Pay yourself first.
Set yourself a portion of your income that goes straight into paying off your debt (excluding mortgage debt, which is very different to overdrafts, loans and credit cards) or building up your savings. Depending on your current financial situation and your attitude towards life (living for the now vs. saving for the future), this will vary enormously. But whatever amount you choose, set it in stone and have a standing order into a savings or investment account or the credit card that needs cleared.
The more you earn, the more you should save.
If you get a payrise, or start earning more (or spending less), give yourself a raise! We all know that money doesn’t buy happiness, but getting control on your spending and saving brings peace of mind. Some suggestions of how much to save relative your annnual income could be:
<£20k = Try to save 15% of your take-home
£20k — £30k = 20%
£30k — £100k = 25%
£100k — £200k = 30%
I won’t bother going further — you get the idea and I hope that nobody on higher salaries needs financial advice from some random guy on Medium!
Spend no more than 25% of your income on putting a roof over your head…
This won’t be possible for everyone, but if you’re spending more than a quarter of your household income on rent or housing costs (that includes taxes and maintenance), you should consider downsizing or changing your living arrangements if you want to become financially better off (i.e. retire early or have the freedom to get a lower paid or less stressful job).
I truly sympathise with anyone on lower incomes for which this is simply not possible, but there are many people who choose to put themselves in the financial trap of buying a house that is too big or in an upmarket location and requires a high-flying job that they hate just to pay the mortgage.
…and make sure it never amounts to more than 20% of your net worth.
If you’re fortunate enough to own, or at least partially own, property, it should ideally never make up more than 1/5 of all your savings / pension / investments. This goes doubly if the property you own is also your home! Too many people end up property-rich but money-poor. If you follow the first two rules, you should try to end up owning more investments than whatever is tied up in your home.
Spend no more than 1/40th (2.5%!) of your accumulated wealth (net worth) on a car and the same on stuff. 95% of your wealth should be in assests, not liabilities.
In general, people spend way too much on their cars. Much like houses, it’s very easy to want the biggest and best, or in the case of a car, the newest.
Don’t judge your vehicular budget on your monthly earnings. A car, unlike a house, is a massive liability. It’s common knowledge that a brand new car loses ~10% of its value the instant it’s driven from the showroom. Annually, cars lose ~20% of their value.
If you have a large income, there is nothing wrong in hire-purchase schemes (it makes more sense to rent depreciating assets than owning them), but very few people could afford to lease a car if they’re already following the previous rules.
For most of us, buying a second-hand car based on our net worth makes more financial sense. Again, this is a very challenging rule that is almost impossible to abide by when first starting out (and I’m still breaking it now!), but you should try to spend less than 2.5% of your net worth on a car. This means that if you have £10k as a deposit in your house, £20k in savings and £20k in a pension, your net worth (assuming no debt) is £50k.
2.5% of this £1,250.
Now you can see how tough this rule is. Only you can decide how closely to follow it, but what’s the point in having goals if they’re easy?
The same goes for stuff. TVs, computers, clothes, gadgets. Beyond a certain level of comfort, we don’t need it. The more money you can divert into savings and investments, the more freedom you’re buying. It’s probably important to stress that there is nothing wrong with stuff. It makes our lives easier or more enjoyable. But too much of anything can be bad.
Don’t just save. Invest.
Once you’re debt-free and have started building a few months’ living expenses in a bank account, you should start to diversify. There are five main assets that tend to store or increase in value over time:
For most people, cash and property is as far as they get, although they probably have shares and bonds in a pension scheme, and perhaps even some precious metals.
You shouldn’t have too much of any one of these (e.g. see previous rule), but you should have a little of everything. How much you choose to invest in each is up to you. There is no magic combination that consistently wins. Each has their time in the sun, so to speak, so best make sure you’re always exposed to the sunshine somehow. Spreading your investments in this way is also an insurance policy. It would be (almost) impossible to lose everything if you own at least some of each of these things.
Owning shares, bonds and gold can be done more easily than you may think — much like online banking — by using a broker. Gold can also be bought as coins (small denominations in your country’s specific format are best — sovereigns in the UK, eagles in the US, the maple leaf in Canada) and kept either in a deposit box with the bank or gold vendor. It’s probably best kept hidden in a location that you have access to at any time, however. Whilst this might sound paranoid, part of gold’s function is an insurance policy. If you can’t hold it, you don’t own it as the saying goes…
For more detailed information on finding a broker and picking which investments to buy (I’d advise a global stock market index, as well as a global bond index, rather than those of your country of residence), check out the awesome guides on Monevator, specifically:
If you’re outside the UK, you can definitely find similar blogs for financial advice / independence.
Start a business or get a side hustle.
OK, so this one’s probably harder than the others. I admit that I myself don’t have much going on here — mostly because I’m in the position that I’m not terribly motivated by money and I’m in a job that I enjoy with very little stress and that pays me enough to enjoy the ability to save for the future and enjoy the present.
There’s plenty more advice out there on this topic, so I’m not going to provide anything other than a recommendation of investigating it. Especially if you need more money or you want to try something new.