Eight steps to a better financial future
An investment in knowledge pays the best interest
In 1980, I studied Maths and Computing at the University of Bath. The city was enchanting and, despite its expensive properties, I hoped to be able to call it home in the future. Leaving Bath as a graduate, I returned in 1993. Defying the odds, I first bought a flat and then a house with a large garden in the city's most sought after areas. I credit my good fortune to two key decisions: first, buying my first house in the North East then leveraging a promotion and company subsidies to move to the South East; and second, taking on a significant mortgage in 2001 with my wife to secure our current home.
In his book, Seven Myths About Money, Rob Dix argues that buying a home provides financial protection but is not a blindingly obvious choice. He explains that the recent era of low interest rates and inflation was a historical anomaly. Today’s unstable economic environment should cause young adults to consider alternative investment decisions. Rob acknowledges this is not a pure financial decision as societal expectations and emotional factors are at play too.
Rob Dix lays out an eight step plan to optimise our chances of a better financial future.
1. Make easy cuts to spending
I reckon you’ll be able to take 10% off your spending while barely noticing it. - Rob Dix
While we can’t save our way to wealth, mindful spending helps cut back without compromising essentials or joy. Addressing the inability to save or invest is key to financial progress. A steady approach to saving balances enjoying life today with preparing for the future, ensuring youthful experiences aren’t missed. To avoid impulse buys, as Rob suggests, I now wait a few days before making new purchases, e.g. a jumper or book.
2. Get basic protection in place
Secure a basic level of protection, starting with an emergency fund. Rob Dix calls this our Protect bucket. While some argue against separate pots due to inflation, most find comfort in keeping emergency funds and other savings distinct. In the last year, I paid off credit card debts and am building a cash reserve.
3. Decide about our home
Your home won't make you fabulously wealthy, but for a variety of practical and emotional reasons it will still form part of many people's plans. - Rob Dix
If we are undecided whether our home should be bought by us or rented from others then our main options are:
Prioritise buying: Save towards a deposit in a secure account.
Prioritise investments: Start compounding early and delay homeownership.
Mix and match: Split savings between investments and a deposit.
Our choice should focus on lifestyle preferences, e.g. stability versus flexibility, as financial outcomes are uncertain. Many find mix and match works best, especially if employers offer pension contribution matching.
I got on the housing ladder early as I had an option to leverage the possibility of house prices going up faster than interest rates. If I were facing the decision now, I might take a different route, e.g. investing in my own business.
4. Calculate bucket sizes
Investments can be categorised into three buckets which serve different purposes:
Protect against disaster (personal risk), e.g. emergency cash fund.
Maintain our life style (market risk), e.g. our home or S&P 500 index fund.
Improve our financial status (aspirational risk), e.g. penny shares or Bitcoin.
Determine the desired allocation across investment categories based on aspirations and risk tolerance. Conduct an audit of current investments relative to these targets. A lack of Improve assets may limit lifestyle upgrades or early retirement, while being overly focused on Improve could increase vulnerability during downturns. The goal is not to make irreversible decisions but to refine and adapt the strategy as priorities shift. Having completed my own audit, I want to shift the balance from Maintain to Improve investments.
5. Audit the maintain bucket
Getting the split between buckets right is more important than finding the perfect split within buckets. - Rob Dix
Review our Maintain investments for true diversification. Many people, including myself, are overly focused on stocks, often biased toward the US or their home country. Consider gradually rebalancing for greater diversification.
6. Build a compounding machine
Set up a system to automate investments. Arrange monthly bank transfers and recurring purchases of our chosen assets to ensure consistency. This eliminates human error, such as forgetting or second-guessing market timing. By automating our contributions, we’ll effortlessly harness the power of compounding while freeing up mental energy.
7. Earn more
Anything extra you can earn will give all your investments a lift. - Rob Dix
If we lack sufficient funds to meet investment goals, increasing our income is the most impactful solution. This could mean pursuing a pay raise or launching a side hustle. Unlike other factors, earning more is within our control and can immediately amplify our investment capacity.
8. Research improve investments
After securing Protect and Maintain buckets, consider how Improve investments could elevate our lifestyle or accelerate financial goals. If we're not ready to invest in higher risk assets like property, begin by saving in a dedicated account while building knowledge. Starting small and learning reduces the risk of costly mistakes. Focus on preparation. Those who invest time in understanding their chosen asset class are better positioned for long term success. Rob Dix made me realise I need to investigate Improve investment opportunities, particularly to help my kids.
Other resources
Money Tips that will Change your Adult Life interview with Rob Dix
Four Principals of Wealth Creation post by Phil Martin
How to Join the New Rich post by Phil Martin
My younger daughter, Astrid, asked for my financial advice recently. I said she should follow Rob Dix’s eight step plan.
Have fun.
Phil…
Hi Phil, I'm a late starter in this but thank you for sharing.