The idea of saving £500 each and every month can be a bit daunting. This is especially true if you are just starting out. The first steps are often the most difficult with this kind of lifestyle change.
Therefore, this idea is aimed at those people who are just getting started on investing. It is a way of clearing the decks before starting to make the investments that you really want to make.
Pay Off Your Debt
Having outstanding loans is one of the most common barriers for new investors to overcome. Every Pound that you need to put towards servicing a debt is a pound less to invest in your future.
At the start of 2019, the average British household had a debt of £14,500 to deal with. 1.7 million Brits have persistent credit card debt that they pay £1.3 billion in interest on. Thankfully, the Financial Conduct Authority has recently advised credit card companies to help these people to pay off what they owe.
Start off by looking at the debts with the highest interest rates. This will be typically be on credit cards or on any emergency loans that you have taken out. With credit card debt, if you pay off the minimum amount each month that you will only really be paying the interest rather than lowering the amount due.
Putting your extra money on these debts isn’t as exciting as investing in cryptocurrencies or stocks. You may be tempted to think about making high-risk investments and paying off your debts with the profits.
However, it makes more sense to wipe the slate clean before putting money into anything else. Trying to make fresh investments while paying off loans or credit cards can be too much of a financial strain for most people to deal with.
In the end, it can come down to choosing one of the other. Since you are unlikely to earn as much on an investment as you are saving on interest by paying off your debt, the only sensible move is to pay off the debt first of all.
Put Away an Emergency Fund
The lack of an emergency fund can lead to a financial disaster yet only around half of us add money to our savings every month. It is recommended that you have between three and six months’ worth of pay set aside for unexpected issues.
Let’s imagine that you carried out the previous step of paying off your debt with £500 each month. By the end of the year, you might be debt-free, but the time isn’t right for investing heavily.
If you start putting money into shares and commodities, you could end up having liquidity problems if you need to repair your car, fix something in your home or meet some other expense.
A study by the AARP Public Policy Institute in the US found that over half of Americans don’t have an emergency fund. These people are exposed to the risk of having a serious setback some point. Even if you are debt-free, the lack of an emergency fund could mean that you are forced to take out fresh debt to cover your bills.
Ideally, you will use your £500 each month to pay off your debt and then build up a reserve fund of a few months pay. If this takes more than a year then it is worth having the patience to see this through.
You should work out a plan for doing this at the start. If a year isn’t enough for all of it then considering prioritising. You may decide to pay off the high interest debts, build up your emergency savings for a few months and then go back to clear off the remaining debt at lower interest rates.
What Happens Next?
Having done this, you will now be in a terrific position to start investing with a clean slate. You can now look to use all of your £500 for investments that bring you a brighter future. There will also be far less chance of surprise expenses forcing you to interrupt your savings plans.