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 you know that I'm the least tech savvy person and it takes me forever to understand anything

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much as I have and you want to continue then the first 200 people who sign up using the link also get 20 off of their subscription that's brilliant.org forward slash Nisha hopefully this video gave you some ideas on where you want to be putting your money on your next payday if you want more ideas on how to get the most value out of your 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