“If you wish to speak to me,voltaire
define your terms…
What You Need to Know
Most young UK professionals suck at money because they’re not familiar with a few simple concepts:
- Total Monthly Spend (TMS)
- Emergency Fund
- FU Money
- Percentage Savings Rate
- Compound interest
- Index Funds
Total Monthly Spend (TMS)
Total Monthly Spend or TMS is what you spend each month – on average – across nine distinct categories. Those nine categories include all your mundane monthly bills. And then some. More…
We all need an Emergency Fund. For life’s emergencies. Which tend to get more expensive the older we get. But very few young professionals have a “cash reserve” that they can call on when they meet the inevitable “bumps in the road”.
We’ll examine what your starter Emergency Fund should be and what a fully-funded Emergency Fund looks like. More…
Unsurprisingly, “Fuck You Money” is the least polite term in personal finance. However, it’s also the most attractive term too. Especially for young professionals…
Why is that?
Because FU Money is both a catalyst for personal growth and career development and close enough (only three to five years out) to “get your motor running” with the sheer possibilities it can bring. More…
Percentage (%) Savings Rate
Get your savings rate correct and everything else just follows. Get your savings rate “wrong” and whatever else you do won’t amount to much.
Your percentage savings rate is:
- Any money paid against the principal of
- consumer debt
- student loan debt
- mortgage debt and
- any money used to pay into
- a savings account
- an Index fund
- a workplace pension
- Expressed as a percentage of
- your take-home pay
% Savings Rate = 1 + 2 / 3 x 100
Add all of those payments listed in 1 &2 to get your savings for a given month. Then divide that figure by your take-home pay (3) and multiply by 100.
You now have your Percentage (%) Savings Rate. More…
This is “the interest on the interest” that leads, slowly at first, but inexorably to exponential growth. It’s how the rich get richer and the poor get poorer.
“Those who understand compound interest…earn it.
Those who don’t understand compound interest…pay it.”unknown
It’s a mathematical law that has been called “the 8th wonder of the world”. More…
Young professionals who don’t suck at money, will need to, at some stage, start investing in stocks and shares of publicly-quoted companies.
However, picking individual stocks is both time-consuming and risky. Index funds mitigate this risk by taking a large basket of such stocks that effectively mirror the performance of a complete market: like the FTSE 100 in the UK or the S&P 500 in the USA.
When trillions of dollars are managed by Wall Street charging high fees… both large and small investors should stick with low-cost index funds.”warren buffett
2016 letter to shareholders
You can buy index funds directly from an index-fund provider such as Vanguard or through your bank.
I’d recommend that young professionals who can invest take out a Stocks & Shares ISA with Vanguard and fill it with low-cost index funds.
When you buy an index fund, you get a diversified selection of shares in one easy, low-cost investment. Index funds typically invest in hundreds of companies in a single fund, and that helps lower your overall risk by diversification. More…