A lot of friends, family and colleagues have expressed both that they are’t quite sure how to get on top of their money, and aren’t particularly interested in finding out how to. Fortunately, I’m a lame personal-finance nerd, so I’ve written a very simple set of instructions to get on top of your finances and start investing. Follow them step by step. If you already have completed a step, then just skip to the next one.
Note: I am not a professionally qualified financial advisor, investment decisions are at your own risk. I included a couple referral links — it’s in no way changed my recommendations or views, feel free to ignore them.
Step 1, pay off any loans (except student loans)
I’ll specifically come back to your student loan later.
Some people don’t have loans to start out with, but if you do then order them by interest rate and pay off those with the highest interest rates first. For example, pay off payday loans then credit card debts then loans from friends and family.
If you have any high interest debt (payday or credit cards), seriously consider extreme measures (asking your family to loan you some cash, a temporary and unsustainably tight budget, taking on extra work, etc) so you can pay the debts off ASAP. High interest loans create poverty traps where you are stuck in a cycle of barely paying off the interest, unable to meaningfully reduce the actual loan itself.
If you have no other choice, you can pursue debt consolidation or refinancing options, but really leave it as a last resort as it’ll be pretty bad for your credit rating.
Pay off your debts prioritizing the highest interest debts. Consider extreme measures to pay off payday loans and credit cards.
Step 2, surpass the ‘treading water’ stage and build up 1–6 months salary in easy access savings
While you can take some extreme short term measures to pay off debts, after they’re paid you need to start thinking about a budget that’s more sustainble: low enough that you save something each month, high enough that you can enjoy yourself and don’t burn out! The aim at this stage is to pass a typical month without hitting 0 and also be in a position to cover reasonable unexpected expenses without loans.
This is probably the stage that most people get stuck at. Some people get stuck because they allow their expenses to just follow their salary. On the other hand, often people are stuck at this stage because they are struggling to break into the next tier of their career path and their current salary is only just enough to surpass local living costs. Advice for what to do in this situation is beyond the scope of this article, but given covid I’d say you should go easy on yourself (and your employer) if things aren’t quite going to plan!
Whatever the scenario, if you have the means to not hit 0 every month, now’s the time to start using saving tools like Plum, Moneybox or the round-up savings features on accounts like Monzo to put money aside without even noticing. Anything that’s left over on top, manually squirrel away into those savings accounts.
Also, for those who can’t help spending whatever’s in their current account, I recommend either: setting a fixed, affordable amount to be sent to a separate savings account each month, or getting a neo-bank account (Monzo, Starling or Revolut) and topping it up with your monthly spending money, then just using that card for day-to-day expenses. I personally prefer the latter, it seems easier to work out ahead of time ‘how much should I reasonably spend this month’ rather than ‘how much should I put aside?’
Build up these savings to the point of having 1 to 6 months salary (depends on your personal/family circumstances) either sitting in your current account or in an easy access savings account (I’m talking, accessible within 1 week max), which will probably have a very low interest rate if any. Don’t worry about missing out on investment returns on this money, in the event you needed it you’d have to pay to access this money otherwise.
You can also use this pot both for unexpected expenses or the odd, more expensive month (holidays, xmas gifts, etc). If you take any money out, make it a priority to top it back up.
Step 3, find out if your employer pension scheme matches further contributions
Once you’ve reached this stage, you’ve got some disposable savings to think about. One of the best ways to maximize your returns is to focus on not just the best investment returns, but also the most tax efficient investment schemes. As such, your pension is a very obvious place to start. Despite being boring and inaccessible, pensions are so damn tax efficient!
Pension contributions are taken from your salary before it’s taxed and your employer matches your contribution up to a certain point. So, at the minimum levels required by law, you would be auto-enrolled to contribute 4% of your salary, your employer would put in 3% and you’d receive 1% government tax relief. That means you effectively double your money. Some employers even offer to match pension contributions if you put more forward. If that’s the case, it may be worth upping your pension savings.
However, there’s a big caveat to this which renders this step optional. Firstly, many employers (especially smaller ones) simply don’t offer matching on further contributions, which makes it significantly less attractive to further top up your pension. Secondly, your pension savings must remain inaccesible until near retirement to maintain the tax benefits. This means that if your current priority is saving for a deposit on a home, pensions won’t help achieve that (you may instead want to consider a Lifetime ISA, more on that below). The same goes for any other savings aims that are not retirement, pensions just don’t help as the money gets locked away. That said, don’t undervalue saving for the longterm as it is important!
