Priority List for Financial Health

Just like with everything else in life, making the first steps towards financial peace of mind feels very daunting for most of us. Unfortunately, personal finance is not a subject thought at schools around the world, and since it is a somewhat taboo topic, many embark on their path to financial independence in complete darkness, unsure of what to prioritise and what to put on hold for the time being. I am saying all this because this is genuinely how I felt from the moment I became an independent adult some 16 years ago, and I really wish I had some guidance as to how to handle my finances from the moment I got my first pay check.

DISCLABER: This piece of work is intended to serve as a mental exercise for myself and should not be treated as financial advice simply because we are all unique individuals in different stages of our lives under unalike financial circumstances.

Finding the "Why?"

First and foremost, you must not only understand but also feel at ease with the fact that the ascent of the mountain, aka financial independence, is less like a sprint and more like a marathon. Probably the most important part of the "race" takes place in the early preparation stages before the gun even fires. Finding the true "Why?" that will remind you of the reason you started is crucial. It will be your most trusted friend who will help push you onward and upward when you feel like nothing is going your way. My "why" is simple. I seek to be financially self-sufficient so that my family doesn't have to depend on others to put food on the table. Equally as important, I want to be able to impart sound financial knowledge to my daughter so that she can grow up to be a self-reliant and confident adult who has one less thing to worry about in an already stressful and challenging world.

Before I even begin, I must state that wanting to not only pay off your debt but also remain financially independed takes a very unique mindset. A mindset that will guide you in making the difference between "want" and "need", between "it is nice to have" and "it will bring true value to my life", between instant and delayed gratification. People without this frugal mindset will find it harder to follow the steps below, as during the hard times of the journey it will feel like they are swimming against the current, which can and most likely will be massively discouraging.

Pay off your high-interest-bearing debt

I have a saying that goes like this: "The best investment one can make is in their own development and health. The second-best investment is one with a guaranteed return". When you have high-interest-bearing debts, which I would define as any loan with an interest rate above 10%, such as payday loans, car loans or credit card balances, they act as an anchor chained around your feet. Such types of debt will drastically slow you down on your journey towards a world in which financial worries go unnoticed or simply do not exist. By paying off such debts, you have a guaranteed return on your "investment" equal to the interest you would have otherwise paid if you did not clear them.

What can be done?

The most obvious solution is to just use any of your savings that you will not need in the immediate future to cover the outstanding balance on those debts.
If you have insufficient funds to cover all or some of your debts, you might want to look into increasing your monthly income by either putting in overtime at work, finding a second job, or even starting a side hustle such as flipping (buying things for a low price and selling them for a higher one) products or items you are very familiar with.
You can also try to do a form of financial juggling by transferring your credit card debt to another bank, which provides you with a 0% rate for 6, 12, or 18 months. There are a lot of offers out there. The sole purpose of this method is to allow you to focus on generating cash while saving from interest payments on your existing debt. This is not a "burry my head in the sand for the duration of the promotional 0% interest rate period" type of exercise but rather a tool you can use to boost your finances for a short period of time.
This last one is more of a last resort option. Consider refinancing your debt by going to a provider that offers lower interest rates.
- For example, if your £1000 AMEX credit card balance incurs 70% AER, then it is a good financial decision to take out a 20% interest rate loan to pay off your AMEX credit card, right?

Personal Pension

Once you have covered your debts, you might be eager to put your hard-earned money to work by investing it, but I think there is an alternative, which in and of itself is a form of investing, you need to consider first. What I am talking about is the workplace pension every employer in the UK and most developed countries is required to offer its employees. You might already be aware, but employers are not only required to offer you to take part in a workplace pension but also match a certain percentage of your contributions. For self-employed people, this holds the same priority.

