they haven’t achieved FI, if you have put together your own plan, they could possibly help accelerate your progress through a few of the sections they have experience in. For more information, please check out the article i wrote on martial arts mentors and business coaches.
While business coaching is mostly offered as a paid service, there are people around that have done what you want to do that would be happy to mentor you on an informal basis without charge. Please ignore any peers that suggest that ‘free information is worth every penny’ as this just isn’t the case. Simply charging for information does not make it any more valuable and often this is just a way of trying to suggest that their service is great just because they charge higher rates than others. On the flip side even expensive coaching / mentoring can be worth every penny. Quality is quality regardless of cost.
Another way of accelerating your progress is to get together with like minded colleges and form an accountability partnership. Not only does this give you someone to bounce idea’s off but they can also hold you accountable for the goals you set. They can also call you on any BS excuses you throw out when you don’t achieve what you said you would.
Buy for need or really want
Earlier on in this article i told you that i try and live by the rule of ‘Buy for need or really want”. I have this rule for 3 reasons:-
- Too much ’stuff’ can clutter your life as well as your home, business and mind
- Not buying things you want in the heat of the moment can save you a lot of cash
- In a throw away society, i want to do my bit and work against this trend
Reminding myself of these reasons has stopped quite a few impulse purchases of items that would probably never have been used and would have ended up being ‘stored’ around the house. I still occasionally slip up but it seems like the older i get, the easier it is to resist new shiny things.
As well as the money you save from not spending all your spare cash on tat you don’t need, i am also conscious that as an adult of 46 years old, i already have so much ’stuff’, half of which i never use. We seem to spend the first 20 years of out adult life collecting ’stuff’ and the second 20 years trying to get rid of it. The most frustrating thing about not getting rid of items you don’t need is that on the rare occasion you do actually need them, you can’t bloody find them due to all the other stuff burying it!
Over the last couple of decades we have also turned in to a ’throw away and buy new’ society and i am not keen on creating anymore waste than i need to. At the moment i feel like the planet needs all the help it can get and i want to help where i can. As a self confessed tekkie, this is quite difficult when it comes to new technology. My girlfriend never lets me forget that i still have 4 Canon 1d camera’s and i only ever use one (with one as a backup). I keep meaning to get rid of the old camera bodies but as it’s low on my list of priorities, so it never gets done.
On the plus side, i am writing this article on a 5 year old MacBook Pro and although i occasionally look at the new MacBooks, i have so far resisted the temptation to spend £2800 to buy a new one (yes i know you can get one for £2400 but i want the one with the i9 processor!). I currently live in a modest stone built terraced house and drive a black 2006 2.5XT Subaru Forester. One day i would love to have a little small holding that feels like i am in the middle of the countryside, but to get what i really want i will need to resist buying the things i just ‘want’.
I think my pursuit of doing more with less is the reason i love useful gadgets in the first place. The gadgets obviously have to be useful and serve a purpose as well as being multi functional or save me time. If i can just sell on (or give to a charity shop) anything i am not using, i know it will have simplified my life.
Grandad Payne was 88 when he died and when my dad and his brothers cleared the house they found multiples of many different items. I know it’s sometimes good to have a back up for items you use frequently but who needs 9 drills, 6 sanders and 7 grinders! My dad also now has a fully stocked garage, loft and shed full of items he hardly ever uses so i know i am fighting my genes.
If you are keen to reduce the stress in your life caused by overwhelm, i can recommend the book Essentialism. This book not only suggests reducing the amount of physical ‘stuff’ you have but will also help you simplify your life and declutter your brain.
Before you start doing anything with any spare cash you have, it is good to have a safety buffer in case any thing goes wrong. While it is easy to think ‘It won’t happen to me’, through contact with the families of the 500 members at our clubs, i have heard and seen life changing events happen too ’normal’ people many times. If you have some form of emergency fund, you will at least have some way of smoothing out life’s inevitable ups and downs.
