The PoundCounter Guide to Wealth...
So far, I don't think I've added a "getting started" post, or a concise guide on how to manage your money, so this will form the basis for it.
1) Pay off debt.
If you have any debts, like credit card balances, store cards, overdrafts or loans, pay them off first. Don't save anything into a savings or investment account until that's done.
Pay off the highest interest rate debt first.
The only exceptions are mortgage debt and student loans (in the UK anyway).
With mortgage debt, you want to make sure you get the lowest possible interest rate, or the lowest total cost over the period (sometimes the interest rate can be lower, but come with upfront fees).
With student loan debt, it's actually much more like an extra income tax. It's very difficult to work out whether you are better paying it off, or just putting up with it for the rest of your working life. This largely comes down to how much money you earn (or think you will earn) and how much you owe. The more you earn and the less you owe, the more likely it is to be better paying it off sooner. But my general advice would be not to worry about it.
2) Get a picture of your income and your outgoings.
Use my previous post as a starting point for gathering all your monthly / annual incoming and outgoing money.
It goes without saying that you want the outgoing to be smaller than the incoming. If it's not, you need to increase your earnings or decrease your spending.
Decreasing your spending is easier. Some things should be entirely within your control - eating out, takeaways, clothes, toys, gadgets.
Cars are one potential easy way to decrease your spending or free up money to be saved. I would strongly discourage using finance of any sort to pay for a car. Ideally, you should own the car outright, never buy it new and only spend as much as you are willing, ideally following the guidelines in a previous post. That's probably a little too extreme for most people, but the principle applies. Cars are incredibly useful, and I personally wouldn't go without one, but most people spend way too much money on their cars.
Think about living for today vs. saving for the future (see next point) and decide how much you want to value each.
Other things are still in your control, but more difficult - you may be paying a lot of rent or a big mortgage. You can still control those things, but it will take more effort and difficult decisions about how far you are willing to change your lifestyle. Granted, negative equity combined with a big mortgage is especially challenging, so it would be worth seeking finance advice on your options.
Ideally, you should be spending as little as possible on rent or mortgage costs. See the next point, but a good rule of thumb would be no more than 25% of your income. (For mortgages, this should include the additional costs such as rates / tax / insurance / maintenance).
3) Decide how much you value the here and now vs. how much you value the future.
Some people live for today. Others defer their happiness into the future. Most people value both to varying degrees.
A lot of the early retirement (FIRE - Financially Independent and Retired Early) blogs are inspiring because it's exciting to think about no longer needing to work and having a comfortable or adventurous retirement.
On the other hand, some of the FIRE blogs are extreme. Eating budget food; not owning a car; never spending any unnecessary money.
The mistake I think most people make is ignoring the future entirely, or assuming it will be fine and something will work out, or that the government will provide for them. Whilst the latter may be true, the current economic climate doesn't bode well for public pension provisions. It's very likely the state pension age will continue to increase, or become means-tested.
Therefore, my advice is to save more than the average person. My previous post on the topic went into some details, but as a reminder, here are the guidelines:
The more you earn, the more you should save.
If you value the future more than the present, save more.
If you prefer to live for the here and now, save less.
10% of your total (after-tax) earnings should be an absolute minimum. This is too low for me, but everyone is different.
Although now is all we have, it's also very likely that there will be a tomorrow. How much you choose to balance that is up to you.
4) Save into a variety of things.
Once you've arrived here, you are probably saving a proportion of your income into a savings account. We know that the interest rate on those savings sucks. Better to actually get that money working for you, and also minimise the risks of losing any of it.
Similar to the previous point, you need to decide how much risk you are willing to take. Generally, the higher the risk, the higher the reward.
You could choose to just continue to save into cash, which traditionally be thought of as safe. However, there are two major problems with this:
The first is explained in the link.
The second is generally covered by the country's financial authority. In the UK, this is the deposit and savings protection scheme. You do not want to have any more than that limit in a single savings account (or number of accounts covered by a single scheme). In fairness, this also applies to other forms of savings, such as investment accounts.
The investment options generally consist of:
- Cash - either physical notes/coins or in a savings account.
- Stocks & Shares - owning a small portion of a company, which produces goods or services
- Bonds - lending money to other people, such as companies or government
- Commodities - generally precious metals like gold and silver, but also things like widely traded goods like oil, animals and crops (known as "soft" commodities because they are consumables).
- Property - owning your own home, buy-to-let or a fund that invests in property
Cash is easy. Just have some notes, coins and savings accounts.
Stocks and Shares and Bonds are also pretty easy - follow Monevator's guides on passive investing interactive broker tool and broker table. Opening an account with an online broker is just like opening a bank account. His guides to which low-cost index trackers to use is also unbeatable.
Commodities is a little more tricky, but not much. You could choose to use an online fund that invests in gold, silver or soft commodities. I'd advise buying gold and silver coins, and having them delivered and keeping them somewhere safe (pun intended). You can choose a variety of online places like www.gold.co.uk.
For most people, owning their own home (or at least a portion of it, whilst paying off the mortgage) should be more than enough property. Because owning a property comes with costs (taxes, insurance and maintenance), it should not be thought of as a method of saving for the future. A better way to think about it is a way of spending less money on rent in retirement. You'll still have "rent" to pay (the costs of owning a property), but these should be much less than the equivalent of renting.
For my own reasons, I will not be going into buy-to-let as a method of property ownership. In any case, in the UK, it's becoming less profitable as the tax benefits afforded to landlords are slowly reduced / removed.
The simplest way to allocate savings would be an equal split into the five assets, and this would not be a bad way to go. However, as with point #3, you should choose a split that you are comfortable with. The mistake most people make is saving too much into cash and their own home, and not enough into the other assets.
The easiest guideline with pensions is this:
If your company offers a pension and they pay into it without you needing to, you should bite their hand off. (i.e. take their offer of "free" money).
If your company offers a pension that pays in as long as you pay in something (often matching your contributions up to a point), you should also bite their hand off. (i.e. take their offer to double your money).
Where I would differ on pensions is outlined in a previous post and point #3. Pension rules are likely to change, so having too much money tied up in a pension might be a problem for your retirement plans down the road.
Saving into an ISA is almost exactly the same (in the end) as a pension. The major difference is that (currently), you are free to do what you want, when you want, with an ISA.
6) Relax and have fun!
Once I had reached this point, I felt much happier knowing that my finances were under control. I enjoy spending money on some things, like good quality food; a car that's not too expensive but fun to drive; the occasional holiday, but I also enjoy saving money and watching my savings and investments grow slowly over time. I save as much as I'm comfortable with, balancing the here and now with planning for the future.