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Increase your contributions

Do the best you can until you know better. Then when you know better, do better.

— Maya Angelou

Regarding money, a lot of people like to tinker. They move their savings from one account to another, then maybe put it in a cash ISA, then maybe move it to a stocks and shares ISA in pursuit of a higher interest rate. Then move it to a different ISA provider, then move it to the latest internet bank offering a better interest rate with only a £2 a month fee. And on and on it goes. People love tinkering. And if they are investing, it’s even worse. They sell this stock and buy that stock. They move from stocks to bonds and back again. Then they move their money to currency trading, then peer to peer, then to crypto currency. Back and forth, around and around. This broker and then that broker. All the while picking up expensive transaction fees.

What people really should tinker with is their contributions. They should pick a good returning cash ISA, if they are building their emergency fund, and then stick with it, until their interest rate term changes. If they are investing in the stock market they should pick a low fee stocks and shares ISA with a provider like Vanguard, and then invest in an index fund with great diversification. After that the only tinkering they should be doing is with their savings rate.

If they are saving 10% of their net salary each month, they should then tinker with the savings rate and increase it, on a regular basis. Maybe three months after saving 10% of their net salary they then increase it to 11% or 12%, or be bold and go to 20% or 30% or 50%+. And they should rinse and repeat this often. Your savings rate is one of the most important things you can control in your journey to becoming financially independent.

If you get a pay rise then this should be a mandatory step for increasing your savings rate. You should increase your savings rate by the amount of pay rise you received. This is because you’ve been happily living off your salary before the pay rise, so you’ll continue to live off the same salary as before and bank the increase each month.

This approach should also happen when tinkering with your workplace pension. You should nudge that up regularly as well, and especially after a pay rise.

So rather than trying to be Gordon Gecko and selling high and buying low, as the majority of the smartest people in the world of investing fail to do this, so why should you be any different? You should instead tinker with your contributions and keep increasing them, even by 1%, and it will make a hell of a difference.

To close, allow this example of a 1% difference.

Let’s say as a net salary you earned £1,000.

So a 10% savings rate would be £100. Invest that £100 a month in the stock market and get a 7% return over 40 years and the amount would be: £247,154.20.

Now 11% is £110. Only £10 more a month. Maybe the cost of a pint of beer and a glass wine. Do the same calculation above and the total is £271,869.62.

The difference is a whopping £24,715.42! Just for an extra 1% increase.

Let’s look at an extra 10%. So our savings rate is £20% or £200 a month. Same calculations, and the total is: £494,308.40!

Tinker with your contributions, leave everything else alone. You will increase your wealth and minimise fees.

Murder your expenses

The stuff you own ends up owning you.

— Chuck Palahniuk from his debut novel Fight Club

Decreasing your expenses increases your saving rate power.

Income is money coming into your bank account. It’s your salary. It’s the rent your tenant pays you to live in your rental property. It’s the dividends that companies pay you for owning a share in their business via the stock market. It’s the money generated from other businesses you have. Income is a good thing.

Expenses are the opposite to income. Expenses take money from your account. Expenses are also known as outgoings or liabilities.

The trick to getting rich is increasing your income and reducing your expenses. The more money you have coming in and the less money you have going out results in a surplus of money in your bank account which you can do something with. Such as:

Debt – You can pay off more debt, if you’re still in debt.
Emergency fund – You can save more in your emergency fund until you get six months’ worth of expenses saved up.
Savings rate – You can increase your savings rate and put more money into the stock market to buy more units of low cost index funds, such as the ones Vanguard offer.
Pension – You can add more money to your pension every month to save for retirement, which results in reducing the tax you pay.

Increasing income is achievable; you can ask for a pay rise, you can find a different job paying more money, you can start a small passive income business; there are a number of options. But maybe at this current moment those options are not available. One way to create more surplus money each month is to reduce your expenses.

Reducing your expenses is in your control.

There are two types of expenses.

Fixed expenses – these are usually monthly expenses, such as gas and electricity, mortgage or rent, gym membership, Netflix, curry club monthly dinner, council tax etc.

Discretionary expenses – lunches, petrol, Friday night drinks, visiting the pictures on a Sunday afternoon when it’s raining, buying a new pair of shoes, the daily Mars bar.

What you need to do first is write out all your fixed expenses, down to the last penny. A good document to use is Pete Matthew’s Meaningful Money Budget Planner. Here you’ll be able to plan your entire financial life on a single page. Also, he has a brilliant podcast, that I thoroughly recommend, and an amazing book.

Once you have all your fixed expenses written down, put them in order from highest amount at the top to lowest at the bottom. Take a look at the total amount of what all these fixed expenses equal, I bet it’s a high figure.

Now for the fun part. Your job is to remove or reduce these expenses from your life.

To remove the expense ask yourself a couple of questions, such as when did I last use this product/service and what value is it bringing to my life? An example is Netflix. If you haven’t watched Netflix this month then go to your Netflix account and cancel it. That’s at least £8.99 a month saved from now on. That’s a whopping £107.88 a year. Over 10 years that’s £1,078.88 saved. The famous blogger Mr Money Mustache has a great calculation for monthly expenses. He likes to show you how much an expense is costing you, rather than investing that money in the stock market at 7% compounded. He takes a monthly expense and multiplies it by 173. So if you invested your £8.99 Netflix subscription into the stock market over 10 years, it’s actually costing you £1,555.27! Netflix has some really great content, but even having Nicole Kidman and Leonardo DiCaprio acting live in your living room isn’t worth £1,555.27. If you don’t use it, remove it.

