The modern economy is debt-driven, with the UK’s national debt accounting for 98.3% of GDP at the end of fiscal year 23-24. A record-breaking 6.7 million Britishers are in financial difficulty, with almost 13% of adults missing three or more credit card or loan repayments. These numbers are alarming, and if you are in a similar situation, it’s time to take action now and start investing in a financially secure future.
In this article, we explore a list of strategies that can help. Let’s begin!
Understand Debt
Financial literacy is very important in making the journey from debt to investment. The first step is to understand the different types of debts, including mortgages, car loans, student loans, payday loans, credit card debts, BNPL (buy now, pay later) and others.
You must also understand the interest rates and terms of each loan, as well as whether it is secured or unsecured. This information can help you decide which loan to repay first. Moreover, whenever you take out a loan, ensure that you thoroughly understand the terms and conditions, have done a complete background check on the lender, and have gotten the best rates.
Start Small
You are likely dealing with debt due to a cash crunch and finding it difficult to make ends meet. However, with outstanding loans and credit card bills, the financial challenges will only keep piling on. This is why the best place to start is by paying the smallest loan.
For example, it might be best to start paying off your credit card debt or payday loan debt. These usually have a shorter repayment period and higher interest rates; thus, prioritising them over a mortgage is often a better option.
Once you make the minimum payment for all your outstanding loans, you can pay any extra amount in the loan with the smallest residual balance. Besides, by simply paying off a single loan in full, you will feel more confident and experience less stress.
Cut Down on Expenses
This one is a no-brainer. If you are in debt and are actively working towards a debt-free future, then you must look for ways to reduce expenses and make more money. However, it is not always easy to look for an alternative income source that meets your needs.
The next best solution? Maximise your existing income.
Firstly, don’t take on any more debt once you start your loan repayment journey. Next, reduce all unnecessary expenses. For instance, choose public transport like taking the bus or the underground when travelling to work, or choose to eat at home instead of going out. By simply cutting down on some of your expenses, you’ll be able to save a significant amount of your existing income.
Make a Budget
When you progress towards financial freedom, a rule of thumb is to have a realistic budget and stick to it. The best way to create a budget is to follow the 50-30-20 rule.
50% of your total income will go towards your “needs”. This includes rent or mortgage payments, minimum debt repayment, groceries, and utilities.
30% of your budget should be set aside for your “wants”. Your wants, such as gym memberships, shopping expenses, eating out, etc., are extra requirements that are nice to have but not essential.
Until you have paid off all of your debt, it may be best to push some part of the wants portion to your needs and savings.
The last 20% goes towards your “savings”. This includes contributing to your emergency fund, pension fund, and investments like bonds and mutual funds. When you are at the beginning of your debt repayment journey, allocate money towards that instead of savings. You can concentrate on savings once you have paid off at least 50% of your loans.
Invest in Your Emergency Fund
Remember the popular saying, “a penny saved is a penny earned”? That holds true when you start building your emergency fund. Your emergency fund is three to six months of your living expenses saved away for unforeseen emergencies. This can be job loss, illness that has you hospitalised or bedridden, or even death in the family. This sum should be even higher if you have dependents, such as children.
Start Investing
This is the final step towards financial liberation. Towards the end of your debt repayment period, when you have more money free, instead of putting it for your wants, divert the extra cash for investing and saving.
When starting your investment journey, it is best to start small and safe. Go for low-risk investments. Some common investment options include government bonds, mutual funds, equities, certificates of deposits, etc.
You can speak to a professional financial advisor for a better understanding of your investment strategy.
Wrapping Up
Going from a life of debts to a life of investments is neither easy nor quick. It takes time, effort and self-control to pay off all your loans and invest that money towards your future. During this journey, you might face many challenges that can make you go back a few steps; however, it is important to keep moving forward and not give up.