A big day in History
The 30th April 2019 was a big day in my financial history. It was the day I paid off the final chunk of credit card debt and became debt free. I had gotten into the habit of paying every extra pound I had into my debt to ensure that it was cleared as soon as I could. I paid off £16k in two years.
This now means that I have spare money each month. Around 10k per year to pay into something. But what is that that something? Mortgage, investments, pension? Which way should I go? How should I split my spare money?
I don’t have enough money to appoint a financial planner to help me with my decision as they normally work with people with at least 150k of assets. Also, they charge a pretty hefty fee in excess of £1000. This is worth it if you have a large chunk of assets but not me who has a £50k pension and am at the beginning of my accumulation journey.
But there is guidance out there. Check out Meaningful Money’s latest podcast series, perfectly timed and as if Pete Matthew, a good friend, knew that I needed this guidance at the moment. It’s called New accumulators.
Before working out where to put your money the first step is to think of your goals. These need to have a value attached and a time frame.
I have two goals, one smaller goal and then another uber goal.
My first goal is to have enough money put aside for my three boys once they reach 18. I want to be able to support them with living costs if they chose to go to university. I went to university and I would love for them to do the same thing. To be as educated as possible is important to me and I know it has propelled my career forward. I have 100% earned more money as a result of studying maths at a good university along with the paths of life I chose following that degree and university taught me some invaluable life skills.
Maybe they won’t want to go to university and will start working or become professional football players. Whatever they chose, there will be a chunk of money set aside for them. I have calculated how much I need, you can read more details in this post, and am putting £250 a month away into an investment account for this sole goal.
My secondary uber goal is to generate enough cash for financial freedom, enough money to generate income for me to live my life to the full and not HAVE TO worry about generating income from my business.
I need to spend some time with a spreadsheet properly working out how much money I need but I have also used a very rough FIRE led calculation that says I would need 25 * my annual expenses of £30k. That means my uber goal is £750k which I may as well round up to £1m for a nice round number. I want to have this set aside by the age of 60, in 18 years’ time.
At aged 60, my children will be grown up; scarily they will be 30, 28 and 25. My mortgage will be re-paid, and it will be time to disappear around the world visiting all those places I have wanted to visit but never have. I would love to visit Costa Rica, Thailand, Hawaii, Australia, New Zealand..I could go on.
What could I do with £1000 – I ask two experts?
I chose two trusted experts to ask what to do with my spare money. I’m assuming £1000 per month for ease of calculations. Also assume that I have a cash emergency fund in place with three months of expenses set aside. I have income protection insurance that kicks in after three months, which you can read all about here.
Pete Matthew of Meaningful Money
Pete Matthew was the first person I asked. He runs the Meaningful Money podcast and website. He is also a financial planner as his day job and lives in Penzance, where I lived for the first 18 years of my life. Pete said:
Firstly, look into overpaying the mortgage, maybe with £200 per month. This will save you £10,377 in interest and shorten the term by 3 years and 10 months.
Next, consider saving towards the kids’ university costs. £50 a month each, at a 6% return would amount to £6,172 for the eldest over 8 years, and £11,831 for the youngest over 13. That’ll make a difference to them when and if they go on to higher education, or will buy them a car or something else if they don’t go to uni.
That leaves £650 left to allocate. I would weight this towards your ISA for the next 1-2 years, maybe £350 per month to build that up a bit. Add £200 to your pension and over time shift the balance of payments towards your pension, once you have a tidy amount in your ISA.
If my maths is right(!), that leaves you with £100 to enjoy in the present.
Faith Archer of Much More With Less
Faith is the person who supported me through my debt repayment journey and has written about money for 20 years for all the newspapers and runs her own website Much More With Less. She said:
Many congratulations on paying down your debt – clearing £16,000 in 2 years is a massive achievement that took a lot of hard work!
I’m a money journalist and blogger not a financial adviser, so I can only tell you what I would do with a £1,000 a month in your circumstances.
Priorities for me would be bumping up the emergency fund, beefing up the pension pot and getting rid of the mortgage.
With pensions, the earlier you can start, the better. I also like pensions because of the free money added by the tax man. If you’re self-employed, you won’t have a boss to pay into your pension, so it’s even more important to stash away your own cash. So, I’d start paying £500 a month into your PensionBee pension asap, topped up with an extra £125 in tax relief every month.
I’d add the remaining £500 a month to the emergency fund, ‘til it’s large enough to cover 3 to 6 months’ essential living expenses.
Afterwards, I’d chuck the £500 a month into the mortgage. You’re already on a great rate for the next four years (1.9% fixed), but there is no guarantee mortgage rates will stay so low. Mortgage loans last so long they also rack up massive interest bills. Even if your rate stayed down at 1.9% for the whole of the rest of your mortgage, you’d pay nearly £45,000 in interest. I’d rather keep that money myself!
Instead, if you pay an extra £500 into your mortgage every month, you’ll slash more than £18,500 off the interest bill, and clear your mortgage debt nearly 9 years earlier. Think of it – mortgage free by 55! (Here’s a mortgage overpayment calculator to try.
Really interesting to get two different views from financial experts. But still the question remains what am I going to do with my spare money?
I think I am going to split my money 50/50 and put 50% into my investment account and 50% into my pension. Eventually my investment account will have enough to repay my mortgage in full, and my returns from my investment account should exceed my mortgage interest charges by far. Who knows though? Its my view and my view only.
In terms of investing, it can be a daunting prospect. There’s no getting away from the fact that investments can go up and down in value over time. Even if you’re happy to accept that risk, it’s still seen as complicated and only for the super-wealthy. Thankfully that needn’t be the case.
One useful resource I’ve discovered is Stepstoinvesting.com who offer some brilliant guides and tools to aid with your investment journey. Their Steps to Investing portal is packed full of super useful content where the whole investment process is explained simply and logically. It’s a perfect resource for beginner investors and a great place to get started. Coincidentally contains many pieces written by Faith Archer!
This post is a collaborative post with Stepstoinvesting.com. Please be aware that any form of investment can go up and down. You may get back less than you invested. All investment carries risk and it is important you fully understand these risks and are willing to accept them. The tax advantages of ISAs may change in the future and depend on your individual circumstances. You may want to consider advice from a qualified IFA, just make sure they are recommended by a trusted friend and check their investment levels as some will only work with clients with an investment level of £100 to £150k.