Removing expenses is easy, as you just cancel the product or service. But what if you need the product, such as electricity? Most of us can’t build a solar panel station in our garden to power our homes with electricity. What you can do though is look for a different provider that offers the same service or better, at a lower cost. Use comparison websites such as Money Savings Expert to get information about the best deals. Or simply call your provider and ask for a better deal. Tell them you are considering leaving and want to know what deal they can offer. Always ask for a ridiculously low price, they can either say yes, which is great, or they can talk you up slightly, and it’s still great as you’re still paying less. Or they can say no and you move to one of their competitors and put a nail in their coffin.

This exercise should be conducted regularly as these providers have a sneaky way of nudging up the prices by a pound or two every six months, So, if they can raise them you can also reduce them. You can also do this with debt, especially debt such as credit cards. Call your credit card company, tell them you want to move your debt to another credit card company as they’ve offered you a 0% interest rate for 3 years and ask your provider if they can offer something similar. It costs these companies thousands of pounds to get a new customer. The last thing they want to do is lose an existing customer. If you can get even 12 months worth of 0%, that gives you a full year where you’re not paying interest on the debt, so you can overpay on your principal for that year and get out of debt faster.

Discretionary expenses takes a little more skill. First of all you need to know what you’re blowing your surplus money on. Is it cakes or cups of expensive tea? Is it a vinyl record habit you just can’t quit, is it getting the odd taxi to work when you get up late, is it buying pay per view boxing matches that make you wait up until four in the morning and are over in the first round, is it that three in the afternoon packet of £1.50 crisps that you buy every day?

Whatever it is, you will first need to track your discretionary expenses. Do this for a month, write down every single thing you buy, you can use a credit card or debit card for this and tot it up at the end of the month, but I find writing it down manually either on paper of tapping it into my mobile telephone works better as there are some things that don’t accept credit cards, like the vending machine at work.

Once you’ve tracked how much you spend at the end of the month add it all up and categorise the items, such as any snacks you purchased, call that snacks; any meals out in restaurants, call that restaurants; or however you want to word it. The trick is to group expenses so you can see where the damage is. If you’ve blown £400 in restaurants this month, then immediately that’s a discretionary expense you need to cut. Instead of eating lunch in restaurants five times a week, cook more food at night and bring the leftovers in the next day for lunch. If you buy a tea at an expensive coffee shop in the morning, bring your own tea from home in a thermos, or buy a box of teabags and leave them at work, if, or course, your company doesn’t supply teabags. And if they don’t supply teabags, get out of there quick! There’ll be no huge pay rise coming your way.

Once you cancel or reduce your fixed expenses, and stop or reduce your discretionary expenses you’ll find you’re floating on a sea of extra money that can go to paying off debt quicker, building your emergency fund of six months’ worth of expenses or investing in your pension or the stock market for later in life. And that’s not a one off thing, that surplus of money will be there every month. Your job is to put it to use. Make it work for you to earn more money.

One analogy I like to use is imagine your bank account is a bucket. When you get paid you fill it with water. Each expense is a hold in the bucket and the water trickles out. If you can plug those expense holes then more money will stay in the bucket until one day it overflows out the top rather than through the holes.

Murder those expenses, because they’re doing their best to murder the financial you.

The emergency fund

Dig your well, before you’re thirsty.

— Harvey Mackay

What is an emergency fund?

An emergency fund is a ‘pot’ of money, that you save up, which, if an emergency should strike, you can use to end the emergency without damaging your finances.

An example would be that you have £2,000 saved in an emergency fund. When you wake up on a cold winter’s morning and jump in the shower, you’re met with a downpour of freezing cold water. Your boiler’s knackered. You call a plumber and he or she tells you the boiler needs to pass on to the afterlife of the local tip. Meaning you need a new boiler. They tell you the cost of a new boiler and fitting will be £1,200. It’s time to crack open the emergency fund.

Now, imagine of hearing it will cost £1,200, and you don’t have an emergency fund. What’s your options?

Borrow from a family member or friend? – Nightmare. To repay £1,200 will take months. The relationship won’t last that long. And what if the family or friend has their own emergency and now can’t solve that because you borrowed off them? I always say, “Once a borrower off friends and family, always a borrower off friends and family.” I know a fifty-year-old man that still constantly borrows from his retired mother.

Use your current monthly salary? – Difficult. Unless you’re earning a large salary and have a handle on your expenses which leaves you £1,200 over each month, this isn’t going to happen. And even then, that month will be one hell of a long month.

Stick it on your credit card? – Never! Only a desperate fool would do this… Which, yes, we’ve done things similar, believing we’ll pay it off before the statement arrives. And we never do, so the £1,200 has interest whacked on it, and it takes months, maybe years to clear the balance, resulting in the £1,200 costing £2,000+. Plus, the psychological knock on could be horrendous. Once you’ve got debt on your credit card you then say to yourself, “Well, I’ll use the card to put petrol in the car. It’s only £50.” And before you know it, that card is maxed out and you’re in serious water.

Get a payday loan? – Hell… Utter hell. See credit card above and times the situation by one thousand. Payday loans are the last stop of the completely desperate and financially naive.

Get finance from the boiler company? – No! That’s what they want. Now they’ve got you.

There are probably another hundred options to go with the above. But, whatever the option, there’s nothing better than the emergency fund option.

Why is the emergency fund such a good option?

Using your emergency fund to solve an emergency is the only option for dozens of reasons. Below are some of the best reasons.