The least you could do is create a small emergency fund of around £1000 before you start paying down your other debt. This is for those occasions that the washer breaks or your heating decides to stop working just as you are already struggling in January when money is already a little tighter than usual. As soon as your most expensive debt is cleared, you could expand your emergency fund to cover 3-6 months worth of expenses. This will increase the chances of covering more substantial problems without having to affect any of your funds already invested.
Pay down debts
If you have high interest debt, it makes sense to pay it down before investing in any assets. If you have an investment of £10,000 and are receiving interest of 5% but you also have credit card debit that charges interest at 30%, you can see the investment is actually costing you money. Before I started looking at investments, i paid off my credit card and now the balance is automatically paid off on a monthly basis. The only debt i have outstanding is the mortgage on my home and a little student debit. For the benefit of your credit file, the credit monitoring companies recommend that you try to keep your usage low.
Although you don’t have to worry about paying off the student loan if you earn under the current threshold (roughly between £19k and £25k at the time of writing, depending when you started your under graduate course), I always planned to earn more than this so i am currently paying the debt off. I was lucky in that i had already paid off my student loans from the first time i went through uni and the second time i paid most of the fees through my company. This meant i could offset the course fees against turnover before paying tax on the profit. The only student debt i have left is the remainder of one years worth of tuition from topping up my foundation degree to an honours degree.
Do i think university is worth the investment? My personal opinion is that you should probably only go to university if you know what you want to do in life and you love your chosen field. As most students now finish uni with around £50k in debt, you want to make sure that you enjoy the subject you are studying. There is only one thing worse than spending £50k going to uni and ending up with a qualification you will never use and that is going to uni and dropping out before you complete the course (unless it is to create the next Facebook or Apple).
The first time i went to college and university was to study Computing / IT. The second time was for a BSc and MSc in Sports Coaching. I don’t regret studying either subject area and still use skills i developed from both areas today. For me personally it was well worth the investment but i think this will be an individual decision. Looking back at my education now, i can see how it has helped me combine skills in business, IT and coaching to give me a unique approach to solving problems in the martial arts industry, but as Steve Jobs suggested ‘You can’t join the dots looking forward”.
Before we start, I am not an accountant. That said even after my accountant has completed my accounts, i have to sign them off. For this reason i always make sure i have a reasonable understanding of how the accounts are put together and what my liability is. Please don’t take anything i write here as tax or financial advice. This article is just a description of the way i currently operate and any changes you make to your own tax affairs should be done though your accountant.
Taking the time to find a good accountant will save you money and help you stay out of financial trouble. I have known my accountant since we worked together when we were teenagers. He was also my accountant when I set up my first company when I was fresh out of university. He not only submits my accounts but also gives me a ‘sanity check’ on new ideas and projects. When looking for a new accountant I would go by personal recommendation while making sure you get on with them on a personal level.
While i am not averse to paying my ‘fair share’ of tax, i don’t want to pay more than i need to. I am currently paying my salary from my own limited company but as i am the only shareholder. In the eyes of the government i am often classed as ’self employed’. On the plus side, this does give me flexibility in how, when and which way i pay myself. Although these figures will change over time, in the UK at the moment your basic personal allowance is £12,500 (unless you earn more that £100,00 – year 2019-2020). This is the amount you can pay yourself before having to pay income tax.
As a shareholder in a limited company i can also take a dividend payment. In the tax year 2019-2020 I won’t need to pay any tax on the first £2,000 and then I will have to pay Dividend Tax at 7.5% (as my total income is less than £50,000). This means that in affect, I can take £12,500 as a salary and then up to £37,500 as a dividend without crossing in to the 40% high tax bracket. One thing i do need to highlight is that by the time I take the dividend from my limited company, my company has already paid the 19% Corporation Tax on profits.
As well as the Dividend Tax I will also pay national insurance contributions at 12% for salary paid above £720 per month. It is important to pay National Insurance for a sustained period to qualify for a full State Pension. You will normally require 10 years on your National Insurance record to get the new State Pension.
