I’ve been frustrated by the fact that so much personal finance material online is US-centric. There are different retirement and tax-sheltered accounts available in the UK vs US, but even so, many of the steps are the same. With this in mind, here’s how you can build long-term wealth in the UK:
1. Become genuinely valuable at work, so you can…
2. Negotiate a pay rise
If your employer sees you as a valuable asset, you put yourself in a strong position for a pay rise. You may be worth more than you think! So go for that pay rise. After all, there’s no harm in trying and if you don’t ask… you don’t get. These first two steps focus on increasing your income. There’s inherently a limit on how much money you can save (we all have essential expenses like food, housing, transportation, bills), but there’s no limit on how much money you can earn. Sometimes, you just have to ask. Earning more will put you in a much stronger position to build wealth.
3. Track your expenses over the past 6 months
Get a spreadsheet open and write down every single incoming and outgoing expense from your bank account. Cut out any unnecessary monthly payments, and become mindful of how you’re spending money. Don’t stop this exercise either – keep updating it every month. I won’t deny that this is a tedious exercise, but necessary to build a clear picture of your financial health.
4. Save 1 month’s worth of expenses in a starter Emergency Fund
After you’ve tracked your expenses and have a better understanding of your spending habits, prioritise saving 1 month’s worth of expenses in an easy-access savings account. Click here for a list of the best savings accounts in the UK. Get this done as quickly as possible. Now you have some financial protection if things suddenly take a turn for the worse.
5. Pay off high interest debt (anything over 5%)
Prioritise consumer debt first (credit card debt/ car loans/ personal loans). Promise yourself not to get into further debt – in fact, sign a written contract, frame it and hang it up on your wall. Aim to pay off debt as quickly and efficiently as possible. No fancy restaurant meals or nice holidays until it is done.
6. Save 3-6 months’ worth of expenses in an Emergency Fund
Once all the “bad” debt in your life has been eradicated, boost your Emergency Fund further. Save 3-6 months’ worth of expenses. How much you save is up to you – everyone’s situation is different. You may want to save more if you are self-employed and have an inconsistent income, or less if you live in a household with two working individuals and no kids.
7. Learn more about personal finance
This is the fun part! Immerse yourself in the world of personal finance. There is a wealth of information available to you on the internet for free. Aside from this website (which you should definitely explore more of!), some of my favourite places to learn about personal finance include:
- ChooseFI
- MoneySavingsExpert
- Mr Money Mustache
- JL Collins
- Bogleheads Wiki
- Early Retirement Extreme
- The Motley Fool, and so much more!
Here are some fantastic books on personal finance that I recommend. In my opinion, if you’re going to read one single book on personal finance, read The Simple Path to Wealth by JL Collins. It’s elegant and beautiful.
8. Consider paying off mortgage and student loan (if you have them)
Make a considered decision about whether to pay these off early. Student loans can be devilishly complicated to calculate repayments on, so use a student loan calculator to calculate repayments based on potential career salary growth. Find out the maximum contributions you can make to your mortgage – is it more advantageous to pay it off early or invest the money instead? You must balance the emotional effect of the decision against the maths.
9. Invest in the global stock market
I invest into Vanguard FTSE All-World UCITS ETF (VWRL/VWRP), but Vanguard S&P 500 UCITS ETF (VUSA/VUAG) or Vanguard US Equity Index Fund (VUSEIDA) are equally good choices. A more comprehensive list of the best index funds to own can be found here.
If you do this consistently, you will absolutely wealth over the long-term. Consistent investing is the most reliable way to build long-term wealth. You’re effectively buying a slice of global capitalism, which has generated enormous stock market returns over the past 150 years. Create an investing plan and stick to it – put it up on your wall in a prominent place. Set up a direct debit and put your investments on autopilot. Save as much as possible, but aim for a 50% + savings rate if you can. If you save 50% of your income, you can retire in 17 years. If you save 70%, it will take only 8.5 years, and if you’ve already got investments, it will take even less time.
10. Use tax-sheltered accounts
The two main tax-sheltered accounts available in the UK are the ISA and the workplace/personal pension. Make sure to invest in these accounts first before you open a General Investment Account (GIA – where you are liable to pay tax on dividends, interest and any capital gains you make).
- Take advantage of the workplace pension first: you must make a minimum contribution of 5% per month, and your employer will contribute a minimum of 3%. They’re giving you free money, so you should absolutely use this! Also, the government will pay an additional 20% in tax relief (and potentially more if you’re a higher-rate taxpayer) – although, note that you’ll still have to pay income tax on your pension when withdrawing it during retirement.
- Ask your employer if they will match pension contributions to an even higher limit.
After this, you should move on to your ISA allowance, which offers completely tax-free savings. The two ISA wrappers you should focus on are the Lifetime ISA and the Stocks and Shares ISA.
- The Lifetime ISA exists for you to save money for retirement or to put down as a deposit on a house. You can put in up to £4,000 each year, until you’re 50 (but you must make your first payment before you’re 40). The government adds a 25% bonus to your savings, up to a maximum of £1,000 per year. Pretty good! However, you can only withdraw if you’re buying your first home or aged 60 or over.
- The Stocks and Shares ISA has a £20,000 allowance each year, and you can access your money whenever you need it.
After this (if you manage to exceed the yearly ISA savings limit then congratulations!), you should open a General Investment Account and continue investing. Note that you’ll have to pay tax on any dividends you earn, so if there is a dividend-paying version of the fund you want to invest in, go for this.
11. Invest solely with Vanguard. They have the lowest fees, by far, of any investment provider
The interests of Vanguard are aligned with the owners of the funds (you and me), because Vanguard’s funds are the owners of Vanguard. In other words, if you invest in a Vanguard fund, you become an “owner” in the company. You don’t own shares in the company per se, but the net result is that Vanguard does not need to skim off a profit for its shareholders. This means that the fees are lower (the lowest on the market in fact), and you keep more of the returns. So, a win for the investor.