Essential Personal Finance Chapter 7 Residual income © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Contents Introduction Earned vs residual income Importance of assets Risks Sources of residual income Property Business Investments Internet Leverage Conclusions © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Income Work Linear/earned income If you stop work due to sickness, retirement, unemployment, your linear income stops! © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Income Work Residual income If you stop work due to sickness, retirement, unemployment, your residual income continues! © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Celebrities and residual income Table 7.1 Celebrities and residual income Source: Telegraph (2008), Forbes (2013). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

People own a system, people work for you Sources of income Employee YOU x JOB = INCOME You have a job Time = £ No leverage Business owner YOU x PEOPLE = INCOME People own a system, people work for you People = £££ Leverage Self-employed YOU OWN A JOB Time = ££ No Leverage Investor MONEY WORKS FOR YOU £££ = £££££ Passive Income Figure 7.3 Different sources of income Source: Adapted from Kiyosaki (2002, p.176). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Differences between rich and poor Rich people believe ‘I create my life’. Poor people believe ‘Life happens to me’. Rich people play the money game to win. Poor people play the money game not to lose. Rich people are committed to being rich. Poor people want to be rich. Rich people think big. Poor people think small. Rich people focus on opportunities. Poor people focus on obstacles. 6. Rich people admire other rich and successful people. Poor people resent rich and successful people. 7. Rich people associate with positive, successful people. Poor people associate with negative or unsuccessful people. © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Differences between rich and poor 8. Rich people are willing to promote themselves and their value. Poor people think negatively about selling and promotion. 9. Rich people are bigger than their problems. Poor people are smaller than their problems. 10. Rich people are excellent receivers. Poor people are poor receivers. 11. Rich people choose to get paid based on results. Poor people choose to get paid based on time. 12. Rich people think ‘both’. Poor people think ‘either/or’. 13. Rich people focus on their net worth. People people focus on their working income. 14. Rich people manage their money well. Poor people mismanage their money well. © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Differences between rich and poor 15. Rich people have their money work hard for them. Poor people work hard for their money. 16. Rich people act in spite of fear. Poor people let fear stop them. 17. Rich people constantly learn and grow. Poor people think they already know. Source: Harv Eker (2005). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Five wealth principles Invest in things that go up in value. Don’t diversify! Concentrate all your eggs in the right basket. Wealth seekers are always on the offensive, not on the defensive. Choose investments that are both powerful and stable. Control is essential. Source: Allen (2006). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Activity 7.3 Imagine that you have won £100,000 from the lottery. How much would you spend on the following items? Jewellery £ Holidays £ Bank savings £ Cars £ Stock market £ Property £ Gifts to family £ Gifts to charity £ Pay off debts £ Set up a business £ Buy more lottery tickets £ © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Activity 7.4 Let’s imagine the following investors have asset holdings as follows: Suggest the value of the assets in ten years’ time. What are the risks of the portfolios? Would you recommend any changes? How would you invest your money? © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

House prices Figure 7.4 House prices in UK, 1986-2013 Source: Adapted from ITV (2014) (for illustrative purposes). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

US house prices Figure 7.5 US house prices Source: http://news.bbc.co.uk/1/hi/business/7373158.stm. © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

House prices in Asia Figure 7.6 Index of house prices in Asia Source: Scatigna et al. (2014, p.71). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

House prices in China, Hong Kong and Singapore Figure 7.7 House prices in China, Hong Kong and Singapore, 2004-2010 Source: http://churchousepublishing.com/the-churchouse-letter/inflation-cost-push-demand-pull. © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Investing in property Table 7.2 Investing in property © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Renting out rooms Table 7.3 Renting out rooms © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Types of businesses Table 7.4 Different types of business Source: Hansen (2002, p.318). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Examples of famous businessmen Table 7.5 Examples of famous businessmen Source: www.thisismoney.co.uk/money/smallbusiness/article-2809685/Top-25-self-entrepreneursstarted-small-sums-money.html#ixzz3xDbd5OoV; www.telegraph.co.uk/finance/enterprise/11930889/How-wealthy-is-Lord-Sugar-A-billionaire-thanks-to-clever-property-investments.html. © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Investment yields Table 7.6 Yields from investing in selected companies Source: Morningstar (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Different types of leverage OPM – Other People’s Money OPE – Other People’s Experience OPI – Other People’s Ideas OPT – Other People’s Time OPW – Other People’s Work © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Financial leverage Figure 7.8 Effect of leverage on return © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Conclusions Residual income does not require sustained efforts from you and you can have multiple sources It is important in creating financial independence Residual income comes from many sources: property, business, investments, internet All these require taking some risks But it can give individuals time © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne