Transcription
Okay, so you want to invest your money. You live in the UK, but you're not quite sure where to put it. Well, stick around because today I'm going to share the ideal order to invest your money for financial freedom. And it all starts with step number one, which is to build an emergency fund.
This is absolutely the first thing that you should do before you think about anything else. And this is why. Firstly, an emergency fund is going to help you cover any of life's unexpected events without any effect on your day-to-day spending. This could be things such as your car breaking down, or maybe even your PC packing up, which seemed to have happened to mine last week.
Another thing you can use your emergency fund for is basically your own insurance policy in case you lose your job unexpectedly and you need to go and find a new one. What's going to happen with your emergency fund is that's going to be able to cover your bills, and there will be less pressure to rush into a job that might not necessarily be the right fit for you.
And finally, which is most important, having an emergency fund is going to significantly reduce your stress when it comes to money. Because for me, knowing that I have a backup of cash actually allows me to go ahead and spend and invest my money with confidence, as I'm less worried about what would happen if things went wrong.
Now, a question that I get quite often is, how much cash should I have in my emergency fund? Well, it very much depends on your risk tolerance, but I would ideally look at no less than three months' worth of your monthly bills and no more than nine. Another question I also get is, where do you store it? And essentially, my response would be to look for an easy access savings account so you can get your money quickly, but also take advantage of some of the more generous interest rates out there right now. It doesn't really matter which one you choose. The main thing that does matter, however, is that you need to be able to access that money fast, with no delays or penalties.
Step number two is to pay off any high-interest debt. So, when it comes to defining what is classed as high-interest debt, it can very much depend on your personal circumstances. But as a general rule of thumb, anything with an interest rate of 8% and above, I would say makes the cut. When it comes to some common examples of high-interest debt that you see in the UK, you're going to be seeing things such as credit card repayments, car loans, and even finance deals on certain furniture and electronics.
The lower the debt you have, the more money that you will have to invest in areas that can actually grow your wealth. It's also one of the only investments that you can make where you can guarantee a return on your money. For example, in the UK, the average interest rate on a credit card repayment is currently around 24%. Now, if you had that debt and you were able to pay that off, you would be making a guaranteed return of 24% on the initial principle, and it will become interest that you will no longer have to be paying in the future.
A common observation that gets pointed out in conversation of high-interest debts is, where does a mortgage repayment fall into all of this? And my response would be is that I class these as more lower-interest debts, but overpaying is definitely beneficial, and I am going to talk about that shortly. But first, let's get into step number three, which is going to be to match your employer pension contribution.
If you have a job in the UK and you earn more than £10,000 a year, you will be auto-enrolled into what is called a workplace pension. This is something that your employer legally has to set up, and whilst you do have the option to opt out and get a little bit extra money every single month, I actually highly suggest against doing this. Here's why. You see, the reason why it's called a contribution is because whilst you have to contribute 5% of your salary to your pension, it's by law that your employer must contribute a minimum of 3% extra on top of that. Now, what this is is essentially free money that your employer is giving you towards your retirement. Also, the more you do contribute, the more you actually decrease your tax liability, and for people on the borderline of the high-income tax bracket, this could make a really big difference.
Step number four is contributing to either an ISA or overpaying on your mortgage. Now, as you can see on this step, I've very much left it a choice down to you. You can either invest in a tax-free ISA up to £20,000 a year, or overpay your mortgage, or even of course, do both. I'll explain why they're on the same step in just a second, but this actually starts by talking about why you should be doing at least one of them.
Okay, so starting with ISAs. What these basically are, if you didn't already know, are accounts that you can actually contribute up to £20,000 a year into, and any interest or profits that you make from them will always be completely tax-free. There's a few different ISAs out there that you can actually get. You have savings, stocks and shares, Lifetime, and Innovative Finance ones. These all serve different purposes, but the main common ones are the first two: savings and stocks and shares. For example, if you were to contribute towards a stocks and shares ISA and invest into an index fund like the S&P 500, which actually currently returns an annual average of roughly 10% a year right now, you're going to get a really nice return on your savings over the long term. But essentially, that's ISAs in a nutshell. I've got plenty of videos on my channel about them. They're great finance tools and they're very straightforward.
