Back in January 2023 I put together a blog titled ‘11 money rules’. The reason being is that we all like rules, they are easy to follow, are clear and we know instantly if we are following them. In return, we receive instant satisfaction from “doing the right thing”. However a whole bunch of rules are difficult to remember, so I decided to go one step further and not only try to simplify but to create an order. Meaning every individual understands where they are on their journey and what they need to do next. Luckily for me this has already been done. Some of you would have heard of Dave Ramsey ‘7 baby steps’. Dave is a US talk show host who offers financial advice. His baby steps are US based and with this in mind I have put my own slight twist on them and put together 5 stages.
1. Save a £1000.
This is your ‘just in case money’ while you pay off your short-term debt.
2. Pay off all short-term debt apart from your mortgage.
This includes all loans and credit cards. How this is done, is open to debate. Dave Ramsey prefers the snowball method (pay off smallest debt first) whereas someone like Martin Lewis prefers to attack the debt with the highest rate of interest first. To me the outcome is more important step than the method.
3. Build up 3-6 months cash reserve.
This is your emergency fund. If an individual is not a homeowner, then this step needs to be replaced with saving for a house deposit.
4. Save at least 15% of your gross income.
This amount excludes an individual’s employer pension contribution.
5. Pay off your mortgage.
Your mortgage repayment should cost roughly less than 25% of your net monthly income.
These stages are designed to be easy to remember but also to understand where you are at and what you need to do next. By design they are a one size fits all approach and naturally there will always be questions off the back off this….” I am saving 15% of my income but I have money left over at the end of each month, do I overpay my mortgage or save some more?”. Or maybe an individual might have paid off their mortgage and if they are not financially secure and built sufficient wealth, they might need to save a little extra to what they are already saving in stage 4.
The quicker an individual can go through the stages not only will they be financially free but the more money they save in mortgage interest payments and are in a better position to take advantage of the 8th wonder of the world…. compound returns. Or put it another way…. Investing earlier means an individual will need to save less.
If we take a 20-year-old who saves £500pm for 10 years until they are 30, and leaves the money for a further 25 years, until they are 55 years, it would be worth £342,474.
Now if we took a 45-year-old who also saved £500pm for 10 years to age 55, it would be worth £79,241.
This is an extra £263,233 just because they saved the money earlier and benefited from compound returns.
Please note this assumes 5% return and doesn’t factor in inflation.
In my last blog I spoke about a short-term mind set, an individual is programmed to have an unconsciousness bias towards the present and discount the future…every client I meet who has saved money towards their future is happy that they did. I have never met someone who wished they didn’t save into that pension or ISA.
If are reading this and are at one of these stages, I hope this helps to provide clarity. If you are reading this and are thinking I have completed them all….is it possible to help your children or grandchildren, perhaps this could be stage 6?
