When I decided to follow the principle of paying yourself first I managed to exponentially increase my savings rate from around 10% of my income to 30% of my income. I discovered this principle from a book titled the Richest Man in Babylon. The book is made up of short stories or parables which the author uses to teach the reader a set of finance lessons.
Prior to following the principle of paying yourself first, I would receive my salary for the month and immediately pay bills- rent, mobile, broadband and groceries. Then I would pay Sony and Netflix for entertainment. Through the course of a month I dwindled down my cash through frequent spontaneous spending on lunch or takeaways. And whatever amount of money was left over is what I would save.
Trying to save this way meant my savings rate was not consistent. Over a six month period my savings would read something like this: January savings +£100.00, February savings +£50.00, March savings +£73.00, April overspend -£200.00, May savings +£65.00, June savings +£35.00, so in my mind I thought I’d saved quite lot, but what I didn’t include or didn’t realise was the one month where I spent close to what I managed to save over five months. As a result, I was moving sideways instead of moving closer towards a total savings goal. However when following the principle of paying yourself first, I found you are always making progress, every time you execute the principle, you will always be further head compared to the previous month. The way I interpret this principle is, the money you get paid at the end of each month only came into existence through you exchanging your time and skill set at a job or business. Therefore, paying yourself first is simply acknowledging this.
In order to execute the principle of paying yourself first, I needed to change other aspects of my savings behavior. The first thing to have in place was a savings target. In my case, my target was £6000.00. Additionally I gave a personal reason as to why I wanted to save £6000.00. And the reason was because I wanted to have a contingency fund in place before investing in property and the stock market. Something else I did, which is not mandatory, I decided to challenge myself by saving 30% of my income instead of the 10% suggested in the Richest Man in Babylon.
I then took action, I opened separate accounts for my income and my savings. I did not allow my income and savings to remain in the same account. To make this easier, I made use of standing orders. On the same date I received my income, 30% of my income would automatically be transferred from my ‘income’ account into my separate contingency account.
Today I'm sharing how I split my income across different types of accounts and the purpose of each account.
Long Term Savings & Investments
1. Group Personal Pension Plan - The pension pot is the first place part of my income goes too. The money in this account is used for the purchase of company stocks and shares with the aim of providing a 'retirement' income.
Medium Term Savings & Investments
2. Help to Buy ISA (Individual Savings Account) - This account is used to save for a property deposit. The great thing about this account is the government payment bonus received when you're in the process of buying a property. At the time of writing, the account rules allow a maximum monthly deposit of £200.00 per month.
3. Regular Saver - Due to the savings restrictions of the Help to Buy ISA, I use a regular saver account as a second place to save money for property deposit and the associated purchasing costs. Compared to a standard savings account, a regular saver usually pays a higher interest rate in exchange for a commitment to deposit a certain amount of money each month.
4. Stocks and Shares ISA - As the names suggests, this account is used for investing in the stock market. The primary use of this account is to provide future retirement income. However, unlike the group company pension account where you have to be age 55 to start withdrawing the income without penalty, I'm free access the money in my Stocks and Shares ISA when I need too. As a result, I may use the some of the funds for the purchase of property. I wrote a basic introduction to stock market investing in this post.
5. Tax Free International Investment Account - Similar to the stocks and shares ISA, I use this account for investing in the shares of companies outside of the US and UK stock exchanges. And like the ISA, the earnings made in this account are exempt from capital gains tax.
Short Term Savings
6. High Interest Current Account - This account is used as an emergency fund. I keep 6 months worth of essential livings expenses in this account. The purpose of this account is to prevent or delay my need to borrow money during a time I need to make an unexpected purchase or a period I'm not earning any income. This cash reserve is also in place to prevent the need to sell any of my current or future income producing assets such as stocks or rental property.
7. Current Account - Once my salary is in this account, I only keep the amount of money needed for cash payments. This includes rent, pitch hire for football with colleagues, donations and life insurance. I use a rewards credit card for all my other monthly bills and expenses (council tax, broadband, sim only mobile, train tickets, groceries, music and gaming subscriptions).
Your credit report shows what information is currently held about you and your finances. Your credit file is accessed by banks, credit card companies and other money lending firms to decide wether or not to lend you money and if you are approved for a loan, how much interest to charge you. To access your own credit file, you need to send a request to a credit reference agency.
Based on your account management (paying bills on time, not exceeding your spending limits on your credit cards) credit agencies will also give you a credit score. When looking to apply for a loan with a high or good credit score, you should expect to get charged a lower interest rate compared to having a poor or low credit score. For UK residents, there are four credit agencies which update your credit report:
Some sites and credit agencies will charge you to provide your credit report and credit score information. I've gone ahead and included a couple of sites which provide your credit score and report for free!
Let's go over why someone would bother trying to increase their credit limit? short answer, in almost all cases, a high credit limit has a positive impact on your credit score .
What is Credit Utilization
Credit utilization is a calculation based on the total credit you have available to you vs. the amount of credit you use. So if you have two credit cards, the limit on credit card 1 is £100 and credit card 2 is £100. This means the total credit you have available to you is £200.
