When you start working towards financial independence, it can be hard to know where to begin. There’s so much information out there that it’s easy to feel overwhelmed. That’s the main reason I started later than I’d have liked. I didn’t know whether to pay off debt, pay more into my pension, invest in an ISA or simply put my money into a fund and let it grow.
Ramit Sethi sets out a clear order in his book I Will Teach You To Be Rich. He calls it the ladder of personal finance. Sethi is American, so here’s our version for UK savers.
When investing, your capital is at risk.
Step 1: Get your full employer pension match
If your employer matches your pension contributions, pay in at least enough to get the full match. It’s free money. You won’t find an instant 100% return anywhere else.
Under auto-enrolment, your employer must pay at least 3% of your qualifying earnings. Many pay more if you do. Check your scheme’s rules, and ask whether your employer offers salary sacrifice, which can also save you National Insurance.
Step 2: Pay off expensive debt
Pay off credit cards, overdrafts and other expensive debt. Credit card interest rates are often over 20% a year, so clearing that debt is a guaranteed return at that rate, which no investment can promise. Debt destroys wealth, so get rid of it as quickly as you can.
The debt snowball method (smallest balance first) keeps you motivated. The debt avalanche method (highest interest rate first) saves the most money. Before you start, build a small emergency fund of around £1,000 so an unexpected bill doesn’t push you back into debt.
Step 3: Invest in a Stocks and Shares ISA
In the US, Sethi recommends a Roth IRA. The closest UK equivalent is the Stocks and Shares ISA.
You pay into an ISA from income you’ve already paid tax on. All growth and income inside the ISA is tax-free, and so are withdrawals. You can put in up to £20,000 a year across all your ISAs.
I personally prefer an ISA for most of my investments. I’ve paid the tax upfront and have nothing more to pay later. With a pension, withdrawals are taxed, and I don’t trust future governments to keep the rules the same. Given the government’s debt, I can see income tax rising or allowances falling in future. An ISA also lets you take your money out at any age.
That’s my preference, not a rule. Pensions have big advantages too, which is why step 1 comes first.
If you’re aged 18 to 39 and saving for your first home or retirement, also consider a Lifetime ISA. You can pay in up to £4,000 a year (counting towards your £20,000 ISA allowance) and the government adds a 25% bonus.
Step 4: Pay more into your pension
If you’ve used your ISA allowance and still have money to invest, put more into a pension, such as your workplace pension or a SIPP.
Pension contributions get tax relief, so you invest money before income tax. For a basic-rate taxpayer, £800 from you becomes £1,000 in your pension, with the government adding £200. Higher-rate taxpayers can claim back even more.
Bear in mind the drawbacks:
- Access: you can’t usually take money out until 55, rising to 57 from 6 April 2028. Withdrawing earlier, outside rare exceptions such as serious ill health, can trigger tax charges of up to 55%.
- Tax on withdrawals: up to 25% is usually tax-free. The rest is taxed as income.
- Inheritance tax: from April 2027, most unused pensions will count towards your estate for inheritance tax.
Step 5: Invest in a General Investment Account
Still have money to invest after all that? Open a General Investment Account with a low-cost broker. There’s no tax wrapper, so you may pay dividend tax and Capital Gains Tax above the yearly allowances (£500 for dividends and £3,000 for capital gains in 2026/27).
Climb one step at a time
It really is that simple. Each step builds on the one before. Finish the first, then move to the second. If you never reach step 5, don’t worry. Most people never even reach step 1. Opening the accounts and getting started is what matters most.
Some steps won’t apply to everyone. If you’re self-employed, there’s no employer match, so skip to step 2 and use a SIPP for your pension.
Disclaimer: This is not financial advice. Tax rules can change and depend on your circumstances.
Pedro is passionate about finance, marketing, and technology. He is a growth manager at several online projects and a former digital marketer for a fintech company.
