The Golden Path
Your financial path is simple when you understand it!
Find out where you are on this path.
Learn how to take the next step.
Save 1 month of your fixed expenses
"I’m covered for small ups and downs"
What
Put aside 1 month of fixed essential expenses that you absolutely can't live without (Rent/mortgage, groceries, transportation to work, insurance, etc.)
Why
To protect yourself against small fluctuations in your monthly income.
To protect yourself against small unforeseen expenses (repairs, medical, etc.)
How
Save it as cash in your checking account so you can immediately access it in an emergency.
What to do
If you use part of your buffer, make sure to top it up next month immediately.
Do not use your buffer for discretionary expenses such as vacations, celebrations, nights out, etc.
What not to do
Don't try to optimize this, just keep the cash at hand and keep it constant.
Pay off all your high-interest loans (except your mortgage)
"I’m not paying stupid interest"
What
Any consumer loans, credit card balances, car loans, personal loans, etc. which have a high interest rate (>5%) need to be paid off so you can start building your wealth.
Why
High-interest loans are working against you and limit your ability to create margin and build your investments.
You expect ~8% return on an index fund, most loans have higher interest rates than that, so paying off your loan is a better move.
How
Debt avalanche: Sort all your loans by interest rate from high to low. Pay them off gradually or in a lump sum if you can.
Debt snowball: Sort all your loans by total amount from low to high. Pay them off gradually or in a lump sum if you can.
What to do
When a loan is paid off, use the freed-up monthly cash flow to put towards the next loan. Use the momentum.
What not to do
Do not try to also make significant investments while you're paying off debt. There's a reason this is step 2 and investments are step 5.
Save 3-6 months of your fixed expenses as an emergency fund
"I’m covered if shit hits the fan"
What
Save 3 to 6 times the amount of Step 1 and use it as a larger Emergency Fund.
Why
To protect you against life changes such as losing a job or major unforeseen expenses.
This is your "peace of mind" and will give you options when an emergency arises, so you can make better decisions with less stress.
How
Keep this in a variable savings account that you can access freely with no binding period and no withdrawal charges.
Choose the best savings account rates offered by different banks. Make sure the bank or institution is covered by the government Deposit Guarantee.
What to do
When a loan is paid off, use the freed-up monthly cash flow to put towards the next loan. Use the momentum.
What not to do
Do not try to optimize your interest rate by moving your emergency fund to a new bank every other month. A 0.2% increase is not gonna change anything for you. Remember this is not an investment, it's your peace of mind.
Use your employer's salary exchange program to boost your pension (optional)
"I get a cheap boost in pension"
What
Some employers offer a salary exchange program that takes some of your pre-tax income and adds it to your pension.
Why
Since the exchange happens pre-tax, mathematically this is the best return you can get out of a regular investment.
How
Your employer defines the maximum amount and how you can enroll if they offer it, talk to your Payroll.
What to do
Consider your monthly cash flow needs. If after your base expenses, you have a healthy margin, this could be a good option.
If your main goal for investments is your retirement, this is a great option for you.
What not to do
Consider your liquidity needs, if you need to have access to your money (maybe you're not sure you'll stay in Sweden long term), this might not be a good option as you won't be able to withdraw from your pension before you're 55, even then there are limitations to how much you can withdraw.
Automatically invest 10-35% of your monthly income in an index fund
"I invest for my financial independence"
What
You have built a strong foundation in steps 1-3, now it's time to build your wealth by investing a percentage of your monthly income.
Why
You want to leverage investing in the stock market to use compound interest consistency that will make the majority of your wealth as time goes by.
You want your money to make you money. (A 30-year-old couple with 35,000kr net income each, can make 56,000,000 kr by the time they retire if they save 35% of their income)
How
In an ISK account, automatically buy a global index fund every single month with a percentage of your income (start as low as you can and increase it over time. Even a 500kr automatic investment per month can make you 1,100,000 kr)
What to do
Automate your monthly investments, and take your emotions out of your investments. Consistency + Time = Wealth.
Your investments should come before your discretionary expenses. Pay for your investments before you pay for restaurants and go karting!
What not to do
DO NOT pay attention to what the market does on a daily basis. Remember, your time horizon is >5 years and the market is more likely to go up the longer you keep your money in.
Pay off your mortgage loan
"I’m debt free"
What
Through steps 1-5, you now have no debt outside of your primary home and have built a considerable amount of wealth towards your investments. You can wait a few years after step 5 before you start on step 6.
The only remaining loan is your mortgage to be paid off.
Why
Your house/apartment is part of your assets, you'd want to own it 100% alongside your other investments.
Other than the financial aspect, the psychological effect of fully owning your home is liberating. You will have very little risk associated with loans (due to interest rate changes, etc) after you pay it off.
How
Increase your amortisation: you pay a consistent amount of amortisation per month that goes to your principal repayment, you can increase that amount which will result in your loan period and total interest paid to the bank decreasing. (e.g On a 3,000,000 kr, 50-year loan, if you increase your amortisation from 5000kr to 10000kr, you will pay 1,500,000 kr less to the bank and pay off your loan in 25 years)
Pay lump sum: If you come by some extra money (stock options, inheritance, etc.) you can put all or parts of it towards paying your mortgage.
