Self-Sufficiency in Style - Return on Capital

Self-Sufficiency in Style

return on capital

Can self-sufficiency pay?

Long ago, the writer was a businessman.

Even though self-sufficiency is not a business, there is no reason why some business techniques should not be used to make sense of financing a new life.

It may help persuade yourself that you are not a complete lunatic.

"Return on capital employed" is a very standard commercial idea.

If you tie some money or capital up in a project by investment, the annual income is the return.

If you put 1000 Pounds, Dollars or Euros into a bank and get 50 back every year, the return on your capital is 5 percent.

You will often here a small businessman complain, "I would be better off selling my business and living on the interest."

In effect, he is comparing two possible investments on the basis of return on capital employed.

He may well be comparing the return before or after a cost of his labour and before or after tax. To get a true picture he must compare like with like. There is no labour in putting the money in the bank, whereas running a business is a full time job.

His personal wants and needs make it an imperfect comparison, however you do the sums. The same is true for self-sufficiency, but we can try to make some sense of the figures.

An Economical business?

Never mind the size, look at the land

Imagine you live in a house that suits you, but with no land.

You buy an exactly similar house but with say five acres.

The second house will cost more, the difference being the cost of the land.

The cost of land attached to a house will vary widely according to area.

In the West of Ireland, rural Wales or rural Scotland, it will be about the same as agricultural land in the area, maybe just a little more.

In areas such as the South of England, or favoured areas elsewhere, it will be very expensive indeed - far more than the equivalent agricultural land.

The formula for the South of England was something like the following:

First acre £10,000
Next two £5,000 each, thereafter ordinary agricultural value - say £3,000 each.

On this calculation you can see that 5 acres will cost you £26,000.

The reality has been recently that the shortage of houses with land has been so bad that £50,000 would be nearer the mark, although there are signs that prices will fall back again.

Five acres will cost less anywhere else.

Land Deal.

Getting equipped.

So to set yourself up with enough land for self-sufficiency might cost you £50,000.

Then you need animals, housing, fencing, water systems, storage, gardens, greenhouses and equipment.

In our case, a rough guess would put this at £50,000 - very definitely at the top end of the range.

So the most anyone might reasonably spend to be fully self-sufficient in an expensive area would be £100,000.

So we have just made an investment of £100,000, what about the return?

Well, we produce enough food for a family of four and whilst we don't sell any, we do give any surplus away.

We estimate that is worth about £5000 per annum, since we buy very little. We don't have any costs, because we do all the work ourselves.

Then there are the things we don't do - health clubs, golf clubs, holidays, lots of meals out, more expensive clothes - that's another £5000 per annum.

Money can grow on trees.

Coughing up.

We do spend the odd bit on running cost - seeds, artificial insemination for the cow and sow, hire of the ram.

We pay for taking the animals for slaughter plus butchering, some extra electricity for the freezers, but overall it is not that significant.

Let's say £1,000 p.a.- to be very generous.

Now we don't claim tax relief on our costs and we don't pay tax on money we don't spend....so the net £9,000 per annum is tax free.

There are not too many things in life that are tax-free.

So even your extravagant friend, the author, is getting 9 percent tax free.

Makes you think doesn't it?

Now, of course, this is not directly comparable to a "normal" investment since there is no allowance for labour costs.

But, the writer and his wife are retired. The bit of work we do is recreation and exercise.

So the calculation is true for us, but not true for someone trying to turn self-sufficiency into a business or trying to subsidise it with the earnings from a job outside.

Working it out.

Self-sufficiency need not be a taxing business!

You can return to Capital or

Finding a Place and Income may answer more questions.

If you are really short of cash Going for Broke or Inheritance might help.

So for someone trying to trade down from a big house to a smaller one in the country on retirement, especially early retirement, the calculation is pretty useful.

The same is true for someone moving from an expensive house and location to a cheaper house and location. It can be adapted to meet personal circumstances and location.

The genesis for this particular article came by email from a reader in Southern California preparing to move on early retirement to Northern California. They gave some figures and details for their individual circumstances and it was striking just how similar were these to those common in Britain and Ireland.

The basic economics of self-sufficient living are probably much the same everywhere.

"taking a percentage"

the tax haven of Hangman's Cottage, just to the south of Misery Corner.

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