Avoid debt. By using your emergency fund to solve the boiler issue means you don’t get yourself into debt. Debt is, by far, the killer of your financial life. If you go into debt you have to pay it back, almost always with interest; meaning that £1,200 costs more. It could cost you hundreds of thousands of pounds more. Going into debt is like opening a tap. Before you took debt, the tap was shut off tight. Not a drop came out. Now, you’ve loosened that tap, and water is dribbling out. Next month you don’t pay the debt off and the minimum payment at least needs paying, so the tap opens some more. Then the psychological knock on happens and you add more things to your credit card, day to day things like petrol, shopping, a Saturday takeaway. Before you notice the tap’s fully open and debt spills out everywhere. Unfortunately, the plumber can’t help with this. No. The answer is to use your emergency fund.

Maintain credit score. Now imaging you start missing payments, maybe default on a loan, and two huge geezers called Biff and Thump arrive at your house. Your financial self is ruined. What will the neighbours think? What will you think? Plus, your credit score plummets, so forget about getting a loan in the future for the next emergency. Your financial self is toxic. No. The answer is to use your emergency fund.

Preserve your well-being. With the above going on, you won’t be feeling like you’re beside the pool bar having a pina colada on an early summer evening in Greece. You’ll feel awful. You might not be able to sleep, you might not be able to work, you might fall into a funk and your relationships with family and friends might suffer. Imagine the above happens. You could lose your job. Once your health is impacted you can’t put a price on it.

No. The answer is to use your emergency fund. If you use it you won’t sink into debt; nor damage your credit score, so you can still achieve those financial goals, such as buying a house or going on holiday; and not get sick through worry. It’s an old saying but true, nothing is as important as your health. By using your emergency fund, actually the reverse will happen. You’ll feel great for not having to worry about the emergency, as your emergency fund covered it. You’ll feel, and rightly so, proud of yourself. You had the foresight to squirrel away the money in the past to help deal with today. That is being financially mature.

And, what’s so strange about the emergency fund is, and I paraphrase the great Financial Planner Pete Matthew here is, “Once you get a pot of money saved away for a rainy day, it suddenly stops raining and is always sunny.” It’s a bit like a small invading army deciding not to attack a country that has a huge army with lots of weapons. It won’t win.

How to build an emergency fund?

The emergency fund is the keystone to financial freedom. If you can achieve this, you can do anything with money. You can become rich. Yes, rich. But, on the flip side, if you can’t achieve this, everything else, such as budgeting, paying off debt, getting protection like life insurance, buying a house, saving into a pension, and investing your money almost certainly cannot happen, meaning you’ll never have financial freedom. You are not poor, you’re poor with money. There’s a difference.

I see an emergency fund based on levels. A bit like a karate student has different belts. They start with a white belt: inexperienced, then move through the different coloured belts until the black belt: experienced.

Level 1: £100

The first thing you need is a pot to put your money in. So, go and open some type of savings account. It can be a regular savings account from a bank, a bit like a current account. Or, my recommendation would be open an instant cash ISA. An ISA is an individual savings account. Most banks do them, and if you bank online you can probably get one with your online banking or via your mobile banking app. The great thing about ISAs are that they’re tax-free! Thank you government. Every year you can add £20,000 into the ISA. The interest your money makes in the ISA does not get taxed by the government. You can open an ISA with as little as £1. I actually lent someone £1 to open an ISA as they didn’t even have £1. Seventy days later they had £550 in there. Now that’s financial focus. (Note: just using a regular savings account can also provide tax free money, due to your personal savings allowance. I don’t know too much about this, but read up on it if you don’t want to use ISAs from the amazing website The Money Advice Service.

If above fills you with dread, as you’ll worry about what ISA to get, what interest rate etc etc, then don’t worry. On instant cash ISAs, the interest rates are woefully low, so whichever one you get won’t make much of a difference. Plus, once you become more financially aware you can shop around for a better ISA at a later date. As of now, the goal is just get an ISA. It’s like painting the garden fences. If you don’t at least buy the paint, there’s no chance you’ll paint them. The ISA is like the paint. If you don’t have one you won’t save into one.

Okay, you have the instant cash ISA, here comes the tricky part. Put £100 into the ISA. For some this might not be a lot of money. For others, this might be a fortune. I feel the roundness or £100 smackers has a finite feel to it. Even if you took out £1 it wouldn’t look right. £99 is just not as elegant as £100.

If you can put £100 straight into the ISA, then great! Well done. If you can’t then you need to focus on the next pay day. This can be done by budgeting. There are loads of fantastic blog posts about budgeting out there online or in books at the library. You should read those immediately after this.

The only way to really make sure you will put £100 into the ISA is to automate that process. By this I mean set up a standing order to automatically take £100 from your wages, as soon as you get paid, and put it in the ISA. Again, there are loads of information about automating money that you should go off and read. You can probably set the standing order up online or via a mobile banking app. Or you can call the bank or visit a branch. But get it automated with a standing order. If you don’t, there is little chance that you’ll manually transfer this £100. Think about it. You’ve never done this before, so why would you now all of a sudden become a person who has the strength to move the money manually? Automate it. Then once the money has been moved into the ISA, sit back, open your mobile banking app or look online or go to the bank and ask for a statement and marvel at that beautiful £100 in the emergency fund, and say to yourself, “I did that.” This is the beginning of becoming financially free.

Level 2: £200

Last time you put £100 into your emergency fund. Maybe the hardest part was not putting it in, but keeping it in there and not touching it. An emergency fund isn’t a lucky dip fund where you’re in and out of it more times that the hokey cokey. It is there for emergencies. A pizza on a Friday night because you worked late is not an emergency, no matter how starving you are.