Multiple income streams
While you may have heard the term ‘job for life’ from previous generations, this is not really the case any more. People now typically have a higher number of jobs / roles throughout their working life. In fact, the average number of years in position is now just 4.6 years. This falls to 3.2 years for 25-34 year olds. It is now more important than ever that you or your household has multiple streams of income. This is even more important if like me, your partner performs a role connected to your martial arts club / business. In this scenario, if something happened to your club and you could not operate, without another suitable venue available you could be down the financial river without a paddle.
My own personal solution to this problem is to try and build multiple streams of income. If possible i want these income streams to be independent of each other. If you have a full time martial arts centre and you start selling equipment to the members or running birthday parties, this is all extra income but i would suggest it’s not independent. If something happened to your club and you had to close your doors, you would lose all the income.
In 2008 when i went ‘full time’ coaching martial arts. My first priority was to build a thriving martial arts club that could provide me with an income to live off. At first this was a small amount as i reinvested most of my income back into the clubs. As an example, in 2009 i took on my first full time venue and then in 2014 my second. As i was reinvesting the profit form the first venue in to the second, it was only after establishing the second venue that i was able to provide myself with a reasonable income. I could have of stopped at one venue and still made a reasonable living but at the time, i wanted to prove to myself that I was able to replicate the process.
To be able to run 2 full time centres and not be at the venue teaching every day, i had to hired staff. It takes time for the students to get used to the fact that you don’t teach all the classes but as students come and go, this gets a lot easier. If you ‘hire right’, ‘train right’ and ‘treat right’ as Dave Kovar would say, you may even find that some students prefer the way other instructors deliver classes (i know, a kick in the ego right?).
If you think of getting the club up and running as stage 1, employing and training staff so you don’t need to be there every night is stage 2. If you enjoy coaching and want to do it for a long time without sacrificing your health and time with your family, this is an important step. Having competent, motivated staff means that you can take time off to train yourself, have holidays, be ill or spend time with your family. This year i plan to get back in to coaching at international competitions but i wouldn’t be able to do this without the staff to cover classes while i am away.
Unless you are charging massive amounts, your club will probably not make you a millionaire overnight. I am pretty confident that this would be possible over quite short period with a multi venue set up but as one of my close friends said “It would be easier to make money in any other business and less hassle too”. Incidentally, this friend runs a full time martial arts centre with 700 members as well as two other businesses.
What your club will provide you with is ’seed money’ to build your other streams of income. Even if you can live off the income from your club, it makes sense to diversify your investments and build at least 1 to 2 more sources or revenue.
At the moment my plan is to build 5 streams of income, these are:-
- Sustainable martial arts centres
- Index funds (Held in a stocks and shares ISA)
- Online side business
- Commercial property
1. Sustainable martial arts centre
I currently have two martial arts centres though i would be happy to add a few more if i had the right extra staff that were both competent and motivated. If this does not happen, i will not be too disappointed as i have plenty of other projects that are ongoing. Looking back I think i would have been just as happy running one centre. After helping others go from having no club or students progressing through to a full time centre with a personal income of around £4k a month, i know that just having one centre would still have provided me with a reasonable income.
My ideal setup for each centre is a detached, 2000-3000 square foot building with its own private car park in or nearby a large residential area, preferably on a main road. The building has to have enough space for at least a 90 sq metre training area, 2 toilets, some storage space and a room separate from the training area for a reception table and seating area for parents. I have had bigger venues and they are great to feed my ego, but unless you are focused on constant growth, they are not really needed if you just want a life style business.
I personally run the venues as separate Community Interest Companies (CiC) with separate directors (of which i am one). This not only allows each venue to focus on their own community and also apply for funding but it’s also tax efficient and means that the affairs of one club does not affect the other. A CIC is registered with Companies House and most importantly has Limited Liability. This is important as it helps protect your personal assets if something was to happen to any of your businesses. The same protection can of course be achieved using a standard private Limited company or a Limited Liability Partnership (LLP). For more information about running your martial arts club as a ‘not for profit’, please see the article i wrote in 2019.
If you want your martial arts club to be around for years to come you need to make sure you have enough revenue to cover all your bills and some. Just because our clubs operate of CiCs it does not mean that they can’t make profit. In fact, all businesses including not for profits and charities need to produce some profit or they will be out of business as soon as external funding dries up.
