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One size does not fit all but here we map out what a typical financial path may look like for you

A step-by-step guide to achieving financial freedom
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Paddy Doran

The end of the path: financial wellbeing

Let’s be honest, when push comes to shove there are two uses for money: 

  1. Security: To pay for things that let you and your loved ones survive.
  2. Freedom of choice: To pay for things that let you and your loved ones live the life they want

You can't have freedom without security. Financial wellbeing is the endpoint of a journey that takes you through securing your today and tomorrow and then unlocking the freedom to choose the life you want to live.

The journey to financial wellbeing

Whilst everyone is different, and the journey will not be the same for each person, there are broadly seven key steps on the journey to financial wellbeing

Step 1: Budget, reduce expenses and set realistic goals

Step 2: Maximise the amount of free money you can get (from employer or state support)

Step 3: Pay off expensive short term debt 

Step 4: Build an emergency fund 

Step 5: Save for short term goals (goals in less than 5 years)

Step 6: Save for long term goals (goals in more than 5 years)

Step 7: When all of these are satisfied, kick back and enjoy financial freedom

Let’s dig into the steps in a bit more details.

Step 1: Budget, reduce expenses and set realistic goals

To kick-start your financial wellbeing journey create a solid budget. Begin by listing fixed expenses such as your rent or mortgage, council tax, food, car payments, insurance and utility bills. Then add any discretionary spending such as eating out, clothing and entertainment. Remember to also include any “one offs” and annual payments which can be converted into a monthly bill for budgeting purposes.

Once you’ve created your budget, compare your costs with your monthly take home pay. Then track your spending to see where you can begin making changes and cutting costs. While it tends to be easier to reduce discretionary expenses, a great way to cut costs is to reevaluate your household bills as many people overpay on their gas, electricity, broadband and phone bills.

Make sure you are setting achievable, specific and measurable goals or you won’t be able to sustain and keep track of your new saving habits. Don’t forget to reward yourself when you hit a goal!

Step 2: Maximise the amount of free money you can get (from employer or state support)

The first part of step 2 is checking out whether you are maximising the amount of state support you can get. A great site is entitledto which has a calculator designed to tell you whether you are eligible for any state benefits that put more cash in your pocket. 

Secondly, pension auto-enrollment means that if you put 3% of your salary into your pension, your employer has to put in another 5% on top. Although 3% of your salary may sound a lot, by doing so you effectively turn £1 of salary into £3.60, well worth it if you ask me. 

Some great employers take this further and match pension contributions. You should check with your employer if this is the case and then see whether you can afford to take advantage of this if so. 

Step 3: Pay off expensive short term debt

If you are reliant on credit to make ends meet, you can seek debt counselling from a reputable charity such as Step Change

When it comes to debt repayments, focusing on high interest debt can be the most efficient strategy over time if you’re able to stick to it. The second option would be to focus on repaying small debts which would then snowball into larger successes. While less efficient, this option can have psychological benefits. In both cases you should make the minimum payments on all of your debts and then choose which method to add extra money to.

Step 4: Build an emergency fund

Step 4 lies right in the middle of security and freedom of choice. For an emergency fund you should aim to save 3-12 months of necessary living expenses that are easy to access. If this sounds intimidating, remember any amount will help pay for unexpected expenses. Research from the London University UCL found that having £1,000 in your bank can make you financially happier.

Step 5: Save for short term goals (goals in less than 5 years)

As you edge closer towards financial freedom, you can focus on your life goals. For short term goals that are within 5 years, keep your savings in cash and find the highest-paying savings accounts for them. 
Looking to buy your first home? Consider opening a Lifetime ISA (LISA). This government product aimed at those aged between 18 and 39, allows you to deposit up to £4000 per tax year and you get a 25% government bonus on any contributions you make. That means for every £4 you save, you get £1 for free which over time can really add up. 

Step 6: Save for long term goals (goals in more than 5 years)

When you start saving for long term goals, you might want to consider investing options such as a Stocks & Shares ISA. Investing over the long term (5 or more years) can offer higher returns, although the value of investments can go up and down. Should you want to buy a house in 5 or more years time a S&S LISA is also available.

Saving for retirement is also important, and you can make additional contributions into your workplace pension or open a SIPP and invest in low-cost global index trackers. A general rule of thumb for your pension is to take the age you start your pension and halve it. Then put this % of your pre-tax salary into your pension each year until you retire. So if you began saving at 24, you should aim to contribute 12% of your salary. While this figure may seem high, it also includes your employer’s contributions and your future self will thank you.

Step 7: When all these are satisfied kick back and enjoy financial freedom

Note: The Content is for informational purposes only, you should not construe any such information or other material as investment, financial, or other advice.

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