Now, level two is £200. A £100 isn’t to be sniffed at, but £200 is twice as nice. If you set up automated savings with a direct debit, then money from your salary should have gone straight in. If your ISA balance is under £200 then keep focused and wait until the next pay day or the next until you get £200 as a balance. If you are already at £200 or maybe a bit more, then great. Don’t touch it. Keep focused.

Level 3: £500

The next step is £500. That’s a lot. It’s half a thousand pounds! But what an emergency fund you will have if you have £500 in your ISA. That’s the type of savings that can hold off quite a big emergency.

If you’re automatically saving £100 a month then it will take you five months. Is that a long time? Depends how you look at it. At the moment it is a long time away. But when you hit the five-month mark and you see £500 in your ISA, then the time will be worth it.

To become financially free a skill you need to learn is delayed gratification. That means you hold off something today to enjoy it in the future. An example is, imagine you’re going on a day-long hike. You’d never drink all your water at the start of the hike because you know that in a couple of hours you’ll be gasping for water. It’s the same with saving money. You make sacrifices now so that the future you can have a nice life. One of the most famous and successful investors of all time, Warren Buffett said, “Someone is sitting in the shade today because someone planted a tree a long time ago.”

If you are automatically saving more than £100 a month then you’ll get to the £500 mark quicker. But either it takes longer than five months or less than five months you’ll end up with the same result: £500 in an ISA. Plus, don’t forget the savings in your ISA creates interest. Free money! Unfortunately, at this amount of money and with interest rates so low it will be a matter of pence. So maybe hold off Googling for personal butlers for the time being. Still, free money is free money. And that interest compounds. Look up compound interest to understand the greatest friend you’ll have in your financial life.

Level 4: £1,000

The big one: £1,000. Here you make a conscious decision to either stay the way you were before you started the emergency fund or continue with changing your financial life. You can opt to stay broke, or in debt, never having enough, always overspending, always borrowing, always worrying about money, always destined to be poor with money. No matter what your age, if you’re twenty or seventy, you have a long time ahead of you. And to continue to live how you used to is no picnic. Or, you can make the conscious decision to become financially free. To take responsibility of how you deal with money.

If you reach level four and get £1,000 into your emergency fund, then there’s no stopping you. You’re doing better than not thousands, not hundreds of thousands, but millions and millions of people. In his book The Automatic Millionaire David Bach says, and I paraphrase. “4 out of 10 American’s are so poor with money they can’t get hold of $400.” That’s over one hundred and thirty million people! Build up the emergency fund to £1,000 and for once, you’re ahead. It might take time. 10 months if you automatically save £100 a month. But that’s okay because you’ll have £1,000 in your emergency fund… Now, if you’re saving £200 a month it will only take 5 months. If you’re saving £333 a month, you’ll be there in 3 months. The more you save the quicker the emergency fund builds.

How much is enough?

How much do you need in an emergency fund? The best way to calculate this is, count up every expense you have: rent or mortgage, gas and electric, council tax, phone bill, internet, petrol and an average food cost. etc. Add them all up. For an easy number, let’s say it’s £1,000 a month. You need, at least 3 times that: £3,000. So, if something terrible should happen, like you lose your job, you have £3,000 in the emergency fund to weather the storm until you find a new job. That three months stops you going in debt. Great! Plus, stops you missing payments and killing all your good credit score work you’ve done in the last couple of months. Three months’ expenses is the minimum. My recommendation would be to get to six months’ worth of expenses. That’s £6,000. Sounds like an impossible figure at the moment. But once you get in the habit of automatically saving, it will become easier and easier. There’s also numerous things that can be done to speed this up and increase your contributions to your ISA, such as spending planning (fancy word for budgeting), getting out of debt, increasing your income, calling your providers and getting a better deal etc etc.

And why is six months better than three months?

The obvious answer is more money is better. The subtle answer is, imagine you have three months’ worth of expenses saved in your emergency fund. You lose your job and it takes you three months to get a new one. You’re back at square one, £0 in your emergency fund. And what if it takes four months to get a job? You’re in debt, a land you vowed never to enter again. But if you had six months’ worth of emergency fund and it took you three months to find a job, well guess what? You’ve still got three months’ worth of expenses in your emergency fund. If an emergency comes up, you can handle it.

And, of course, you could say, “Well, what if I don’t get a job after six months?” And that is true, but it’s less likely to happen. I know of some people that have two years’ worth of expenses. Whatever makes you sleep easier at night is the target you should aim for. I have one year’s worth. I sleep like a king. Notice I didn’t say sleep like a baby, any of you who have children know babies don’t sleep.

In summary

  • An emergency fund is a pot of money that you save.
  • You only withdraw money from the emergency fund in a real emergency, such as you lose your job.
  • You do not withdraw for things like a night out for someone’s birthday, a holiday, you want a shiny new car, you are too tired to cook so you order a Chinese takeaway.
  • An emergency fund is the keystone to your financial freedom. If you can achieve an emergency fund, then you develop the habits and focus to become rich.
  • An emergency fund actually wards off emergencies.
  • An emergency fund stops you going into debt.
  • An emergency fund stops you missing payments.
  • An emergency fund is held in an account where you can get instant access to it, such as an instant cash ISA.
  • An emergency fund should be built in levels, one small step at a time. Achieving small targets, little but often.

Conclusion

As you can tell, here at Pound Pence we’re huge fans of the emergency fund. The reason being we’ve seen it work. It really does do all of the above. People have gone on to becoming financially free. And it all started with an emergency fund.

Now let’s say your emergency fund of six months’ worth of expenses is £5,000. The last question I leave you with is this. How would you feel right now if you had £5,000 in an ISA, sitting there building interest, and protecting you from practically every financial scare life can throw at you? It would feel pretty good, right? Then go and do it, so that the future you can experience that feeling.