While making money in martial arts can often be a taboo subject, i hope you now understand that to provide a sustainable service, you need to monetise your operation. To do this you need to set your prices appropriately and make sure you are offering complimentary services. Here are a few ideas to help you create additional income outside of just teaching regular classes;
- Private sessions
- Equipment sales
- Merchandise sales
- Drinks and snacks
- Online content
- Leadership courses
- Birthday parties
- Holiday camps
- Teaching in schools
In my opinion, if you are teaching martial arts for a living there are a few systems that I think will make your life easier as you grow.:-
- Taking tuition payments by monthly Direct Debit
- Administrating your club using an online club management system (sometimes called a CRM)
- Marketing materials, plan and budget (and the knowhow to build campaigns)
- A participation development model that documents your programmes and how students progress from one to another
- Your club guidance documentation (mission, vision, values)
Each of our clubs makes enough to pay the bills for the venue, staff wages, my fees and still has enough for a rainy day fund and a budget to reinvest in to the club. Each venue has a Centre Manager that also coaches, at least one part time Lead Coach, a couple of Junior Coaches, half a dozen teenage Assistant Coaches and about a dozen volunteer Class Assistants.
The teenage Assistant Coaches and some of the volunteer Class Assistants take part in our Martial Arts Leaders programme and we are just in the process of setting up an apprentice scheme. I love this route for students, as rather than coming out of school / college at 18 with a couple of A levels, they have experience, a little cash, a qualification and a good understanding of what it’s like to be a responsible adult.
Running a sustainable club is not complicated. To grow, all you need to do is keep the students you have while obtaining new ones. This means that as a club owner your most valuable skills are coaching and marketing. To get from being self employed to running a business, you will also need to learn to develop these skills in others too.
When i am mentoring martial arts coaches i tend to split the business development of the club in to 4 stages:-
Stage 1 – Hobby
Stage 2 – Self employed
Stage 3 – Business owner
Stage 4 – Multi venue or franchise
To those wondering, the difference between stage 2 and stage 3 is that in stage 2 you are teaching most of the classes and doing most of the admin work. By the time you get to stage 3 you are spending more time working on your business than in it. At this stage you should be able to go on holiday, take time off if you’re ill, attend training events to improve your skills and take time off for family events.
If you are eager to get from stage 1 to stage 2 as fast as you can, after paying all the bills just pay yourself enough to get by and reinvest the rest in marketing. When i say marketing i mean not only investing in paid ads but also educating yourself on current and new marketing methods and strategies. That said, try and pick the marketing channels that your target market use. Once you hit your desired number of students you can drop your marketing budget to a more sustainable level.
2. Index funds (Held in a stocks and shares ISA)
Unless you are going to scale fast or implement schemes that have questionable ethics, your martial arts club is unlikely to turn you in a millionaire overnight. Just from anecdotal evidence i would suggest it takes 10 years to establish yourself in the local area and create the systems and continuity required to develop your own staff. After around 10 years of consistent action it is reasonable to think that you should have a martial arts club that is sustainable and less reliant on you teaching all the classes. While your club is unlikely to make you a millionaire, the personal income you receive from the club could provide you with the ’seed money’ required to invest in other assets.
If you have ever read the book ‘Rich dad, poor dad’, you will already know that an asset makes you money while a liability costs you money. ‘Rich Dad, poor dad’ was probably the first business books i ever read and I have recently re read it again last year with my 13 year old daughter. While i liked the book, listening to Robert Kiyosaki on his podcast talk about stocks and shares made me cringe. He seemed to lack the understanding of what an index fund was and how it was different to investing in individual companies.
Investing in index funds is the heart of the FI or FIRE movement and for very good reason. For as long as records go back, stocks and shares have out performed putting your cash in the bank. Of course the market goes down as well as up but as long as you stick with the ‘invest and hold’ mentality, the longer you invest for, the better the chances of seeing growth in your investment.