Another consideration is any other special employer perks, like employee share purchase plans. These are highly unique to the business you’re at, but often also a very good deal to consider, if you can bear locking up your cash for a while.
Consider contributing more to your pension, especially if your employer matches it! However, if your #1 goal is to build up a home deposit ASAP then skip this step.
Step 4, the fun part, setup and regularly contribute to ISAs.
This is the part people are really thinking of when they consider savings and investments: choosing how to put your hard earned money to work. Again, tax efficiency is important and ISAs (individual savings accounts) allow you to invest up to £20k per year with all interest earned being tax free. There are many different types of ISA accounts, they’re all very easy to set up (providers have easy inbuilt forms) and you can split your £20k allowance across several different types of accounts, but you can only have one of each type! The key types to consider are: Cash ISAs, Lifetime ISAs, Stocks and Shares ISAs and Innovative Finance ISAs.
Firstly, I generally do not recommend using Cash ISAs as an investment vehicle. Interest rates are typically below inflation rates, so you effectively lose money investing in them. Also, you have your 1–2 months saved in your current account/easy access savings account (from step 2), so you don’t need another form of easily acccessible and safe cash. You need to be saving with the aim of actually making some interest at this point since, in the words of Einstein, compound interest is the most powerful force in the universe. Don’t miss out by ‘investing’ in a Cash ISA.
Second to consider is the Lifetime ISAs (L-ISA). They function as something between a home-buying scheme and an alternative pension scheme. You can contribute up to £4k per year and the government will top this up by 25%! However, the money can only be used either as a deposit on your first home or for retirement. Given the 25% top-up and ability to use this for a home deposit, this is the obvious place to start your savings if your aim is to buy a home. However, mind the small print! The government sets out the terms of what your purchase must look like here, and it doesn’t necessarily suit everyone. If, for example, you already part-own a home, don’t intend to live in the property you’ll buy or don’t intend to use a mortgage then the (L-ISA) won’t work for you.
Note that L-ISAs are actually a special type of stocks and shares ISAs or cash ISAs. If you expect to purchase in over 5 years, a stocks and shares L-ISA invested in a tracker fund (more on that below) is likely a better bet as the possible interest adds up. If you expect to put down a deposit within 5 years the possible volatiliy of the stock market may make a cash L-ISA the better bet (this is the only circumstance in which I recommend a cash ISA, in fact). Moneybox is a solid recommendation as they have both Cash L-ISAs and tracker fund stocks and shares L-ISAs.
The next ISA to consider is the stocks and shares ISAs. This is where you start taking some risk, but it’s definitely worth it. First and foremost, my overall belief is that, at this stage, you should never pick individual stocks or invest in managed funds. Stick to index (or tracker) funds.
Aside from the fact that picking individual stocks is essentially just gambling (you’ll be very overly exposed to just a few stocks, that’s not a safe diversified investment portfolio for your future) it’s also impractically expensive for small time investors due to transaction fees, with platforms charging over £10 per transaction in some cases. The very cheapest way to select individual stocks in an ISA is to use freetrade’s ISA, which costs £36 per year. This means that if you only have £1000 invested, you’ve already lost 3.6% on transaction fees. Update: someone mentioned Trading212 as a cheaper option with an ISA, check out my view at the end of this section.
A ‘managed fund’ basically refers to professionals who group up people’s money and actively select what they put that money into on your behalf. Examples include Nutmeg, Fidelity…basically any fund that is not labelled as a ‘tracker’ fund or a recognized index (such as S&P 500 or FTSE 100). In contrast, an index or tracker fund is, as the name suggest, a passive fund that simply indexes or tracks the market. Basically, a portfolio of the top X stocks. In a sense, it’s investing in the overall stock market.
The truth is that there’s little evidence that actively managed funds outperform index/tracker funds. A study by the S&P 500 (a large american index fund) found that over a 15 year period, 95% of managed funds underperformed their relevant index. Furthermore, since it takes a lot of highly paid professionals to provide active management, managed funds charge you more for that privilege!
