Read Part 1 here.
Disclaimer: Disclaimer: All golden rules listed below are principles I have personally learned from following other financial experts and reading books. I am not a financial expert, and these should only be used as a guide and mere advice.
6. Build an emergency fund and cash cushion
When I started learning about personal finance, one of the main lessons I learned was the importance of building an emergency fund. One of the main reasons for getting on top of your finances is that you can live comfortably without any financial strain and gradually grow your income to live the life of your dreams. Although the making and growing part seem like the most exciting part, it cannot be done without the first goal.
You never know what can happen, and it is important to have an emergency fund to protect against any unexpected disaster that might occur. We all know the horrible feeling when you accidentally spill a drink on your laptop, or when your boiler breaks down. You or life might get you into situations that require you to pay a large sum of money. Rather than getting a loan- which in turn might get you into more debt- you should have a substantial amount of cash (not necessarily physical but accessible) saved up specifically for these unexpected situations.
The general rule of thumb is to have 3-6 months worth of your outgoings. If you usually spend £1000 per month on rent, food, and general expenses, it is suggested that you should have around £3000- £6000 worth of savings in your emergency fund that is accessible.
If you’re like me, that number seemed impossible. I was disappointed because I was excited to invest and grow my money, but I had nowhere near that much of an emergency fund to set me on my way.
However, that is only the ideal amount. Pete Matthews maintains that there isn’t really the right amount- it is all circumstantial: “anything is better than nothing, so don’t get hung up on the numbers.”. I’m a 23-year-old graduate still living with my parents and saving money. At the moment, I’d like to think that I don’t have to have that much saved for an emergency just because I don’t have that much to lose. I also don’t have anyone relying on me.
Although I don’t have the ideal amount yet saved, I still have something that is enough to pay for a new laptop if I accidentally break mine. Whenever I get paid, I immediately put a percentage of my income (currently £100pm) towards growing that slowly so that when I move out, I will have a comfortable emergency fund.
- Follow Step 4’s ‘Pay yourself first’, and try and put a decent percentage of your income towards building an emergency fund.
- Decide where you want to put your emergency fund. It has to be somewhere accessible. It could be in physical cash, or it could be in an accessible savings account. If you have a Monzo or Starling account, you can easily put it in one of their Savings Pots or Spaces.
7. Pay off your debt
It is imperative to gradually eliminate any sort of debt you might have before you start thinking about investing. Pete Mathews in The Meaningful Money Handbook distinguishes between ‘Good’ and ‘Bad’ debt.
Good debt: “generally carries a low-interest rate and is used to buy things which increase in value.” e.g. student loans, mortgage
Bad debt: “involves a high-interest rate and is used to buy things which decrease in value.” e.g. credit card debt, car loans, consumer debt
Focus on paying back all the bad debt.
- Don’t get into more debt. Don’t use your credit card if you know you are not able to pay it back; that’s why it is useful to have a basic emergency fund to use in case a disaster happens.
- Follow step 4 and ensure you always put the decided percentage of your income towards paying off your debt. You are paying yourself first.
- Consider Dave Ramsey’s Debt Snowball technique: prioritise paying back the smallest debt you have first while making minimum payments to the other debts (that’s the crux of it but read here for more detail).
- For example, if you have a credit card debt of £2000, a car loan of £1500, and a payday loan of £1000, focus on paying back your payday loan first.
- This may not be the most effective technique for preventing an overall rise in interest rate, but it could be the most psychologically effective.
- The point is that if you start paying off the smallest debt (regardless of interest rate), you are still paying off debt. And it’s more likely that you’ll pay it off quicker than tackling the biggest debt. The more debt you pay off in a shorter period of time, the more it should encourage and motivate you to pay off the rest!
8. Build multiple streams of income
This is one of the most valuable lessons in making money. A lot of millionaires and billionaires attribute their wealth to their multiple streams of money. Even if your goal isn’t to become a millionaire or billionaire, it should be your goal to have the freedom to live your dream life whether that is to buy a house, travel the world, or even just to live a happy debt-free life. Whatever it is, you most likely won’t achieve it by having your 9-5 job as your only source of income.
Having multiple streams of income does not mean that you need to work 3 different jobs. There are so many ways to make money on the side as a side-hustle. Every little helps.
A few examples that don’t require any/ little money
- Sell your stuff- you probably have a lot of stuff you don’t actually need.
- Clothes and things: Ebay, Depop, Poshmark.
- Revision/ class notes: Stuvia, Facebook groups.
- Quality photos/videos (if you have really dope photos and videos): Shutterstock, Adobe Stock
- Babysit or pet sit
- Write an E-book
- Answer questionnaires
- Affiliate marketing
Some of these- after some setting up- can turn into passive income, which is the ultimate goal. Passive income is regular income received with minimal or no effort.
9. Invest wisely
This is for only when the previous steps have been mastered. For someone like me, investing might sound like something only adults who have their life, money, and career established do. But it’s something that everyone who is out of debt and has a good emergency fund built should think about. It’s something that should definitely be considered if you already have loads of money in a savings account.
I won’t be giving a list of why you should consider investing, but the main reason is that you can grow any money you can afford to put away/save. Due to inflation, money in a normal savings account with very little interest is losing value. You have an opportunity to grow your money over time! I give a bit more detail on this in this post.
- Don’t consider investing unless you have done all the steps before. You only invest money you don’t need in the near future.
- Educate yourself by not only watching YouTube videos but reading at least one book or several well-sourced articles on investing. There are so many different things you can invest in. Make sure you pick the right one.
- I have a list of 5 Books on Personal Finance that explain investing.
- One of my favourite ones on investing is Investing Dymistified by Lars Kroijer. If you’re a complete beginner, consider reading The Meaningful Money Handbook by Pete Matthews first.
10. Think about pensions, wills and insurance
Preparing yourself for the future if you’re a young adult might seem unnecessary and boring, but all the books I have read stress the importance of contributing to your retirement as soon as you can. If you want to live a comfortable retirement, you actually need a lot more money than you think! It’s easier to start contributing when you can.
Admittedly, I still have a lot to learn about pensions, making wills, and getting life insurance. I’m still trying to learn about it.
- Read! Make sure you read/ watch videos that are specific to the policies and laws of your own country.
- Consider contributing to your pension- if your employer contributes to your pension, take advantage of that.