The 8 Money Milestones
I am naturally an impulsive and spontaneous person, and I love socialising and doing fun things. But when I was younger, those aspects of my personality got me into real bother financially, and I ended up with over £30K of expensive consumer debt.
I felt stressed, bad about myself, and ashamed that I was in such a hole. I had trouble juggling payments, I had a stream of letters from people chasing me for money, and I felt totally out of control. And all this happened when I was earning an above average income!
In desperation, I researched how I might be better with money. I came across US money guru Dave Ramsey and his Baby Steps programme and learned how other people had got on top of their money.
Many people who get into financial problems do so because of an event that is out of their control – divorce, illness, redundancy etc. But many are like I was in my 20s - architects of their misfortune due to unwise spending choices.
My 8 Money Milestones is an evolution of Dave Ramsey’s Baby Steps, which I developed to reflect the UK personal finance situation and my own judgement of what matters. These gave me a solid framework against which I could assess my daily money habits, behaviours and decisions… and they can help you too.
The 8 Money Milestones
Milestone 1: Have a Smart Spending Plan
Give every pound of income a job to do. Whether it is meeting essential living costs, repaying debt, or having fun, decide where you want your money to go before you get paid. Check out my Smart Spending System or have a look at the insights and system from You Need a Budget.
Milestone 2: Save £1,000 in a "starter" emergency fund
Creating just £1,000 in an accessible cash savings account means you have some money to fix your car, replace the washing machine or ride out that dip in income. [i] It also gives you a sense of achievement.
Sell off unwanted possessions, work extra shifts or get an additional job. Cut everything you do not need out of your budget and delay any necessary expenses, but get that £1,000 together as fast as you can.
“Give every pound of income a job to do. Whether it is meeting essential living costs, repaying debt, or having fun, decide where you want your money to go before you get paid.” Tweet This
Milestone 3: Pay off ALL non-housing debt quickly
Use the snowball method to get rid of all your non-mortgage debt as fast as you possibly can. Line up all your debts, smallest to largest. Then pay the minimum monthly amount on all but the smallest debt. Then put as much as you can to knock out the smallest debt. Then repeat the process on the next smallest debt until you are debt-free. And remember, a mobile phone provided 'free' as part of a contract is still debt, so make sure you route out ALL your debts.
From a mathematical perspective, it makes sense to repay the most expensive debt first. But research shows that the snowball method has a higher success rate due to the psychological benefits that come from feeling a sense of progress.
If you want the long-term gain of being debt-free, you will have to suffer some short-term pain by trimming your spending, working more or doing both. As Dave Ramsey says, you might have wandered into debt, but you certainly won't wander out.
You need to be intentional, stay focused and think about how you will feel when you are free of all those monthly debt payments. And remember that any sacrifices you might have to make to achieve this are just temporary.
Milestone 4: Finish funding the emergency reserve
Now that you have got those nasty non-mortgage debts out of the way, you can redirect the monthly payments to finishing off your emergency fund. I always hold an amount equal to 12 months' core living expenses, but any amount from 3 months would cover most situations.
And do not even think of buying a house or moving home until you have the emergency fund fully funded and it will stay that way after you buy.
Milestone 5: Contribute 15% of gross household income to retirement plans
Planning for life after you cannot or no longer want to work is not optional, and it's also the most expensive life goal you have. Save and invest 15% of your gross household for life after work.
Based on an average household income of £50,000 per annum, 15% equates to a monthly contribution of £625 gross (i.e. before any tax relief). Assuming annual real (after inflation) investment returns of 5.5% net of costs, and that contributions are revalued in line with inflation of 2%, over 35 years the fund would grow to in excess of £1m in today’s value. Or around three times the amount saved over that period. You can do your own projections here.
Contribute first to a pension plan if employed and get the employer's contribution (which is in addition to your 15%). Then use a LISA (if under 40). Then a pension. Then an ISA.
Milestone 6: Protect your income and life
Each year one million UK workers suddenly find themselves unable to work due to serious illness or injury.[ii] You need to have enough income to meet your essential living costs if you are ill or disabled for longer than your emergency fund can support. Buy income protection insurance equal to your core living costs.
You also need to have enough life insurance to support any financial dependants if you die and repay any mortgage or other liabilities.
The Special Risks Bureau* are friendly UK specialists personal insurance advisers who can advise and arrange the cover you need.
Milestone 7: Pay off the home mortgage early
Although mortgage rates are low, you still have the monthly repayments to meet every month. Reducing your mortgage is a risk-free return, and the sooner you become mortgage-free, the sooner you can redirect the mortgage payments to build wealth.
For example a £200,000 25-year mortgage at 2% pa interest would be repaid nearly 6 years earlier and save nearly £13,500 in interest with a £200 overpayment. And with a £400 overpayment you’d repay it nearly 10 years earlier and save £21,500 in interest. Use this calculator to see how quickly you could be mortgage free.
Don’t be like everyone else and accept that you will be paying your mortgage repayments for decades. Be different and get rid of the home loan as fast as you reasonably can. The psychological and emotional comfort from being debt-free and owning your home is priceless, whatever investment ‘experts’ might tell you.
Milestone 8: Accumulate financial capital and give
Once you've repaid your home mortgage, you can then start making even bigger regular savings to investments. You'll not only be able to live a great life, but you will also be able to give generously to your family and other causes.
Celebrate Progress
Whenever you make progress on each milestone, make sure you celebrate your success in whatever (non-spending) way that works for you. I like to say “Yes!” out loud and punch the air.
If you are not where you’d like to be financially, don’t fret. Your past doesn’t need to equal your future. But you will need a system to help you do the right things with your money. The 8 Money Milestones is tried and tested by me so I know it works. Give it a go. What have you got to lose?
[i]https://www.stepchange.org/MediaCentre/Pressreleases/Actionplanonproblemdebt.aspx#:~:text=StepChange%20Debt%20Charity%20is%20calling,enrolment%20framework%20used%20for%20pensions.%EF%BB%BF
[ii] https://www.abi.org.uk/globalassets/sitecore/files/documents/publications/public/2014/protection/welfare-reform-for-the-21st-century.pdf
* If you arrange insurance via this link, I might be paid a small referral fee which I use to maintain this free-to-use educational website. But it doesn’t affect the premium you pay, nor did it influence my selection of this company.