So, my recommendation is to set up a stocks and shares ISA with a provider who has a good selection of index/tracker funds or ETFs of index/tracker funds (don’t worry about what ETFs are, in practice they’re the same as a normal fund). Try get exposure across most of the developed world by either using a ‘developed world’ tracker fund, or investing in a few different regional tracker funds. You can also chuck in some bonds for good measure if you’re feeling more risk averse, as they’re typically considered safer than stocks.
Most providers will have these options included, including the previously mentioned Plum, Moneybox and even more traditional platforms like Hargreaves Lansdown. Note that some of the newer platforms do charge some small fees, but generally it’s worth the simple and inuitive interfaces they offer (my top recommendation is Plum as it marries Steps 2 and 4 by helping you with both savings AND investments and the interface is very neat). Personally, I use Vanguard directly, one of the pioneers of the index fund industry, but the platform isn’t the clearest or easiest so I don’t recommend it for everyone, and the fees are barely lower than via Plum or Moneybox.
A final, important point on mindset: you are investing for the longterm, do not bother stressing yourself over the everyday ups and downs of the stock market. Pick your provider, set a regular monthly contribution and forget about it. Generally, over the long term, the stock market grows in value because productivity and production in the economy improves as technology does. The long term average is about 7%, which would roughly double your money every 10 years, well worth the volatility and risk. So, don’t worry about the short term ups and downs. Besides, the biggest impact you can have on your personal finances is by focusing on your career, not your investments.
Update: I was told by a colleague that Trading 212 now offers an ISA that allows free stock trading and has ETFs of index funds and bonds. I was dubious as T212 was originally designed for other forms of trading where you can lose a lot of money…but it actually seems wholly legit, just don’t get drawn into the other products! Given the low fees, I suppose it’s a possible recommendation, but it’s still not as user friendly/clear as some of the other services mentioned.
The final ISA is optional, the Innovative Finance ISA. This is basically for peer-to-peer lending sites. I’d previously used Funding Circle and achieved a pretty solid 6–7% returns, but given covid they’re no longer offering their services as they’re focusing on dispursing government loans. I’m now looking at setting up with Kufflink which advertises up to 7.2% returns on loans which are backed by UK property (so relatively low risk, as there’s a high value asset as collateral).
Invest as much as £20k a year through ISAs. Forget about Cash ISAs. Consider a Lifetime ISA if you’re looking to build up a deposit for your first home, but check the small print. Set up a Stocks and Shares ISA that invests monthly into an index or tracker fund and maybe some bonds. Set it and forget it. Innovative Finance ISAs can be good to diversify your savings a bit, check out Kufflink to that end as it’s highly rated by money.co.uk.
Step 5 (optional) start making some alternative and higher risk investments
This final step is also totally optional. Once you’ve got your recurring ISA contribution set up, if you have some more savings available you may consider investing in unusual asset classes such as crypto currencies, making individual stock picks and investing directly into early stage businesses. I’d go so far as to say that this is the investing that you do following interests and passions, not viable long term investment strategies! Though the potential reward is great, so are the risks, so this should only be a small proportion of your overall savings and should be money you’re prepared to lose.
Again, tax efficiency takes priority so lets start with the relevant investment schemes. Through the EIS and SEIS tax schemes, it is extremely appealling to invest into early stage UK businesses, and thanks to Seedrs and Crowdcube it’s easier than ever to find such investment opportunities. Through these schemes you receive up to 50% of your investment back as an income tax rebate, pay no tax on profits (as long as you hold for 3 years or more) and can get further income tax rebates on any losses! However, be aware that Crowdcube and Seedrs do basically no vetting of the businesses they list. They will check it’s not a total fraud, but they will not verify that the price offered is fair or that the future prospects of the business in question are solid. If you choose to invest via any funds, they charge large management fees and if you invest directly yourself it’s hard to find a decent number of good deals!
Crypto is a very exciting asset class which I personally have a decent level of exposure to. There is potential for huge returns and even solid interest through ‘staking’, but it’s very high risk and not tax efficient. If you want to dip your toes, I recommend checking out Coinbase and buying some coins there. Particularly look out for the coins for which you get interest simply for holding them in your account (tezos and atom/cosmos). Bitcoin and Ethereum are the big ones, but it’s also late in the hype cycle so I doubt you’ll see 1000x returns anymore.
Finally, timely to say on at the time of Airbnb’s IPO, but sometimes you have such strong conviction about an individual company that you simply must buy directly. Do your research on their actual performance though, don’t just decide based on liking their product! Consider Freetrade.io to access such shares cheaply from the UK, but be aware you’ll have to pay capital gains tax on your earnings.