What to do
You can think about this step as soon as you reach step 5 or give it a few years. You will need to think about your asset allocation and your liquidity needs to make this decision.
What not to do
As your last debt, this is not just a financial decision anymore, this is your last step to own everything in your life. Do not just think about this step as a mathematical calculation.
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Pay off all your high-interest loans (except your mortgage)
What
Any consumer loans, credit card balances, car loans, personal loans, etc. which have a high interest rate (>5%) need to be paid off so you can start building your wealth.
Why
High-interest loans are working against you and limit your ability to create margin and build your investments.
You expect ~8% return on an index fund, most loans have higher interest rates than that, so paying off your loan is a better move.
How
Debt avalanche: Sort all your loans by interest rate from high to low. Pay them off gradually or in a lump sum if you can.
Debt snowball: Sort all your loans by total amount from low to high. Pay them off gradually or in a lump sum if you can.
What to do
When a loan is paid off, use the freed up monthly cash flow to put towards the next loan. Use the momentum.
What not to do
Do not try to also make significant investments while you're paying off debt. There's a reason this is step 2 and investments are step 5.
Save 3-6 months of your fixed expenses as an emergency fund
What
Save 3 to 6 times the amount of Step 1 and use it as a larger Emergency Fund.
Why
To protect you against life changes such as losing a job or major unforeseen expenses.
This is your "peace of mind" and will give you options when an emergency arises, so you can make better decisions with less stress.
How
Keep this in a variable savings account that you can access freely with no binding period and no withdrawal charges.
Choose the best savings account rates offered by different banks. Make sure the bank or institution is covered by the government Deposit Guarantee.
What to do
When a loan is paid off, use the freed-up monthly cash flow to put towards the next loan. Use the momentum.
What not to do
Do not try to optimize your interest rate by moving your emergency fund to a new bank every other month. A 0.2% increase is not gonna change anything for you. Remember this is not an investment, it's your peace of mind.
Use your employer's salary exchange program to boost your pension (optional)
What
Some employers offer a salary exchange program that takes some of your pre-tax income and adds it to your pension.
Why
Since the exchange happens pre-tax, mathematically this is the best return you can get out of a regular investment.
How
Your employer defines the maximum amount and how you can enroll if they offer it, talk to your Payroll.
What to do
Consider your monthly cash flow needs. If after your base expenses, you have a healthy margin, this could be a good option.
If your main goal for investments is your retirement, this is a great option for you.
What not to do
Consider your liquidity needs, if you need to have access to your money (maybe you're not sure you'll stay in Sweden long term), this might not be a good option as you won't be able to withdraw from your pension before you're 55, even then there are limitations to how much you can withdraw.
Automatically invest 10-35% of your monthly income in an index fund
What
You have built a strong foundation in steps 1-3, now it's time to build your wealth by investing a percentage of your monthly income.
Why
You want to leverage investing in the stock market to use compound interest consistency that will make the majority of your wealth as time goes by.
You want your money to make you money. (A 30-year-old couple with 35,000kr net income each, can make 56,000,000 kr by the time they retire if they save 35% of their income)
How
In an ISK account, automatically buy a global index fund every single month with a percentage of your income (start as low as you can and increase it over time. Even a 500kr automatic investment per month can make you 1,100,000 kr)
What to do
Automate your monthly investments, and take your emotions out of your investments. Consistency + Time = Wealth.
Your investments should come before your discretionary expenses. Pay for your investments before you pay for restaurants and go karting!
What not to do
DO NOT pay attention to what the market does on a daily basis. Remember, your time horizon is >5 years and the market is more likely to go up the longer you keep your money in.
Pay off your mortgage loan
What
Through steps 1-5, you now have no debt outside of your primary home and have built a considerable amount of wealth towards your investments. You can wait a few years after step 5 before you start on step 6.
The only remaining loan is your mortgage to be paid off.
Why
Your house/apartment is part of your assets, you'd want to own it 100% alongside your other investments.
Other than the financial aspect, the psychological effect of fully owning your home is liberating. You will have very little risk associated with loans (due to interest rate changes, etc) after you pay it off.
How
Increase your amortisation: you pay a consistent amount of amortisation per month that goes to your principal repayment, you can increase that amount which will result in your loan period and total interest paid to the bank decreasing. (e.g On a 3,000,000 kr, 50-year loan, if you increase your amortisation from 5000kr to 10000kr, you will pay 1,500,000 kr less to the bank and pay off your loan in 25 years)
Pay lump sum: If you come by some extra money (stock options, inheritance, etc.) you can put all or parts of it towards paying your mortgage.
What to do
You can think about this step as soon as you reach step 5 or give it a few years. You will need to think about your asset allocation and your liquidity needs to make this decision.
What not to do
As your last debt, this is not just a financial decision anymore, this is your last step to own everything in your life. Do not just think about this step as a mathematical calculation.
