Seven steps to financial freedom: A guide for young professionals

1. Understand Your Income and Expenses

Good financial management starts with knowing your cash flow. Understand how much you earn each month and where your money goes. If you’re unclear about where your money is going each month, creating a long-term plan will be difficult.

Use a budgeting tool or app to track your expenses, categorising them so you can see where your money is going.

If you don’t know where to start, I like the 50/30/20 rule: allocate 50% of your income to essentials (rent, bills, food), 30% to non-essentials (dining out, entertainment, holidays), and 20% to savings or debt repayment.

As your income increases, try to maintain these ratios and avoid the temptation of lifestyle creep—where your lifestyle expenses grow as fast as, or faster than, your income.

2. Build and Maintain an Emergency Fund

An emergency fund is essential, no matter your age or stage in life. Aim to save 3-6 months’ worth of living expenses to cover unexpected costs like job loss, emergencies, or urgent repairs.

Keep your emergency fund in a high-interest savings account that’s easily accessible but separate from your daily spending account. This separation creates a psychological barrier, making it less likely you’ll dip into it for non-emergencies. If you do need to use it, prioritise replenishing it as soon as possible.

3. Protect Your Financial Future with Insurance

As you take on more responsibilities, protecting yourself and your loved ones becomes vital. Consider life insurance, income protection, and critical illness cover to provide financial security in case of unexpected events like illness, accidents, or death.

Life insurance is crucial if you have dependents who rely on your income. Income protection insurance can help cover your living expenses if you’re unable to work due to illness or injury. Review your insurance after major life events like marriage, buying a home, or having children.

If you imagine your financial plan is a house, your emergency fund and financial protection (insurance) are the foundations of the house. If you do not have strong foundations, the house will fall down.

4. Tackle Debt Strategically

Debt can be a significant burden, especially early on in your financial journey.

Focus on paying off high-interest debt first, such as credit cards or payday loans, which can quickly spiral out of control.

For lower-interest debt like mortgages, maintain regular payments while balancing other financial goals. If debt feels overwhelming, seek advice to create a manageable repayment plan. Consider options like debt consolidation or balance transfers to reduce interest costs.

5. Plan for Major Life Events

Significant life changes, like, buying a home, marriage, or starting a family, can have a big impact on your finances.

• Buying a Home: This is one of the biggest financial commitments you’ll make. Save for a deposit, understand all the associated costs, and consider how mortgage payments will fit into your overall budget.
• Marriage: Merging finances requires open communication and shared financial goals. Discuss how you’ll handle expenses, savings, and investments.
• Starting a Family: Children bring new financial responsibilities, from childcare to education costs. Adjust your budget to accommodate these changes and consider life insurance and writing a will to secure your family’s future.

Time horizon is key. If you have major life events or goals within the next 5 years, then keeping the money in savings accounts is likely to be the best option. Consider how much you will need and when you will need it by.

6. Invest for the Long Term

If you don’t need to have access to the money in at least 5 years, and ideally 10+ years, you might consider investing to help meet your long-term financial goals.

While retirement may seem distant, starting early can potentially benefit from compound returns over time. Contributions to a pension or Individual Savings Account (ISA) could significantly grow over long periods. However, it’s important to note that investments can go down as well as up, and you may get back less than you invest.

The chart below shows how much of your income you need to invest to replace your income by retirement. You’ll notice that the earlier you start, the less you need to put away.

Starting at age 25, you can expect to replace 100% of your current income in retirement by investing 15% of your income each year.

However, if you started at age 35, you’d need to invest 30% of your income each year to get the same outcome.

If your employer offers a pension scheme, contribute enough to maximise any employer match, if they offer matched contributions and you are not maximising this, you are leaving free money on the table.

7. Enjoy Life – Money is Just a Tool!

If you are doing all the above steps right, it can be easy to overlook one of the most important things which is enjoying your money now.

In fact, doing all the above steps should give you the confidence to be able to spend and enjoy your money without fear of compromising your future.

By earmarking money for the future and making sure you are putting enough money away, you should have the confidence that you can afford to do the things you want to do now. Understand what you enjoy, whether that be holidays, meals out, hobbies – these are the things you should spend your money on and remember…Money is just a tool to design the life you want to live!

Remember, investment strategies should be tailored to your individual circumstances, risk tolerance, and financial goals. It’s advisable to seek professional financial advice before making investment decisions.