An index fund is different from an individual share in a company in that it tracks performance of many different companies. The S&P 500 for instance tracks the top 500 largest US companies. Since it was started in 1926 is has returned an average of 9.8% per year and over the last 10 years has returned just over 11% per annum. Obviously some years the fund has occasionally dropped by a large percentage only to rise again in subsequent years. Warren Buffett once suggested that he had a hard time beating the S&P 500 index with his own fund and that “the index is still the best way to invest in the stock market for most people”.
Under normal circumstances any gain made buying and selling shares in the UK would attract Capital Gains Tax (although you do get a Capital Gains Tax free allowance of £12,000 per person – 2020). To maximise the return from your index funds, they can be purchased from inside a stocks and shares ISA (Individual Savings Account). Sometimes called an ISA Wrapper, this means that there is no tax to pay for any gains made and when you eventually draw your money from the ISA (as long as you are investing under the annual threshold) there is no income tax to pay. In the UK you currently have an annual allowance of £20,000 (2020) to invest in your ISA(s).
While an index fund maybe considered passively managed, there are also actively managed funds in which a portfolio manager tries to pick stocks that will out perform the index funds. As you can imagine, this is a difficult task and not many successfully accomplish this feat. When you consider that the commission fee on the managed portfolios generally have an annual commission fee of 1% or higher (compared to as low as 0.1% for index funds), you can see that your managed fund has to more than beat the market to provide more income. While 1% commission does not sound like a big deal, due to compound interest it can have a dramatic effect on you returns over years and decades.
Einstein famously said that compound interest was the eighth wonder of the world. Indeed, it’s crazy what can happen when you implement a ‘buy and hold’ strategy. If you were to open an ISA when you were 30 and invest in say the S&P 500, based on paying in £500 a month and an average growth rate of 10% (remember the average return since 1926 was 9.8%) by the time you has invested for 30 years, you could have £1,139,662.66 in your pot that you could take tax free. Even if you were late to the party (like me) and you invested your full allowance (£20,000 per annum) for 20 years, your pot could have £1,275,651.05 sitting waiting for you. What is also evident from the two examples is the part that time plays in this calculation. The secret is to start saving as soon as you can. If you want to tinker around with the figures a little, take a look at this free compound interest calculator. If you want to learn more about the effects of compound interest not just in a financial sense but also in other areas of your life you are thinking about committing your time, i can highly recommend the book “The Compound Effect” by Darren Hardy.
Before i knew more about this investment asset class i opened an ISA account with Nutmeg but this didn’t give me much control over my investments and had quite high commission rates. I started looking for a new provider and eventually settled on Vanguard. This company not only has some of the lowest commission rates in the industry but is actually owned by the members. I am currently investing in the S&P 500 on a monthly basis but as this only covers US based companies, i am planning on investing in a world index fund too. While i don’t want to invest in too many different funds, just like building up to 5 streams of income, I want to diversify my investments too.
Over the past couple of years i have been renovating our home so my investment in to my ISA has not been as high as i would of liked. Since i purchased the house a couple of years ago i have installed central heating, had the back door replaced, had the bathroom ripped out and replaced, new carpets throughout, kitchen ripped out and replaced, the chimney opened up and a multi fuel stove installed and most of the rooms redecorated. Now most of the work is done, i will be able to increase the investment in to my ISA. I pay into my ISA on a monthly basis by Direct Debit. Not only does this method mean you can set it up and pretty much forget about it, but it also helps smooth out the up and downs in the market.
If you are married, investing in an ISA also has the added bonus that if you or your partner dies, the remaining partner can claim an added ISA tax allowance called Additional Permitted Subscription (APS) covering the size of the ISA when they died or the size of the ISA when it is closed. Although this allows the funds to be drawdown without having to pay Income Tax or Capital Gains tax, it does still count towards the value of the estate of the deceased for Inheritance Tax purposes.
As we are talking about Financial Independence, how do you know when you have reached this milestone? In the FIRE community they tend to use something called the 25X rule. This rules suggests that you need around 25 times your annual expenses saved in your pot before you are in essence, Financially Independent. This amount allows for a draw down of 4% of your total pot per year.
