The correct order of investing - UK edition

Question

This excellent question asks what the consensus priority order of investments should be. The answers seem to have settled on roughly the following:

1. Emergency fund.
2. 401(k) up to employer match.
3. Pays off debts, e.g. student debt.
4. Bigger emergency fund.
5. More retirement savings: 401(k), IRA, etc.
6. Take a mortgage
7. Consider long-term investment e.g. index funds or paying off the mortgage early.
8. Consider retirement.

This is all fantastic, but several of the answers are too American to be applicable to a UK audience. For example, UK student debt is not a big priority and we don't have 401(k)s.

This then gets me to my question: Does the ordering of any points in the above list change for a UK investor? And if so, why?

Answer 1

As others have said, the order depends on your personal scenario.

However, after a quick Google search this article translates a similar list into a UK Equivalent and the steps are:

1. Save a 1 month emergency fund
2. Pay off all debt except house / student loan
3. Save 3 months of expenses
4. Max out pension contributions
5. Create sinking funds
6. Pay off home early
7. Build wealth and give

All these lists, whether for the UK or US pretty much suggest the same things but with county specific means:

1. Have enough accessible cash to avoid getting into further debt due to unexpected expenses
2. Pay off debts as, due to the compounding interest, these are stopping you from building wealth
3. Invest in whatever will give you the best return at a level of risk you are comfortable with. A pension is suggested highly up the list due to the employer contribution matching your investment. Index funds / paying off a house also give a steady rate of return but are not guaranteed.

Answer 2

I think the big difference between the UK and the US is that in most cases you should lower the priority of your student loans, assuming they are the standard government-backed ones for undergraduate degrees.

The repayment terms are pretty generous - they'll be written off if you don't eventually pay them back, and you only have to pay back up a certain percentage of your salary over a threshold. So if you fall on any hard times, you don't have to worry about the student loan debt. Also, a large fraction of the population is expected never to have to pay back the full loan if they just make the salary-based payments. The exact details here will depend on when you got the loan, as the terms have changed over the years.

If you are in a high-paying job, or expect a high-paying career where you do pay it all off, then the priority you list may still make sense. This question goes into more detail on whether it makes sense to pay it off.

Answer 3

The "correct" order varies with your situation. One of the things affecting your situation is which country you are living in. Don't try to apply a simplistic "one size fits all" even within a country.

Looking at the differences between the US and UK, you've already identified one - student debt isn't typically as large. That doesn't affect the priority of it, just means it is easier to pay off. (By the way, it isn't always best to pay off student debt - sometimes it is low interest and you are better off keeping it.)

Another difference is that US emergency funds are mostly there to cover a loss of job. In the UK people are generally less likely to be laid off, and if they are there is more likely to be a severance payment and unemployment payments are likely to be higher. In the UK there is no concern that you will be unable to cover medical bills if you are laid off, as there is in the US.

All of this means your emergency fund might not need to be as big. But remember this varies with many things, not just country. If you are in a highly desirable profession, or one with very stable employment, then you don't need as big an emergency fund whatever country you are in.

Also different tax regimes mean different priorities. In Canada many people use their retirement savings as an emergency fund to some extent, becuase retirement savings can be withdrawn relatively cheaply in an emergency. They can also be used to fund a house purchase, so they get higher priority. My knowledge of British pensions is out of date enough that I won't comment.

In Britain it is harder to save for a mortgage than the US, and many people prioritize this over retirement savings.

But my main point is this - don't take someone else's generic bullet list and follow it - work out what you need in your own situation.