Within your billing period, you spend £100 on Credit card 1 and £0 on credit card 2. Your credit utilization percentage would be 50%. Since £100 is 50% of £200. Having a credit utilization of 50% and above, will have a negative impact on your credit score.
For your utilization to have a positive impact on your credit score, the general advice is to aim for a utilization percentage of no more than 30%.
If we take the same example of two credits cards, credit 1 now has a limit of £500 and credit card 2 has a limit of £500, you now have a total credit limit of £1,000. As before, within your billing or statement period you spend £100. By increasing your available credit limit to £1,000 your utilization will drop to 10%. This keeps you below the 30% credit utilization limit and over time, this will result in an increased credit score.
Maximize your spending rewards
The one other major reason you might want to increase your credit limit is if you’re planning on collecting air miles, hotel loyalty points or earning cash back via credit card spending.
The idea is to put as much as you can, if not all of your normal spending and bills onto your credit card, this will allow you to collect the most amount of air miles and loyalty points. Learn how I was able to save on flight tickets here.
Having a low credit limit of £500 is going to make it difficult and a little awkward if you aiming for reward credit card sign up bonuses which will often require a minimum spend of £1,000 or more.
*****Notice I did not mention anything about increasing your limit so that you can buy a new flat screen TV or take yourself on a holiday****
If you’re anything like me, you probably thought or maybe still think investing is for someone else, someone who doesn’t look like you, dress like you, think like you, maybe they’re young, they call themselves a trader, they analyse the markets and close the deal...........Well I’m here to tell you that investing can be as mundane as brushing your teeth. It’s not complicated. You don’t need to study the ‘markets’, you don’t need to start with a lump sum of £15,000.
This is how I invest – On the 1st of every month, a direct debit of £200 gets taken from my bank account and transferred into my stocks & shares isa account. That’s it.
With the rise of the ‘robo’ funds adviser, every tom, dick and harry can get involved! Investing is no longer just for the wealthy.
Why? Because robo advisers are automated versions of the traditional fund manager. What’s a fund manager? When a group of people or investors, pool their money together, this pot of money is called a ‘fund’. A fund manager is employed to grow this fund by buying and selling assets or stocks.
However, because a fund manager is an ‘employee’ they must get paid a salary. And this salary is paid for by the investors cash.......long story short, this way of investing is very expensive compared to the robo adviser who doesn’t need to be paid a salary to buy a Lamborghini or go on expensive holidays.
In the UK, you can open a robo adviser or wealth management account with MoneyFarm, link Use my promotion code MF130070 to get £5,000 managed free of charge for one year!
Scalable Capital (link) and a host more...
I personally invest through MoneyFarm, I can’t say if they are still the cheapest but at the time of my account opening in 2017, they were the cheapest provider out of all the robo advisers.
How do robo advisers work? As part of the account opening, you complete a questionnaire to measure your appetite for risk, since the value of your investment can go up – you make money, or down – you lose money, the robo adviser will invest accordingly.
However, the number 1 investing rule........(alongside keeping your investment costs down, having minimum 3-6 month worth of living expenses saved in cash)
Investing is a long term practice. This means 10 years +. So whether your investment values go up or down shouldn’t concern you, the aim is for passive long-term growth of your money.
Since being approved in April 2018, I’ve been using my Virgin Atlantic Rewards Plus credit card every chance I get, before I get into the reasons why, a bit of background about me.
My traveling habits
Firstly, as much as I want to travel abroad more frequently, in reality I travel once or twice a year max.
Second, my flights are mostly long haul and I prefer direct flights.
Third, every time I’m searching for flight tickets, prices always seem too high! If 1 purchase is going to cost me more than a third, more than half - hell, more than I’m currently netting, then yes, the price is too high!
More recently, I was able to purchase a Virgin Atlantic return premium economy (Yay upgrade!) ticket priced at £900.00, for £615.42 (Price of the ticket £455.42 + £160.00 credit card annual fee)
Even more reasons...
In addition to the discount on the price of fight tickets, I’ve earned the most air miles in the shortest period of time by using my Virgin Atlantic Rewards Plus credit card.
Once I was approved, virgin wasted no time in slapping the £160.00 annual fee on my first statement. However, with my first purchase (no minimum spend was required) I received 15 000 bonus air miles, and excluding the earnings of 1.5 air miles on every £1.00 spent, I was able to amass 7000 bonus points in September, 7000 bonus points in October and 683 bonus points in December. In total, I collected 29 683 bonus air miles excluding my normal spending of just over £1000.00 per month.
In contrast to my American Express credit card, I earn 1 air mile for every £1.00 spent on the card. Using the Preferred Gold Rewards credit card as an example, the bonus sign up offer was equivalent to 20 000 air miles – assuming I spent £2000.00 in the first 3 months of account opening. And no annual fee for the first year, after year one, the fee is £140.00 - Still one of the best offers for earning air miles!
By putting as many of my normal purchases on my Virgin Atlantic Rewards credit card, I’m roughly £1700.00 shy of spending a total of £10000.00 on the card within the first year of account opening. This is significant because once I hit the target spend, I’ll be able to choose a free upgrade from a purchased (using air miles) economy ticket to premium economy or receive an additional companion reward ticket in economy.