The theory goes that this drawdown rate gives the person retiring a good chance of dying before they run out of money. These figures were as the result of something known as the ‘Trinity Study’. The study was carried out in 1998 by 3 professors of finance from Trinity University. The aim of the study was to attempt to determine safe withdrawal rates from retirement portfolios. Another study by William Bergen suggested that an initial draw down of 3.5% would give you at least 50 years worth under income under most market conditions. This percentage assumes that the only income you have is from your retirement fund but if you carried on working past your FI date, you may not need as much in the pot.
Think of this section of the article as an introduction to holding index funds in an ISA wrapper and go off and do a little more research yourself. I can recommend the weekly ‘Meaningful Money Personal Finance Podcast‘ and also the US based ‘Choose FI‘ podcast. If you would like to do anything more than investing in basic index funds within an ISA Wrapper, i would suggest you pick up the book ‘How to Own the World’ by Andrew Craig. The FIRE and FI movement started in the US and one of the main instigators was the ‘Mr. Money Mustache Blog’. I know the name sounds funny but the blog is an entertaining read is still a good source of information if you want to accelerate your journey to Financial Independence.
3. Online side business
There has never been a better time to start a business online. If an 8 year old child (Ryan Kaji) can earn $26 million posting video’s of himself unboxing new toys on Youtube, you can set up a sideline business online that will diversify where your income comes from. If you are currently teaching most classes yourself and you happened to become ill or one of the venues you teach from was sold off or closed down, you would potentially lose that income. You don’t have the same problem with online informational / educational business as you don’t necessarily need to be available to provide your service in person.
You could use your online business to service your martial arts customers or martial artists all over the world. The least you can do is share your syllabus and teaching methods. Don’t think for a second that your online business has to be martial arts based though. Due to how connected we are you can easily serve people all over the world in quite a small niche. Think of your other hobbies or interests you have devoted years or decades to. It maybe that you have two particular skills in two different areas that you can bring together and provide a new solution to a problem.
It is easy to think that someone has already done what you want to do so what’s the point. The point is that there are people all over the world making a great living doing what many others have done before but with their own individual spin on the problem. While it is a good idea to research your individual niche, try to come up with your own individual take on the way you solve the problem for your prospective customers. To research your market, get a product out there as soon as you can and then ask for feedback. Use that feedback to refine your offering so you know you are delivering what your customers want.
There are various different ways to deliver information online but the main two vehicles are online training courses and membership sites. Try not to think of these methods of information delivery as an easy way to make money, but rather a ‘front loaded’ way of generating income. There is quite a lot of work required to get started but once everything is set up, you can scale back the workload a little.
Once a training course is setup the only thing you really need to focus on is your marketing. Generally a course is set at a much higher price point than a monthly membership but obviously you are receiving recurring income from membership site. As long as the technology is setup correctly, courses tend to run in the background with very little input required. On the other side of that coin a membership site requires a little more regular maintenance and you will be expected to show up in your membership on a regular basis. If you are still unable to choose between a membership site and a course, take a look at this article form the Membership Guys
Technology is your friend. Where possible, try and automate as many of the mundane day to day processes as you can. As we are including this online business as a ’side hustle’ we don’t want it dominating our time. You can start this project with as little as an email address and a free Thinkific account but over time you will probably want to add at least a website, social media accounts and a payment provider to that list. Other optional extras may include a provider to manage and automate you emails such as Mailchimp or ActiveCampaign.
If you struggle with technology, don’t worry you can still pull this off. There are people and services out there that can help reduce the brain ache and information overload while still helping you get results. Fellow martial artist Matt Chapman provides a ‘Done in a day’ service where he meets up with you and gets your course online and for sale by the end of the day. There is also the likes of Amy Porterfield that provides some great free content via her podcast and online articles. She also has two paid services to help you build your email list and another on creating your own online course.
My own side project is my website MartialArtsCoach.com and it’s associated social media accounts. My mission is to help martial arts coaches professionalise their service and build a sustainable living for themselves and their families. I provide most information for free though i am currently in the process of developing a course to help instructors put together their own children’s martial arts programme. Like most ideas, this has been done many times before. My own individual way of creating a unique solution will be draw on my experience and education in sports coaching, business and IT. Blending these three areas together gives me a unique approach to creating products and services different to others currently available.