Save 1%

Motivation is what gets you started. Habit is what keeps you going.

— Jim Rohn

The first time I “really” realised I needed to save money was in my thirties. Far too late, but not too late. I often set myself a New Year’s resolution of saving £1,000. I normally got close to achieving it, then some small “emergency” popped up, or what I thought was an emergency at the time, but really was more like a “want” and I had to spend what I’d saved. The £1,000 felt like the other end of the galaxy. No matter what I did, I couldn’t achieve it. The problem was, the things I was doing to save, were not correct. Some of the things I did were:

  1. Not saving automatically – the money I should have contributed every month, £83.33, was not coming directly out of my bank account (standing order) as soon as I got paid. I needed to move the money manually, and if there was money to move, I didn’t do it, as I often found something else to spend it on.
  2. Not paying myself first – As I was not saving automatically, I didn’t pay myself first. Paying yourself first means as soon as you get paid, before you pay the mortgage/rent, electricity, gas, etc, you pay money into your savings. I never wanted to be without money during the month, so I held off until the end of the month, and told myself I’d move the money then. But or course, at the end of the month there was no money left to move. If I had paid myself first, I would have simply readjusted my spending through the month to compensate.
  3. Not having an emergency fund – By not having money saved in an emergency fund, when an emergency hit, I had to use what I’d saved of the £1,000, meaning I never got to save that £1,000 by the end of the year.

By not utilising the three above best practices, I set myself up to fail. The problem was I simply didn’t know about the three things above. I was financially naive. I realised I’d had this New Year’s resolution for the last four years and had never achieved it. Somehow, without realising it fully, I began searching YouTube and started finding ways to become better at saving money.

The first video I discovered was from Brian Tracy called The Absolute Best Ways To Save Money. In this video he suggested saving 10% of your net salary (salary you get in your bank account after tax, pensions, healthcare, etc). 10%! Jesus, I couldn’t believe it. Where was I going to be able to save 10%? The man must be a raving lunatic.

Note: 10% really is the industry standard. It’s the minimum the financial industry says you need to save. Most people say more than 10%. In the FIRE (Financially Independent Retire Early) community they say save 50%+.

Anyway, back to Brian Tracy. He’s saying save 10%. That just couldn’t be done. Then he said, if you can’t save 10%, then start with 1%. Now that is a number I could… probably, make. Brian Tracy said, if you can only save 1% then just save 1%. It’s not the amount that you’ll be saving that changes your life, it’s the habit that you form.

Immediately after watching the video I watched it again, to make sure I didn’t misunderstand. Then, straight after that, I put a reminder in my iPhone calendar to save 1% of my net salary as soon as I got paid. I was going to pay myself first!

So profound was this knowledge, I told several people, quickly, of my plan. Note: often a bad thing to spread the word about your financial goals. One person actually laughed and asked what I’d do with the 1% of money saved. I ignored the cretin. I had this 1% rule so fixed in my mind that as pay day approached, I watched the video again several times. Brian Tracy turned into Micky and I was Rocky. Every time he mentioned in the video I should save 1% I got more charged up. I was going to do it.

Then, on the morning of the 26th of that month, my standard pay day date, I woke before 5 o’clock, opened my mobile banking app and moved 1% of my net salary into my ISA. It felt amazing. The money was gone, tucked into an ISA: safe, secure, tax-free, and all mine.

I must have looked at that ISA balance 200 times that month. And when the end of the month came, and I realised I’d not spent it, and the following day I was going to do it again, I knew I’d somehow, through sheer YouTube serving content luck, stumbled onto the domino video, the spark plug video, the starter pistol video. There was no turning back. The next day, when I got paid, I once again moved 1% into my ISA. Same happened the following month. And the one after that. I did this for 6 months. There was little showing in that ISA, but that didn’t matter. The habit was formed.

In the video, Brian Tracy said once the habit is formed, we should increase our percentage contributions and raise them, even by a percentage. Still completely financially naive, I thought that going to 2% was impossible. I continued Googling, looking at videos on YouTube and stumbling across podcasts. Once I found some podcasts and heard that all the experts I was listening to: Warren Shute, Pete Matthew, Andy Hart, were saying the same as Brian, that 10% is the minimum, then I knew I had to take the leap and increase my percentage contributions, and that’s what I did.

I’m happy to say I’ve completely passed the 10% mark a long time ago and continuing to increase my contributions’ percentages on a regular basis. My goal is to be like the FIRE blogger The Escape Artist and save 50%+. Let’s see.

Note: The Escape Artist’s blog is amazing. Treat yourself and read every post he’s done. He’ll open your eyes and make you laugh.

Nothing begins until debt dies

This would be a much better world if more married couples were as deeply in love as they are in debt.

— Earl Wilson

Debt is a right git. Once it’s got you in it’s filthy paws, it does everything to never let you go.

What is debt?

Debt is money you borrowed. An example is you take a loan to buy a product, such as a new shiny television. It cost £500, so you borrow £500 from a bank as a loan. You then have to repay that £500. Almost always, debt comes with interest. Interest is an amount of money, usually a percentage of the amount borrowed, that you pay to the money lender, such as a bank, as a reward for loaning you the money. Why else would they risk their money to you if they are not getting something in return?

