ACCOUNTANT EXPLAINS: The Optimal Order of Investing Your Money

we are taught from a young age to follow a certain  path go to school get good grades get a good job   get promoted but after achieving these Milestones  what's next what should you do with the money that   you've earned it seems like the focus on financial  guidance disappears after the good job part when   it comes to Payday there is a lot of conflicting  advice on where you should put your money and in   what order do you pay off debt do you save  do you invest we are continuously fearful of   making the wrong choices so what actually is the  optimal order for investing your money if you're   new here I'm Nisha I'm a qualified accountant  and on this channel we talk about all things   personal finance and self-development and in  this video I'm going to share with you what I   personally believe is the most optimal order to  invest your money and set you up for the future   number one build up a safety net before you  invest in the stock market before you invest   in real estate before you invest in equipment for  your new business you want to have a safety net   this is the very first thing you want to do Focus  number one before you do anything else is save one   month's worth of expense and put it into a high  interest savings account that you can easily ask   success whenever you need to without paying any  fees I want to clarify something here is that   financially optimal for you to instead pay off  your debt before you say for an emergency fund   yes but being mathematically optimal is different  to psychologically optimal and the psychological   comfort of knowing you have a small emergency  fund and that you won't need to go into debt to   pay for a unexpected expense frees you from a  lot of additional stress and this isn't money   to then spend on everyday expenses this emergency  fund really needs to be kept away forget you even   have that out of sight start off with one month's  expense this will cover most small emergencies and   you can look into adding to this after you do  the next step first and that is paying off your   high interest debt the majority of adults are in  debt and we've accepted this as the norm we may   have bought a new car that we could have bought  used we may have bought something that we didn't   even need to impress people that we don't even  like and one of the biggest problems with debt   is that it restricts your monthly income if you  have high interest debt that is eating away on   your income it massively restricts the amount  you can save and the amount of everything else   that you can do instead if you focus on paying  off debt that is a tax-free risk-free guaranteed   rate of return if you have credit card debt that  is charging you 20 then by paying off that debt   you're making a guaranteed return of 20 on that  printer support the interest that you'll no longer   be paying the very first High interest that you  want to pay off is your credit card debt forget   about meal planning forget about cutting costs in  any other place this is where you're going to take   the biggest step towards Financial Freedom so what  is high interest now I would Define High interest   debt as anything above eight percent interest some  people say six percent others say 10 the reason I   chose eight percent is because historically when  investing in the stock market you can expect to   earn about 10 annually and when you adjust  this for inflation it's around eight percent   so to me anything above what you could earn in  the stock market is going to be high interest   debt but what about mortgages or other smaller  loans usually the interest on that isn't as high   as credit card debt or overdraft fees so you can  continue making the minimum payments on those and   to The Next Step instead but before we get into  it I want to let you know that I'm doing a free   five-day money program it's going to be five days  of videos where we cover a different topic every   day from asking for a pay rise money believes  saving investing and it's completely free the   launch date will be confirmed in the next few  weeks I'm really excited for this so if you   want to know when it launches then sign up using  the link below with that aside number three on   my list of order is what you will hear a lot of  personal finance people talking about doing a step   one as it's free money how could you be saying no  to free money but the reason why I don't think it   makes sense to put this as number one is because  it's something that you will benefit from in 20 30   40 years from now and that doesn't matter if you  can't get your finances today in a good place to   start with so once you have steps one to two done  then you want to take the match that your employer   is offering you for your retirement fund this is  called different things in different countries   in the UK it's the pension contribution and the  US you would have heard it as the 401K and what   this means is for every pound or dollar that  you contribute your employer will also match   that contribution put that towards your pension  so say you're earning a hundred thousand and you   contribute 4 000 of that towards your workplace  attention your employer matches everything you   put in so you're basically making 100 return  on your investment straight away remember this   is different from the full amount that you can  contribute all you care about here is contributing   whatever you need to get the full match because  otherwise you're just leaving free money on the   table and unfortunately for these retirement  matches that employers provide as a benefit   you can't claim it retrospectively so you can't  claim it now for previous years so you're going   to repeat this one every