A pension is a tax efficient way of saving towards retirement. This is normally called a workplace pension but is also sometimes called an occupational, works, company or work based pension. You contribute a percentage of your salary in to your pension pot on a monthly basis. This is normally added to by your employer and in most cases you get tax relief from the government. The size of your pension pot when you retire is dependent on how much you pay in, the performance of the stock market/bonds/property etc, the fees charged by the pension company and the size of the contribution from your employee.
Although pensions may not be right for everyone, they can provide a tax efficient way of building an asset to be realised when you are 55 or older. The age constraint on this asset can be a benefit or a curse depending on the circumstances you find yourself in. This is part of the reason why i want diversify my income streams so i am forced to save for the future while also having access to funds if i really need them. Although pensions are a different vehicle to the stocks and shares ISA, they offer similar options in terms of what to invest in. The biggest difference between the two is that one is accessible any time but the other is tied up until you reach at least 55.
If you pay your salary from your own limited company you have the option of paying personal contributions or you can contribute through your company. If you personally contribute in to a personal pension scheme, you contribute with post tax money though the government kindly donates an extra £25 for every £100 you contribute (as basic tax payer rates).
If you contribute through your company, you are able to offset the cost against your income tax (19% in 2019-2020). A secondary benefit is that employers don’t have to pay National Insurance Tax (13.8% in 2019-2020) on pension contributions. This means that by contributing from your company direct in to your pension rather than paying the equivalent in salary, you could be saving 32.8%.
If you still have a full time or part time job at other company and you are part of that companies pension scheme, the company will contribute a minimum of 3% towards your pot while you will usually contribute a minimum of 5%. In some cases the employer will match additional contributions (usually with a maximum cap). If you pay 5% extra, the company will pay 5% extra. If you are currently employed elsewhere and they have a pension where they do match your contribution, it maybe worth looking at increasing your contributions.
While some good gains can be made from contributing to a pension fund there are a few restrictions you should know about. Although there is no limit to how much you can pay in to your pension, there are limits to how much you can contribute and still receive tax relief. The maximum you can pay in a particular tax year and still receive tax relief is £40,000 and this figure cannot me more than 100% of your salary (this does not include dividends). There is also a £1.055 million life time allowance. This applies to all of your pensions together while excluding your state pension. The life time allowance increases every year in line with Consumer Price Index though the £40,000 annual limit is currently fixed.
When you do decide to drawdown your pension you can take 25% of your pot as a one off cash free payment. As the drawdown of other monies from a pension pot are subject to Income Tax, I plan to take the 25% and invest it in my ISA breaking the transfer in to chunks so that i don’t exceed the £20,000 a year limit. This should effectively move 25% of the pension from an income that will be taxable (when I draw it out) to a tax free source that i can draw down whenever i want.
While i don’t want to complicate things too much, when you retire you could also use your pension pot to purchase something called an annuity. This is a product that provides you with a guaranteed income for the rest of your life. The down side to this is that when you die, your annuity provider would keep the remainder of your pension pot regardless of how much has been paid out.
Pensions are usually free of inheritance tax if you die before you reach the age of 75 though it will still contribute towards the total of your estate. After 75, the beneficiaries will have to pay Income Tax on any lump sun they receive.
5. Commercial property
In 2019 i had a particularly unpleasant time trying to negotiate a lease renewal for one of our martial arts centres. When you lease a unit in a large business park you may get on well with your current landlord but if the business park or your building is sold, you have no say over the incoming landlord. Once you agree terms with your landlord, you know where you stand until the lease expires but once the lease is up for renewal, you will need to renegotiate terms again.
In 2017 one of the buildings we were leasing was sold for the 3rd time since we had taken the lease back in 2014. Around 8 months after the new building owner had taken over, they increased our service charge by 90% and then back dated the charge 8 months. After refusing to talk about a new lease for over a year, they came back to us with just 4 months left on the lease and informed us that if we wanted to stay, our rent would increased by 80%. As these price increases didn’t work for us, we move the club 100 metres up the road to a different unit. The new unit is smaller but it was a detached building with it’s own carpark. It worked much better for us while also saving us around £2000 a month on what we would have been paying if we had renewed the lease at the previous unit.