For arguments sake, let’s say you borrow £500 with a 1% interest rate. You pay back £100 a month. After 5 months you will have repaid the £500, but the loan will still not be cleared as you also needed to pay the interest each month. So the loan of £500 actually cost you £501.25. Maybe that doesn’t sound too bad for the use of the money. But, remember, that’s only with a 1% rate. Try and find a loan for 1% and you’ll be looking for a needle in a haystack. Credit cards often charge 19% so in the same space of time you’ll have repaid £523.99. Store cards are around 29% so you’ll have repaid £536.82. And payday loans, which are only for the desperate and financially naive, can be 100%, so you’ll have repaid £631.66. Now you see the problems with taking debt.

Debt costs you money to repay. The deeper you drown in debt, the worst it becomes. People often end up so far in debt that they continue borrowing more hoping somehow this will help, but all it does is drag you further down. Debt can have a terrible impact on your financial life. If you begin to miss payments, default on a loan, then there can be serious implicates on you, such as you could go to court, you will ruin your credit score and not be able to get other forms of debt, such as a mortgage, resulting in you renting all your life, wasting money and having no home to pass onto your loved ones. Debt also causes stress. People often struggle to sleep at night, become unhappy, have friction between relationships, the list goes on and on.

So what’s the answer?

Level 1

The first thing you need to do is make a life long agreement with yourself to stop borrowing money. Write it down. Write it in anyway you want, but write something like, “I chose never to borrow again.” And then sign it. Yes. Sounds stupid, but sign it. No one will know.

The only thing that borrowing money has done for you is to get you into debt. You need to make tough decisions.

An example is you and your family have a summer holiday every year. You use debt to fund this. When next year comes you must sit down with your family and say you cannot go on holiday. You don’t have the money for it, and you are not willing to go into debt to fund it. Instead, have the holiday at home. Summer is a pleasant season in Britain. We often have hotter days than in Europe, so have the holiday at home. A day in the garden. A day in the woods. A day by the river or at the seaside. This home holiday will be so much cheaper, and if you put a lot of effort into it, everyone will have fun and won’t miss boiling, dusty Spain with tap water you can’t drink and uncomfortable beds and blistering sun-burnt skin.

Level 2

Once you’ve made an agreement to no longer go into debt, you now need to find out everything about the debts you have.

Who is the provider?
What is their email address and telephone number?
What is your account number with them?
How much debt do you owe them?
What is the interest rate on that debt per month?
What is the minimum payment you have to pay them?
How do you pay them? Direct debit, pay in a bank etc.

Once you have all that information, list each debt side by side and put them in order of the lowest amount of debt in the left hand column to the highest amount. Also when you’ve done this, add all the totals of the money you owe so you have one total debt figure.

Whatever the amount, small or ginormous, stay focused. Only someone poor with money would bury their head in the sand now and borrow more. That’s not you. You’ve made a pledge with yourself to never borrow again.

Level 3

Now make a life long agreement with yourself and choose to repay your debts in full, as fast as you can. Write it down. Write it however you want, but something along these lines, “I borrowed the money, so it’s my responsibility to repay it, in full.”

Now let’s look at how to repay it.

First of all we need to make some fake debt up for this example. Let’s pretend I’ve got the below debt.

Credit card A
£2,500
19%

Credit card B
£500
18%

Car Finance
£7,000
11%

Store card
£3,000
29%

Loan
£1,500
8%

In total I have £14,500.

Now I’ve made the pledge that I will never borrow again and I will repay my debt.

Option 1: Get help.

There are a number of organisations that help people with debt if they are struggling or can’t pay it. Best to discuss this with the Citizen’s Advice Bureau and they can offer help. I know nothing about these organisations so cannot comment.

Options 2: The Snowball Effect – highest interest rate.

Financially beneficial to your wallet. The debt to tackle first is the store card at 29%. The interest this creates is killing your financial self. You should pay the minimum payment on all of your other debts apart from the store card. On the store card you throw every penny at it until it is repaid. Once that’s done you move onto the next highest interest rate which is credit card A. Again, you pay the minimum on all other debts and throw as much as you can at credit card A. The plus point here is you are no longer paying off the store card, so whatever money you threw at that, plus the minimum payment you were paying on credit card A, now accumulates and you are hitting the debt with two loads of payments. Once you pay off credit card A, you move onto credit card B and throw all your money at that. And this snowball of paying off debt continues to roll picking up more and more money as you pay off another debt. You do this until you are debt free!

Option 3: The snowball effect – lowest owed amount first.

Option 2 is by far the best for your wallet. Option 3 however has great psychological power. Option 3 says forget about the interest rate, you’re already in bad shape. Go and pay off the smallest loan first. So rather than focusing on the 29% store card, you focus on credit card B at £500. For all other debts you pay the minimum payments, and you throw everything you have at credit card B. You will get this debt repaid quicker making you feel like you’re getting somewhere faster. It’s one less debt to worry about. And it’s one less debt generating interest. Once you’ve repaid the lowest amount, go for the next lowest, which is the loan of £1,500. You’ll be throwing all the money you were giving to credit card B to the loan, plus the minimum payment you were paying to the loan, so again, you’re hitting the loan twice as hard. Once that’s repaid go to credit card A at £2,500. And on and on until you’re debt free!

My favourite option is option 3. But it’s down to the individual. There are other things you can do to help repaying your debt.

The first is get an emergency fund.
The second is create, use and stick to a spending planner.
The third is call your providers and haggle, which is an additional option called option 4.

Option 4 – The haggle

Now you’re not a pushy person, you don’t like conflict, you’re easily sold to and couldn’t sell water to a thirsty millionaire. Don’t worry. The haggle isn’t like a stock market film from the 1980s. The haggle is this.