There are four main reasons why I believe contributing to your private pension should have a higher priority compared to outright investing:

It might be your own private pension, but you are not the only one contributing to it. You might already be aware, but employers are not only required to offer you to take part in such a workplace pension but also match a certain percentage of your contributions. So, if you decide to set aside 5% of your annual salary, your employer is going to match 3% of that, which means you will actually get 8% of your total yearly salary added to your pension potover the course of a financial year. This 3% is basically free money for you, which is going to stay in your pension and grow (hopefully) until the day you retire. We all love the concept of free money and the closest thing you will get to a reliable source of it. Take advantage of it to its full potential before you leave this stop of "A Brighter Tomorrow" express.
The concept of investing in your pension implies a long time horizon, which in and of itself should dramatically increase your portfolio value due to what Warren Buffet has famously called the eight wonder of the world—compound interest.
Every self-respecting value investor believes that two birds in the bush are worth one in the hand. In which case putting money away until retirement might seem like a bad financial decision. Although I agree with this I would like to share a different perspective; we might not all have an investor mindset, but we are all humans, and as such, we are all bound to make emotional financial decisions at some point in our lives. Having a large amount of money, such as our pension savings, easily accessible can lead to extreme financial consequences. We drink, smoke, take drugs, get our hearts broken, and it only takes one bad decision under the influence to bring you to financial ruin. Being unable to access our pension funds until later in life acts as a kind of buffer against our emotional shortcomings.
This might not apply to all, but for us in the UK, pension contributions can be a very tax-efficient way of saving money. Pension contributions are deducted pre-tax. Here is a quick example. In England, earnings above £50k are taxed at 40%, which ultimately means that if your annual salary was £51 000, from the last £1000 only £600 is going to make it to your bank account. Whereas, if you decide to contribute £1000 to your pension, it will all end up in that pot with nothing going to the tax people. That is a great way to entice people to save for their future.

Emergency fund

You have your debts paid off and your pension sorted. It definitely feels like it is time to start investing, right? Almost. I think there is one last thing you need to consider, and it is the simple truth that life is full of surprises, some of which are pleasant and others are not. The last thing you want is to have your journey reset and end up back at step one due to an unforseen expense that forces you to go back into severe debt. For that reason, you really want to have some sort of financial cushion in the form of an emergency fund. A small pot of money, a couple of thousand pounds, which stays in an easy-access interest-generating savings account that is available to you in case you need to pay for an expensive car repair, medical bill, boiler replacement, or house repair. People say an amount of money enough to cover 6 months of your living expenses is a good starting point, but I always found that to be just too much. For me personally, a couple of thousand pounds has always been more than enough to allow me to sleep well at night.

Start thinking about investing

Now that you have cleared your high interest rate debts, you are maximising your employer pension contributions, and you have set up a financial cushion for when life brings the unexpected, it is finally time to start thinking about investing that extra bit of money left at the end of each month.

There are a lot of different ways in which you can invest, some more risky than others. As I briefly mentioned earlier, the best investment one can make is in himself/herself. Start teaching yourself on the topic so you have the ability to make an educated decision on which form of investing suits you best. I myself picked the route of stock market investing as I felt like it suited me best. It was easily accessible, and the UK has some great tax-related benefits for small investors such as myself in the form of Stocks and Shares ISA accounts. S&S ISA is a type of brokerage account that is exempt from capital gains tax and has an annual deposit limit of £20,000. This basically means that you can deposit up to £20k per year in your brokerage account with any profits or dividends you get from your investments being completely tax-free.

There are other ways you can invest, such as buy-to-let property investing, starting your own or buying an existing business, or even purchasing premium bonds. Information on each individual and additional ways you can invest your spare money is widely available on the Internet, but please spend the time to research properly and always choose trusted sources. Remember... if something sounds too good to be true, it usually is.

Next steps...

The most obvious next step is to try to increase your earnings power so you have more funds at your disposal.
For parents, once you are confident you have a solid financial base, you might want to start thinking about investing for your children's future. In the UK we have what is called Junior ISA accounts which are a form of Stocks and Shares ISA for children with the caviat that your kids will not be able to access the funds before they turn 18 years old
Travelling is the best way to learn about the world we live in, and it is an investment in ourselves in and of itself.
Help others who need it most either financially or by donating your time.

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