My plan is to use my personal company to buy or build units that would be let back to the clubs on a long term lease. This would not only help ensure the future of the clubs, but also get me started on the commercial property ladder. I see owning the sites and buildings the clubs operates from as the only way to protect against having to move due to an unscrupulous landlord.
While i am not following the McDonald’s blue print for property world domination, the idea of licensing / franchising a business while owning the property it operates out of does make great business sense. While you may assume that McDonald’s is in the burger business, you may change your view when you understand that their property portfolio is worth over 30 billion dollars.
Although terms can vary, often commercial lenders will want you to have 25% to put down as a deposit and they usually want you paying the mortgage back over a shorter period than a residential mortgage. As i write this i am currently in talks about purchasing my first commercial property. The project may or may not come off but i am not in any hurry to get to this stage.
Although i have been looking at this asset class for a while, i am still yet to purchase or build my first commercial property. Luckily one of the parents i speak to on a regular basis is a property developer and has said he would be happy to help build somewhere if we can find the land. I know not everyone has contacts like this but that does not mean you should rule it out as a possibility. Another way of getting the same result it to negotiate a ‘right to buy’ when you arrange a lease for a unit you think would fit your requirements for the long term. You don’t have to purchase the building at the end of your lease but it is nice to have the option.
Actions points for my martial arts blueprint for Financial Independence
Although this blue print is geared towards my own martial arts business blueprint, It maybe also be relevant to other martial arts club owners too. Here is the checklist i am currently working through:-
- Stop buying crap I don’t need or really want
- Create small emergency fund
- Keep reinvesting in my clubs until they are the size I want
- Add different sources of income for the club
- Pay down personal debt
- Document the business processes and train staff so I can move from being self employed to running a business
- Start investing on a monthly basis in index funds in an ISA Wrapper
- Open a private pension and start investing via my company
- Setup an online side business
- Buy or build somewhere for my clubs to operate from
I am just looking into stage 8 but will be having a conversation with my accountant to make sure i am crossing the T’s and dotting the I’s. Setting up my online business is also in progress though due to spending time running the clubs and renovating the house, this has fallen behind schedule a little. That said, i will do everything i can to launch in 2020. In the mean time i am still building my network and learning about the problems of my target market. Action point 10 is also on my agenda but i will need to continue saving within my personal company so i have enough to put down a deposit on a building or land. This last point is a long term play and i estimate it will take 5-10 years before i am in a solid position to pull it off.
You will note that i have no planned exit strategy? This is due to the fact that i have no plans to stop my involvement with our clubs. Even if something happened that stopped me being physically able to train, i would still want to coach and help with the business side of things. That’s not to say you couldn’t sell your club as long as it was privately owned. Finding buyers on the external market could be tough but you maybe able to sell to an employee.
Don’t forget that when you hit the government’s retirement age (65 in 2020), you will also be able to draw your State Pension. This will of course be taxable but will still be a nice bonus on top of what you already have.
If your partner is involved in your martial arts club or runs their own, consider what you could achieve if you came up with a joint FI plan.
You can see on my list that i proposes to purchase the venues my martial arts clubs operate from. I could do this from my limited company but i am also interested in looking in to the benefits of holding these properties inside my pension.
I hope this article has provided you with some inspiration to build your own ‘martial arts blueprint for financial independence’. I know talking about planning for later in life does not sound cool and it can be quite a dry subject but if you have a vision for how you want your life to look when you are a little older, you need to start working towards it now. It does not take much to move forward but you do need to take the first small step. Don’t forget that if you keep putting it off you may end up with £730.60 per month to live off.
Please don’t forget that I am not a financial advisor and anything you want to implement that you have seen in my plan should be run through your accountant and / or financial advisor first. This is the only way you can get specific advice based on your personal set of circumstances.