You can do some crazier stuff once you’ve sorted everything up to step 4. Consider SEIS/EIS investing for the tax benefits. If you want to get into Crypto, stick to a safe platform like Coinbase (my link gives you $10 of bitcoin).
Some final, general tips.
UK student loans aren’t actually loans.
The understanding of ‘student loans’ as ‘loans’ is a pet peeve of mine. The debt is only payable on 9% of UK income above something close to the average national salary. If you don’t earn above that threshold, or any salary at all, you don’t pay it. In fact, if you leave the country, you don’t pay it. In all cases, it’s written off after 30 years. This is a very unconventional sort of debt that is really much better understood as a graduate tax. Essentially, if you went to university and took a loan, you will pay an extra 9% on your marginal tax rates — likely for the full 30 years, unless you make a very large salary.
The question is, should we bother voluntarily directing some more of our salary towards paying this off? My general feeling is no and this is a for a few reasons. Long story short, except for the unlikely situation where you receive a large sum very early in your working life, you are simply unlikely to pay off the loan much before it is written off at the 30 year mark anyway. Since the mandatory payments are fixed at 9% of your salary over £20kish, you pay the same amount whether your remaining debt is huge or tiny, and the amount owed grows at quite a quick rate. So, you only make ‘savings’ if you can totally wipe the debt meaningfully before that 30 year mark, and then take home enough paychecks without that 9% extra fee to make it worthwhile.
Even if you did have a sudden lump sum of money, there are likely better uses of it (a home deposit, for example) and it’s a very big bet to make that you will earn a large salary in the UK for the next 30 years or so, which would be required if you’re to make the long term savings to justify giving up the money now. Maybe you’ll take a lot of time off to raise your kids, maybe you’ll move abroad, maybe your salary won’t grow to your expectations. All mean that the amount saved by the 9% marginal reduction over time is small in absolute terms.
There are sparingly few cases where it actually makes sense to actively pay your student loan off, just think of it as a graduate tax rather than a loan and forget about it.
Build good credit, use a credit card
Whilst it’s a relic of an outdated and unfair financial system which hopefully will become irrelevant soon, for now credit ratings still matter. Build up your credit by getting a credit card and paying it off fully every month, as well as other actions like getting onto the local electoral roll. There’s plenty of info on how to improve your credit and apps to track it, just give it a google. Also, credit cards often give you free benefits and cashback for money you’ll spend anyway, so why not (same goes for a loyalty card to your local supermarket).
I personally use an Amex gold card, but the fees after the first free year can be prohibitive. Whilst I find that I earn enough points to make it worthwhile, that’s not the case for everyone. If you’re going to sign up, use a referral link to get a big amount of bonus points (my link here, which gives 22,000 amex points).
I really don’t recommend the airline cards. They’re not what they used to be; airmiles are worth very little nowadays and even if you get one of the companion vouchers they’re actually impossibly hard to book with (can’t book any popular routes and must be booked about a year in advance)!
Buy responsibly. Avoid expensive contracts, try to sell unused belongings and buy second-hand/refurbished where sensible.
Firstly, too many people think it’s smart or reasonable to buy products on marked up contracts (i.e. it’s split over X payments, but the total paid is larger than the upfront price). Being on a contract is one of the biggest cons around. You commit to paying well beyond the product being outdated and end up paying significantly more than the product is worth for the benefit of spreading the cost. It’s much wiser to simply save up first or buy a cheaper product outright.
Many shops now offer the ability to spread the cost of an item over several purchases at no extra cost. Those deals are good and always preferrable to a lump sum, but be very careful of any contracts that have high interest (5%+) or charge a higher price for the product!
Secondly, most people have a pile of old phones or laptops or clothes that they never use. Seriously consider selling them (after safely wiping them). Not only does it make you money, it’s also environmentally friendly to promote a more circular economy.
Finally and related, consider buying your products second hand or refurbished. For some products which are sensitive to usage, this may not make sense unless specific parts are replaced (e.g. smart phones, as battery capacity drains with use) but for many products you can get a discount for accepting a great product that is second hand or comes in previously opened packaging but is otherwise totally fine! I personally regularly shop at Ebay (the moneyback guarantee makes it super safe) and Amazon Warehouse, where they sell the products that were sent back or scuffed in the warehouse.