The first three steps on the road to financial competence

The two questions I see most often in personal finance and growing wealth are probably “How do I start?” and “Where do I begin?”.

These three simples steps aim to provide a concrete foundation for wealth building. They are not exhaustive, but are a fantastic way to begin your journey:

  1. Pay off all high interest debt immediately. Debt is a roaring fire of a problem and should be put out as soon as is humanly possible. Broadly speaking, healthy debt is perfectly fine to keep, examples include a mortgage or student loans (as the UK system is more a ‘graduate tax’ than a real debt) but consumer debt (credit card, payday loan or similar) that has anything more than a 0% interest rate is insane to take on for long periods of time!
  2. Establish an Emergency Fund in a liquid/low risk form. This should account for something like 3-12 months living expenses, varying on your personal circumstances. Everyone’s situation and take on this will differ e.g. Someone who has a partner to supplement income and a permanent job needs less stashed than someone who relies on a ‘gig economy’ type role. The emergency fund will wax and wane with your life; reassess it regularly and when your circumstances change.*
  3. Define your goals and map out your short, medium and long term financial objectives. Ask yourself if you’d like to retire before the national retirement age. Do you wish to own a house or are you happy enough to rent? This is where defining a strong budget and thinking about your future objectives comes into play.
    • Store money that is guaranteed to be needed in less than 5 years as cash in the highest interest accounts you can find. Examples of the best accounts can be found on my current best picks page. If you’re looking at buying a house, strongly consider the Lifetime ISA or the Help to Buy ISA and maxing one out for the most bonus you can get your hands on. 
    • All money that is being saved for retirement or for use in greater than 5 years should be invested in a low-cost and diversified portfolio, probably consisting of equities and bonds. The easiest and cheapest method will be to open a Stocks and Shares ISA and purchase low cost index funds. Again, take a look at my current best picks page to see what I use. The intricacies of this are a little more complex but if you’ve made it this far down the list, you’re definitely ready for the more advanced stuff.

Congratulations, you’re now more financially literate than the vast proportion of the British population!

*I actually believe that the more financially settled you are, the smaller this cash cushion needs to be.