We’re often spoon-fed the same life recipe from childhood: Hit the books, ace the exams, snag a sweet job, and climb the corporate ladder. But once we’ve ticked all those boxes, what then? What’s the playbook for dealing with the loot we’ve been busting our backsides to earn? It seems the manual on money management mysteriously vanishes after the “land a good job” chapter.
Come payday, we’re bombarded with a whirlwind of advice on how to handle our hard-earned cash. Pay off the looming debts first, or squirrel away some savings? Make a beeline for the stock market, or just stuff it all under the mattress? The fear of fumbling our finances can often feel like we’re dancing on a tightrope. So what’s the winning game plan for investing our money?
Pause right there. We’re here to call a time-out. Yes, there’s a sea of do’s and don’ts, but that’s where we’re stepping in. You’ve been an A-student all your life, but when it comes to your dollars, we bet it’s time for some tutoring.
Number 1 – Lay the Groundwork with a Safety Net
Think about this before you dive into the tempting pool of stock market investments, before you buy your first rental property, or before you splurge on flashy gear for your startup: you’ve got to have a safety net.
This isn’t just a “nice-to-have” thing; it’s your number one priority. Your first mission, before even considering any other financial adventures, is to stash away a month’s worth of expenses in a high-interest savings account. One that’s just a click away when you need it, without gnawing fees taking a bite out of your hard-earned cash.
Now, here’s where I want to set the record straight. Is it more financially sound to pay off your debt before padding your emergency fund? Sure, if you’re looking at the numbers. But numbers don’t account for the psychological peace that comes from knowing you’re prepared for life’s curveballs. The relief of knowing you won’t plunge further into debt if life decides to throw a surprise party.
This isn’t a fun-money stash to dip into for your daily expenses, either. This emergency fund is your financial superhero, waiting in the shadows for when you really need it. Pretend it’s not there, out of sight and out of mind.
Once you’ve got a month’s expenses covered, you’ll be ready for most minor emergencies. Then, and only then, can you consider the next step – tackling that high-interest debt head-on. But first things first: build that safety net. It’s your financial trampoline, ready to catch you when you fall.
Number 2 – Tackling High-Interest Debt
It seems like just about everyone has debt these days, and we’ve sadly come to view this as the status quo. We’ve probably all made a few questionable purchases. Perhaps that shiny new car we could have purchased pre-loved or that one-of-a-kind collector’s item we snagged to gain the envy of folks we don’t even really care about.
But here’s the thing about debt, especially the high-interest kind—it’s like a leash on your paycheck. When you’ve got a big chunk of your income feeding the beast of high-interest debt each month, it severely cuts down what you can save, and it throttles all the other cool things you could be doing with your cash. Focus on clearing that debt, and you’re looking at a tax-free, risk-free, surefire return.
Imagine you’ve got a credit card debt clocking a 20% interest rate. Paying that off is akin to earning a locked-in 20% return, courtesy of the interest payments you’re not making anymore. Your credit card debt should be first on your hit list. Forget about strategizing over meal prep or trimming other costs.
This is your golden ticket to financial liberation. So, what do we mean by high-interest debt? Well, I’d label anything north of 8% interest as high. Some folks might say 6%, others 10%.
Why 8%? Well, historically, the stock market yields an annual return of around 10%. Account for inflation, and we’re back at 8%. So, my take is, anything that costs more than potential stock market earnings is high-interest debt.
Now, what about home loans or smaller loans? Generally, these don’t rake in interest as much as credit card debt or overdraft charges. You can stick to the minimum payments on those and move on to the next step. But hold on, I’ve got some exciting news! I’m running a complimentary five-day money program.
It’s five days packed with videos, each day delving into a different financial topic—from negotiating a pay raise to reshaping your money mindset, from savings to investments, and it’s absolutely free. The official launch date will be announced in the next few weeks. I’m stoked!
If you’re keen to join, click the link below to sign up. Now, putting that aside, the third item on my financial health checklist might be familiar. You’ve probably heard many finance gurus touting this as step one because, hey, it’s free money. But here’s my beef with placing it as the top priority: it’s something that pays off decades down the line.
What’s the use if you can’t get your financial act together today, right?
Number 3 – Employer Match for Retirement Fund
So, you’ve checked off steps one and two, laying a safety net and squaring up against those high-interest debts. Now, it’s time to seize a golden opportunity staring right at you – the employer match for your retirement fund. The terminology might vary from one country to another, but the principle remains the same.
In the land of crumpets and the Queen, it’s called pension contribution. Meanwhile, across the pond in the US, it’s probably something you’ve come across. But let’s break it down a bit. For every pound or dollar you toss into this retirement fund, your employer says, “I see your bet and match it.” So, if you’re raking in a cool 100,000 and you toss 4,000 of that into your workplace pension pot, your employer puts in an equal share.
Now, get this – you’re netting a 100% return on your investment from the word go. That’s a deal you’re unlikely to find anywhere else! Mind you, we’re not talking about maxing out your contributions here. The game plan? Contribute just enough to bag that full match. Anything less, and you’re practically pushing away free cash.