You call your provider, credit card company, loan company whoever, and, ever so politely, you tell them you want to review your terms with them. You tell a little white lie and say you’ve spoken to their competitor and they’ve offered you better terms. You say you’d love to stay with them because the customer service is so excellent. This will please the person answering your call. Life in a call centre can be pretty tough and they don’t often get compliments on all the amazing work they do. You say you’d like to stay, but you need a better offer. Before they can agree or disagree you state what you want. You want your interest rate to be 0% for X number of months. Go high. Don’t say for the next 3 months. I had a credit card with 39 months at 0%, just because I asked for it. And what’s the worst they can say? “No.” But what if they say yes? If they do you get 0% interest for many months meaning everything you pay to that provider goes off your principle debt and not as interest. If they do say no then ask them what they can do for you? If they provide a lower interest rate than you have now then take it. Anything lower is good. Of course read all the terms and conditions to this deal. But if it sounds good, then take it. Every little helps. If they say no and ask you if you want to cancel, you can tell them you have to pop out for a while and will ring back later. That way they don’t cut you off. Then you have a choice, you can go and try and find one of their competitors, tell them you have a debt with your current provider and want to transfer it to them, but only at 0% and for a long time. If they accept this offer, move your debt. If they don’t, can they improve what you have with your current provider? If so, take it, but read the terms and conditions. Even if you got 1 of your debts like this, it will be a benefit to you. If you got them all, that would be amazing.

And don’t forget, these providers want to keep you. It costs them lots of their money to acquire a new customer. You’re in debt for a reason, because previously you were poor with money. The provider doesn’t realise you’re becoming financially aware. You’re playing the game by their rules and you’re going to win.

Conclusion

Whatever option you choose, it needs to be right for you. The aim is to repay the debt and become debt free as fast as you can. You need to stay focused and disciplined. You need to constantly revisit the pledges you made of never going into debt again and repaying the debt if full.

On a side note, here are some great resources I’d recommend about debt:

Ready, aim, fire!

You must give a lot of thought to money and finances or you will have shortfalls and problems in these areas all your life.

— Brian Tracy from his book Goals!

At the beginning of your education to become financially aware, the first thing you need to do before you start planning & organising, before you build an emergency fund, before you create, monitor and stick to a spending planner, before you repay debt, before you get protection (life insurance, critical illness, income protection), before you focus on your pension, and long before you start investing, the first thing you need to do is set a financial goal or goals.

What is a goal?

I think most people understand what a goal is, but for my benefit, let me state it. A goal is something you want, which you don’t have now or you haven’t done yet. A really sexy goal, for this example only is, on Saturday morning, when I wake, I set myself a goal of cleaning the bathroom. Rock ‘n’ roll, right? Gonna live forever… in that germ free, heavily bleached bathroom.

Let’s set another goal. From today to 30th of September, I am going to run one mile a day in order to lose 3 pounds of weight.

Last one. Every Sunday evening, I will write two thousand words of a novel, which will result in one hundred and four thousand words after a year.

I think the majority of us set life goals without realising, such as cleaning the bathroom. A big portion of us set goals at work with our boss. We set goals at the beginning of the year and track them on a regular basis. Why? Well, that’s easy. Your company gives you money to do stuff. They want you to do the stuff that will help them. They want you to keep doing the stuff to help them by you staying on track, resulting in them getting stuff done by you. Elegantly put.

Oddly, I find I stick to my work goals much more than my personal goals. When I asked myself why, I discovered three reasons, which, when they were told to me ages ago, I thought the wisdom of some poor goal-training expert my employer hired for the day was chatting utter nonsense. But, in hindsight, it’s true. I stick to my work goals more because:

  1. I actually write them down and keep a copy of the goal
  2. I regularly check in/track how I’m doing against the goal
  3. I told one person (my boss) about the goal and feel I’ll let them down if I don’t achieve them

I want to be rich

You might have said this to yourself, or heard people say it, but how do you become rich? If you’ve said it to yourself, why aren’t you rich now? Try to answer the below questions.

How did Andy Murray win Wimbledon? How does my neighbour’s garden look so perfect? How did my employer become so successful? How did my doctor become qualified? How did England win the cricket world cup?

Answer: Goals!

All of the above had a clear goal, a target, something to strive for and achieve.
Yet with money, we never set goals. Why is that? We have these pie in the sky goals, such as become rich, own a mansion, win the lottery, but nothing concrete, nothing specific or measurable. Nothing we can return to monthly, weekly, even daily and keep financially focused.

A financial goal

A financial goal is the same as a work goal or a personal goal. You think what you want. “Want” is the key word here. Once you know what you want, then you write it down, then you decide whether it’s achievable, then you figure out how to achieve it.
Example of a financial goal: I want an emergency fund of £1,000.Another example: I want to pay off my credit card balance of £500.

Other financial goals

This list isn’t exhaustive, but some things I thought of.

Repay credit card debt
Increase credit score
Increase income
Build an emergency fund
Stop wasting money
Save for a house deposit
Repay loan
Understand tax
Retire early
Invest in the stock market
Reduce expenses
Learn how to create a spending planner (budget)
Leave your family financially free
Buy life insurance, critical illness and income protection
Stop borrowing from friends and family
Save every month
Pay for a holiday
You get the idea, right?

S.M.A.R.T. goals

Sorry everyone, I’ve gone all corporate. In the dreadful world of business there’s a concept of S.M.A.R.T. goals. It sounds rather pathetic like all the other acronyms, and it is, but actually, it’s not bad. It’s difficult sitting on this fence all day long.

Smart goals stand for:
Specific
Measurable
Achievable
Relevant
Timebound

If you Google them, or Bing them, haha, you’ll see different variations of the naming conventions for each letter, but they’re all the same.