single year you never  want to miss out on this free money step number   four have an additional fund imagine the kind of  freedom and stability you'd have if you had three   to six months of your living expenses in your  bank account at all times knowing that if anything   happened you lost your job your business didn't  work out then you would have something to fall   back onto and that will all be taken care of this  is when you want to have enough money available so   that if anything happens you can bail yourself out  and not rely on credit card debt to get you out of   your situation so you want to work out what is the  absolute minimum you need to survive on so your   fixed expenses your variable expenses your total  expenses for the month and then multi apply that   number by three to six months if you're employed  or nine to twelve months if you're self-employed   this number is your emergency fund and it's  different to your safety net that we spoke   about in the first point this is for the larger  Financial shocks that we just mentioned that have   longer term implications now once you've done that  this is where it gets fun because you've completed   the groundwork for a truly free financial future  now you get to invest and meet some of your other   Financial priorities so the next step is to invest  through a tax advantage account the reason why   you absolutely want to do this is because it's  one of the most tax efficient places you can be   putting your money in to make it grow most other  Investments buy some sort of tax when you buy   a share and make money from it you usually have  to pay capital gains tax however when you invest   through a tax advantaged account such as an Isa if  you're in the UK or a Roth IRA if you're in the US   you Shield your profits from the tax man so you  want to take advantage of these accounts up until   the maximum if you can then we have a payoff low  interest debt this includes for example student   loans in some cases and sometimes car loans from a  financial standpoint this debt may not be hurting   you as as much so you can choose whether you want  to pay it off or instead use that money to invest   but my personal perspective is that unless this  step is being used to help you make more money   if it's not helping you do that then you should  be paying it off so if you're using that money   to invest rather than to pay it back then it  may make sense but if you are not paying off   your debt because you rather have more money  left over to spend on things that you enjoy   then I would instead consider paying off when you  consider debt as a normal way of life it can very   quickly Cascade into a mindset of justification  and using it to fund an elevated lifestyle with   low interest debt is something you want to avoid  you want to get into the habit of paying off as   much bad debt as you can from your life then we  have paying off your mortgage this is the last   thing on the list and I would highlight that it is  completely optional and it really really depends   on your financial situation there are so many  variables that you have to take into account how   much Equity do you have left when does your fixed  rate end how long do you have left personally in   my situation I would not pay off my mortgage right  away instead I would choose to use that money   to invest because mortgage rates are typically  some of the cheapest debt you can get and they   have long-term commitments that have already been  priced in to be paid over the full term so instead   if you wait to pay off your mortgage before you  decide to start investing you're really limiting   your time in the investment Market that can take  away from some of the benefits of compounding   and long-term growth and on top of that making  overpayments can save you money on interest in the   long run for your mortgage but not all mortgages  are flexible so before you make any overpayments   you want to make sure you check the terms of your  mortgage and see if overpayments are allowed or if   there are any early repayment charges if your  mortgage doesn't allow overpayments or limits   them for example for 10 a year then it might make  sense to put that extra money into Investments and   by doing this you're building up a separate pot  of money in your Investments and adding value   to your property simultaneously both of which  will help your financial future of course there   are psychological benefits to paying off your  mortgage and living mortgage free so ultimately   depends on what's more important to you one of  the things I haven't spoken about on this list   is putting your money towards skills and personal  development you could only save and invest as much   as you can earn but you can always earn more and  brilliant.org who are very kindly sponsoring this   video is a really good online platform where you  can learn the skills you need to land those higher   paying jobs brilliant has thousands of interactive  bite-sized lessons they're very fun learning paths   and they make it very easy to learn new things  stay on track and also get real-time feedback   if you've watched my videos 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money I have in a whole  account and explain series videos on my channel   where we talk about all things personal finance  thank you for watching and I hope to see you there

Channel: Nischa

Views: 618,592

Keywords: nischa, accountant explains, investing, 401k, retirement fund, pension, high interest debt, low interest debt, mortgage, finance, personal finance, ladder of finance, money, student loan, car loan, pay off debt, how to invest, how to invest in stocks, investing for beginners

Id: WSoqUdd39-Y

Length: 9min 15sec (555 seconds)

Published: Sun May 21 2023