Regrettably, there’s no time machine for these employer-provided retirement matches. No grabbing missed opportunities from yesteryears. So, this is one ritual you’ll want to repeat annually. Free money on the table? You don’t want to pass on that!
Number 4 – Stack up that Safety Cushion
Picture this: a secure financial runway that stretches out for a solid three to six months of living costs. You’d be walking with an air of confidence, knowing that even if the job rug got pulled from under you or if your business crumbled like a house of cards, you’d have a sweet stash of cash to cushion your fall. That’s the kind of nest egg you’d want to have on hand so that if life gives you lemons, you’re not reaching for credit card juice to sweeten the sour.
It’s time to play a little game called “What’s My Survival Budget?” You want to know your bare-bones, no-frills, survival-level expenses. Consider the bills that are a constant, the ones that play hide-and-seek, and the total cost of living it up (or down) for a month. If you’re punching the clock, multiply that by three to six months. Self-employed? You’re looking at nine to twelve months. That grand total is your emergency fund, separate from your safety net we chatted about in the first tip.
This safety cushion is for those big financial shocks – the kind that could rock you for the long haul. And when you’ve tucked away that wad of security, that’s when the fun begins. You’ve laid down the bricks for a future of financial freedom. Next up: Time to dive into investing and ticking off those financial goals. Welcome to the world of fiscal empowerment.
Number 5 – Invest Through a Tax Advantage Account
Let’s pause for a second and talk taxes. No, don’t groan yet. Most of us like to turn a blind eye to this part of investing, but here’s where we’re throwing down a big, bold marker. Your tax-efficient choices are going to have a huge impact on how much your money grows.
Look at it this way: investing can often feel like you’re running a race. You’re sprinting down the track, your money is multiplying and then…ouch! You’re tripped up by capital gains tax. Each time you buy a share and earn some dough, that pesky tax pops up and grabs a piece of your pie. Doesn’t sound fair, does it?
Enter stage right: tax-advantaged accounts. Picture them as your very own financial bodyguards, putting up a wall between your hard-earned profits and the tax collector. If you’re chilling out in the UK, meet the ISA. For those living the American dream, say hello to the Roth IRA. These accounts are your new best friends, helping you keep more of what you make.
So here’s our top tip: fill up these tax-shielding accounts to the brim. Squeeze every last bit of advantage from them until you hit the maximum. Because in this investing game, every little helps. And if you can, well…why wouldn’t you?
Number 6 – Payoff Your Low-Interest Debt
Most times, this doesn’t exactly ring loud alarm bells. We’re talking about your student loans, and sometimes your car loans. In the grand scheme of your financial life, they might not be causing major ripples, leaving you with a decision: pay it off or channel that cash towards investments?
Here’s my two cents, though. If this debt isn’t helping you pad your bank account, if it’s not leading you to greener financial pastures, then it’s time to show it the door. So if you’re using that extra cash to invest and grow rather than to settle debts, it’s a gamble that might just work out. But if you’re holding onto debt to have a little more spending money for the finer things in life, it’s time for a change in tactics.
Think about it: accepting debt as a standard part of life can spiral into a mentality where justification becomes second nature, funding an upscale lifestyle with low-interest debt. That’s a game you don’t want to play. So, get into the groove of erasing as much of that undesirable debt from your life as you can. Every penny counts, and it’s a habit that’s only going to help you in the long run.
Number 7 – Paying Off Your Mortgage
Now, this one’s a bit of a wild card, and we can’t stress enough that this is purely optional. It hinges heavily on your own unique financial scenario. There’s a laundry list of factors to consider: the remaining equity, the expiry of your fixed rate, and how much time you’ve got left on it. Let’s get real here; in my shoes, I wouldn’t be in a rush to pay off my mortgage.
You see, I’d rather funnel that cash into investments. The fact of the matter is that mortgage rates often fall on the lower end of the debt scale, and these long-term agreements are planned out to be paid over the full term. So, if you’re holding your breath, waiting to cross off that mortgage before you dive into the investment pool, you’re significantly shrinking your window of opportunity in the market. This could mean missing out on the magic of compound growth over the long haul.
What’s more, overpaying on your mortgage can result in you saving a chunk on interest in the long run. But hold up, not all mortgages are as flexible as a gymnast. Before you chuck in any extra payments, you need to get clear on your mortgage’s terms. Are overpayments even permitted? Are there any early repayment fees lurking in the small print?
If your mortgage puts a cap on overpayments or straight up prohibits them, say, by only allowing a maximum of 10% a year, then it might make sense to channel that surplus cash into investments. By doing so, you’re not only amassing a tidy sum in your investment account but also bumping up your property value at the same time. Both of these moves will give your financial future a hefty boost. Sure, there’s a certain peace of mind that comes with being mortgage-free, but in the end, you’ve got to decide which path feels like the right fit for you.