Below is an example of a S.M.A.R.T. financial goal I did with someone I was money coaching. Their smart goal was to, “Save £2,000 by 05/04/2020 in order to begin building an emergency fund.”

Let’s do some groovy analysing here, shall we?

Is the goal specific? – Yes. It states an amount, a due date and a reason for doing it.

Is it measurable? – Yes. We can measure the amount of money relevant to the amount of time to save in.

Is it achievable? – Yes, but. This person who came to me for money coaching was dreadful with money. Yet they earned around the average UK salary, didn’t have any children or huge amounts of debt, still lived at home. So yes they could achieve it.

Is it relevant? – Yes. The person wanted to become financially aware. They were sick of living pay packet to pay packet and having nothing to show for a month’s worth of work apart from owning family and friends money.

Timebound? – Yes. Last day of the tax year, 05/04/2020.

The other financial goals the person had was:

  1. Repay debt (£2,500),
  2. Improve credit score from very poor to poor (It’s a slow process, but a good one).

Setting the goal(s)

You’ve got to find your want, whether it’s building an emergency fund, repaying debt, buying a house, retiring, whatever it is. Until you know your want and can produce a financial goal, you have nothing to aim for. It’s like getting in your car and just driving, it might be fun for a while, but you end up lost.

Staying the distance

Now that you have a financial goal, what do you do with it?

  • Put is somewhere where you see it often, could be on your phone, print it off and put it in your wallet, tape it to your kitchen cabinet.
  • Make scheduled appointments to revisit it. In the first two months, revisit it at least weekly. Then, if you’re sticking to it correctly, maybe reduce it to fortnightly. Monthly is too long. Remember these are short term goals, under a year. So fortnightly would mean your look at it at least 26 times in that year.
  • Tell one person. Don’t announce it on social media.
  • Track it. Every week, or every fortnight, track how well you’re achieving the goal, write down your progress.

When financial goals go bad

Occasionally, as you aim to achieve your financial goals, you might be not performing as accurate as you would like. There are a number of reasons for this, here are some of the common ones:

  • Your goal is un-achievable in your current state. This means you’ve set your goal too high. You will need to revisit your smart goal and make it achievable.
  • You’re not focused enough. This means you’re not ready to become financially free. You like the idea, like learning French, but you’re not committed enough. You maybe should change your goal. Reassess why you’re doing this. Like going to the gym, if you don’t want to go for you, then go for your family (guilt). Make your goal smaller. Maybe the size of it stops you doing it. Saving £100 is easier than £10,000. Then when achieved the smaller goal, create a second goal a tiny big bigger.

A financial emergency has happened

This is something like you lose your job, your boiler blows up, your car dies. An emergency fund will squash this and not impact your financial goal.

If you don’t have an emergency fund, yet, then there are two choices.

The first is you miss this week or this month’s contribution to your financial goal and you extend your smart financial goal by a month. Emergencies rarely happen, and often not twice in a year.

The second option is you make further sacrifices to keep financially focused on your goal. So if you drive to work and it costs £50 a month, you cycle until the next pay day. If you buy a tea and a croissant for breakfast every morning, that month you eat at home. You have a seriously frugal month. Plus, all that cycling and not eating crap will do wonders for your health. Why not keep it up and get healthy and save money? Double bubble!

No matter what happens, if you stay financially focused then you’ll weather the storm and continue to achieve your financial goal.

When you achieve that goal

There’s not many better feelings than achieving your financial goal. You worked hard, stayed focused and made sacrifices. You deserved to achieve it.

When you achieve the goal do a couple of things:

  • Give yourself a pat on the back.
  • For 5 minutes or so, analyse how you did it. What was easy, what was hard, where could you have improved, what would you do different now you have the knowledge and experience of doing it?
  • Inform the person who you told about the goal that you achieved it.
  • Lastly, either extend this goal and push yourself a bit further, such as you now save £5 more a month than you did, or make a completely new goal and use the knowledge from achieving this goal to your new one.

Conclusion

  • Financial goals help you to stay financially focused.
  • Without financial goals it is almost impossible to become financially free.
  • Financial goals can be constructed using a number of methods, S.M.A.R.T. goals are a good methodology, millions of office bods can’t be wrong, right?
  • Constant check in and tracking of your goals is needed, either weekly or fortnightly for short term goals.
  • Make sure you tell just one person about your financial goal so that you are held accountable.

Start now!

Someone is sitting in the shade of a tree today because someone planted a tree a long time ago.

— Warren Buffett

Start now. Don’t think about it. Don’t wait. Don’t check with your spouse or best friend. Don’t stall until payday. Don’t research every angle. Don’t put it off. Don’t procrastinate. Start. And start now.

Start saving now. No matter what your situation is, no matter how much debt you’re in. No matter how little your salary is. No matter what you need to buy this month. Just start saving now.

Call your bank, visit your bank, use your online banking or your banking app. If you don’t have a savings account or an ISA, just open one right now and set up a standing order, meaning money automatically leaves your account as soon as you get paid, and goes into your savings account or ISA.

Don’t know how much to save? Just start. Start with anything: 200, £100. £50, £20, £1. You can increase the amount later once you become financially organised. But just start. The sooner you jump into the habit of saving an amount every payday, the sooner you’ll be rich. Create the saving habit. Just start today.

And for those reading this that’s already done the above either months or years ago, then right now increase the amount you save every month. Move it up 10%, 5%, even 1%. But increase your contributions. You should be increasing your contributions regularly. Nudge your saving rate up by 1%. Live without that money for 3 or 4 months and you don’t notice it has gone. Then nudge it up another percent.

Rinse and repeat.

Start now!