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5. Budgeting before Investing

In danish: Have styr på sin privatøkonomi

Verify that you’re at the stage where you’re ready to invest.

This means:

  1. Budgeting: overview of your current expenses and making adjustments for a better financial future
  2. Emergency Fund: savings which can cover your expenses in a financial emergency (e.g. losing your job)
  3. Paid off high-interest debts: High interests are costly. Those close to 0% are manageable, but 10% or more can make you repay more in interest than the loan itself.
  4. Creating a Financial Plan Estimate your important expenses in the next 5 years (e.g., hobbies, new TV, car, buying a house) and the amount you need to save for them.

Budgeting​

Budgeting just means keeping track of where your money is going, and where you want it to go. The first step to creating a budget is to learn about your current spending. Make a list of:

  1. Fixed expenditure – spending on “needs”, which you can’t choose to avoid (e.g. rent/mortgage, utilities, debt payments, food, transport)
  2. Discretionary expenditure – spending on non-essential “wants”, which you could choose to reduce (e.g. eating out, hobbies, entertainment)
  3. Infrequent large expenses (e.g. Christmas presents, holidays). It can be useful to convert the annual costs into a monthly bill for budgeting purposes.

Next, find out how much you spend on each type. Check your transactions over several months and categorize each one. Don't forget to include infrequent large expenses, for example like seasonal holidays!

Once you know your monthly spending, decide how much you want to spend in each category and create a budget. You can use an app, spreadsheet, or pen and paper - whatever works best for you. Many banks, like Nordea, and the government offer budgeting tools.

It's highly recommended reading the r/ukpersonalfinance budgeting guide for more details on budgeting!

Remember to Live!​

It's fantastic that you're focused on improving your future self, but don't forget about the present. Spending some money on experiences, travelling and dining now too is an investment!

Emergency Fund​

An emergency fund is an instantly accessible amount of money meant for financial emergencies, such as loss of income or sudden necessary expenses. If you are debt-free, usually, this should cover somewhere between three and six months depending on your risk tolerance. If you have high-interest debts, it's recommended on focusing in paying off the debt and building an emergency fund of one month of essential expenses. Achieving this is an accomplishment to be proud of, and will give you a bit of cushion to absorb any unexpected problems.

Keep your emergency fund in an easily accessible and risk-free account, like a current account (In Denmark these have many names: NemKonto, Girokonto, Lønkonto,...) or savings account (DK: Opsparingskonto) without binding periods. Replenish the fund once used.

It's highly recommended reading the r/ukpersonalfinance emergency fund guide for more details!

Debt Repayment​

Debt repayment can be a large topic. Check out r/ukpersonalfinance's debt repayment guide for more details.

Financial Planning​

While you may already have a detailed life plan for the 5 next years, your financial goals may also evolve over the years due to shifts in your lifestyle or circumstances such as an inheritance, career change, marriage, house purchase or building a family. Financial planning is a dynamic process.

Financial planning involves creating a detailed roadmap for managing finances, including budgeting, saving, investing, and risk management, to achieve specific financial goals.

If your goal is within 5 years, money for those goals should not be invested. This is because the value of your investments can fluctuate up and down, risking that you may not be able to pay for your goal at the time you need it. You should put those in a non-binding saving account with high interests. For instance, Bank Norwegian saving account (Free) has a 2.7% interest (May 2024).

If your goal is more than 5 years away, you likely want to invest your savings to benefit from some growth and fight inflation. Five years is around the minimum length of time where investing starts to make sense, i.e. the chances of ending up with less than you put in become low enough to assume you will be able to proceed as planned. This Monevator post has some useful statistics that help outline the risks for less than 5 years.

It's highly recommended to read r/ukpersonalfinance Financial Goals guide.