Moving on to overpaying your mortgage. This is also a very good way to invest your money, but your gains are going to look a little bit different. The way this works is pretty much just like paying off any debt, because anything that you do overpay on top of your monthly payments, you're essentially getting a guaranteed return of whatever your interest rate is at the time, and at the same time as that, reducing your mortgage length considerably. Just to show a visual example of this, they use my own mortgage, which is currently around £230,000 over a 30-year period. And what you can see is that just overpaying my mortgage by £200 a month, it will not only clear my debt seven years and nine months earlier, it will also save me an extra £56,300 in interest, given that my mortgage rate stays the same throughout the whole period. And just like stocks and shares ISAs, this is another great way to significantly improve your financial position in the world. But the one you choose is going to be very personal to your current life situation, which is actually the reason why I have put these both together. Because when it does come to which one to prioritize, there will be no same answer for everyone.
Another reason why they're on the same step, I think, is because subconsciously, I know how much of a debated topic this is, especially on YouTube, and I just don't have the energy for a war in my comment section right now. I think people will argue what is best for years to come. But when it comes to my take, it's as simple as this: as long as you're doing either one or the other, or of course, both, whichever you choose will have a net positive return on your wealth in the long run.
Now, step number five is to pay off your low-interest debt. So, earlier I said that I would class high-interest debt as anything 8% and over. Well, you probably guessed that low-interest debt is generally considered anything 8% and under. One of the most common forms of what I would class as low-interest debt is a student loan. I know they have certain tiers and the interest rate does vary between them, but right now, I think that the highest rate is currently at around 6.9%. Now, of course, with your low-interest debts, they won't have as much of an effect on your income as your high-interest ones does. However, in an ideal world, if we can reach a stage where we are investing and we're clear of any debts, excluding maybe a mortgage, I would class this as a job well done.
Which actually then brings me good reason for step number six, which is have some fun. Now, if you have reached this step, it means that you have been able to become mostly debt-free, invest money into different types of assets to grow your wealth, and you also have a backup chest of cash if anything did go tits up. And if you ask me, I would say you're doing pretty damn good. And what I think that calls for is time for retreat. Because at the end of the day, here's the way that I look at it: we're on this planet just once, and you definitely don't want to get tied down into the world of just saving every single penny and worrying about money and how you can become financially free the entire, entire time. There's definitely more to life than that. Trust me, I've been there. I've been in that situation where I just saved every single penny to the point where I sacrificed all of my actual living that I meant to be doing. So, do make sure that if you can spare some money, then take some time to invest into yourself.
Step number seven is to take some risks. Now, for me, this really is the final boss of the ideal investing order. You spent steps one and two setting yourself up to become a successful investor. By steadying the steps three, four, and five, you're strengthening your financial position in the world with low-risk, long-term investing and increasing your income by eliminating debt. And in step number six, you've rewarded yourself and you're making sure that you enjoy the fruits of your hard work when it comes to your money. And at the end of that, this then all leads to you now, where you finally have the opportunity to start taking some risk with some more speculative investments.
Now, unfortunately for a lot of people that don't understand the optimal order for investing, this step always seems to be step number one for them. And that's normally the people that you will hear talking about how investing is a complete loser's game. However, hopefully after watching this video, you can clearly see that investing and allocating your money in the right order, you can create some solid financial building blocks that allows you to take these kind of risks with little to no impact on your long-term wealth.
Now, let me answer the question of what types of investments I'm actually even talking about here. Well, the big ones that I would class in this day and age are investing into individual companies on the stock market, and of course, we have crypto. I have invested in both of these areas. In particular, I've had some nice wins, but I've also had my fair share of losses. But ultimately, it doesn't matter because it's such a small allocation of my income that ever goes into something like this. It's okay to take risks in life, even with your money. But just remember, this is only okay if you've made sure that you're completing all of the following steps.
I really hope you found this video helpful. Thanks for watching.