How to Think About Debt

(and Why Flexibility Is Your Real Financial Superpower)

Perhaps I should start by saying: this isn’t the way to think about debt — it’s just how I think about it.

But maybe, after reading this, you’ll think a little differently too.

They say there are are no new ideas under the sun, and this one owes a nod to something I once read from Morgan Housel - my absolute favourite non-fiction writer - for the way he communicates big, and sometimes complicated, money concepts.

His thinking helped shape how I view debt. To view it not just as a financial instrument, but as something that quietly reshapes the way we experience life.

Why Debt Narrows Your Future

When most people think about debt, they think about numbers.

The interest rate. The monthly payment. Whether it’s “cheap” or “expensive.”

And that’s fair enough, those things matter. Debt, after all, isn’t inherently bad. Used wisely, it can be a powerful tool.

Mortgages, business loans, even student debt, these can all unlock opportunities that would otherwise be out of reach. Some call it using leverage.

But there’s a hidden cost that rarely gets talked about. One that isn’t measured in pounds or percentages. Debt doesn’t just cost money.

It costs flexibility.

And that flexibility is what determines how much of life you can comfortably handle when things don’t go to plan.

The Hidden Cost: Flexibility

Imagine your life as a squiggly line, like a stock market chart. Yes, you can picture it, going up and down over time. Sometimes you're up, and sometimes you're down.

Those ups and downs represent the natural volatility of life: promotions, redundancies, illnesses, family events, unexpected moves, market crashes, political curveballs, even moments where you simply change your mind about what you want.

Now, picture a band or “channel” surrounding that line, above and below it.

That band represents how much volatility you can handle before things start to go wrong.

When you carry little or no debt, that band is wide, like you can see illustrated here.

You could lose your job for six months and recover.

You could move cities, take time off, or make a career change without breaking.

But as you take on more debt, that band narrows.

A six-month job loss becomes unaffordable after three.

The roof on your home leaking and needing to be replaced was once manageable, but now becomes catastrophic.

The flexibility to adapt, to handle life’s inevitable surprises, starts to disappear.

At high levels of debt, even small disruptions can become existential threats.

That’s true for individuals, businesses, and even entire countries.

How To Think About Debt: Why This Matters

Volatility isn’t a theoretical risk, it’s reality.

I'm not sure when you felt it, but for me it was 2016. Trump getting in power in the U.S. and the Brexit vote here in the U.K. signalled the end of the something. The world has, by common consensus, become more volatile.

Over the next 10, 20, or 30 years, the odds that you’ll experience at least one of the following are 100%:

• A recession

• A health issue (your's or someone close to you)

• A political or economic shock

• A family emergency

• A major life change

  
  

The most dangerous thing about debt isn’t the interest rate. It’s that it reduces your ability to respond to the unexpected.

There’s a reason some Japanese businesses have lasted over 500 years. Researchers studying these ultra-resilient firms often find one common trait: they carry little or no debt, and they hold plenty of cash.

That’s how they’ve survived wars, recessions, natural disasters, and regime changes. They weren’t the most aggressive or leveraged companies, they were simply the most adaptable.

And adaptability is everything. I don't know what's going to happen tomorrow. Hell, I don't even know what's going to happen today, do you?

The Real Asset: Optionality

At its core, managing your financial life, personally or professionally. It is about one thing: having options.

The ability to make changes, endure setbacks, or take advantage of opportunities when they arise.

Debt restricts those options.

That doesn’t mean you should never borrow. Used carefully, debt can be constructive. But next time you consider taking some on, try asking a different question.

Instead of:

“Can I afford the payments?”or “Is the rate low?”

Ask:

“How much flexibility am I giving up by doing this?”

Because that’s the real cost. And in an unpredictable world, flexibility is arguably your most valuable asset.

Planning With a Margin of Safety

In engineering, a margin of safety means designing a bridge to hold 30 tonnes, even if the heaviest expected load is only 10.

Why? Because uncertainty exists. Maybe the materials weaken. Maybe two trucks arrive at once.

The margin of safety exists not because failure is likely, but because it’s possible.

In financial planning, the principle is exactly the same.

A margin of safety is the buffer between what you expect and what you can endure.

It’s the gap between your income and spending, your projected investment returns and your real needs, your risk tolerance and your resilience.

And the further you stretch yourself, financially, emotionally, or logistically, the smaller that margin becomes.

What It Looks Like in Practice

• Save more than you think you’ll need.

  Markets don’t always behave, and life doesn’t follow spreadsheets.
  

• Live below your means. Not for the sake of frugality, but to give yourself room for the inevitable curveballs: redundancy, illness, helping family.
  

• Invest with realistic expectations. Plan for 5% returns even if long-term averages are 7%. That 2% gap is your safety margin.
  

• Hold some cash. It won’t earn much, but it buys you time. And time is flexibility.

  
  

The biggest financial risks aren’t always the obvious ones. They’re the surprises, the things you didn’t see coming or couldn’t predict.

A margin of safety protects you from those blind spots. It’s not pessimism, it’s realism.

Optionality Is the Real Wealth

To me, true wealth isn’t about having more money. It’s about having more options.

The freedom to walk away from a rubbish job. To take a sabbatical. To help a family member. To sleep well at night.

A margin of safety protects those options.

Without it, small disruptions become big problems.With it, big disruptions become survivable.

Having a margin of safety in your financial plan isn’t a lack of confidence, it’s an act of humility.

It’s saying:

“I don’t know what the future holds, but I know it won’t go exactly according to plan.”

And that mindset, more than any number on a spreadsheet, is what creates lasting financial wellbeing.

---

Jamie is Lab Financial Planning Managing Director, and a Certified Financial Planner™. He advises business owners and makes sure that their money, life and business are aligned in working towards their goals.

If you feel like you need help with your financial planning, why not get in touch to see if we can help?

Remember, there are no stupid questions. Everyone has a different level of knowledge about money and planning their finances.

We speak in plain English to help take away the fear and empower you to use your money well.

You can drop Jamie an e-mail: jamie@labfp.co.uk

Or, you can book in a free introductory call, to discuss your situation, here: https://calendly.com/labfp/intromeeting

RSUs - What Are They And What Should I Do With Them?

Written by Jamie Flook - Managing Director and Certified Financial Planner at Lab Financial Planning.

Jamie helps clients who hold RSUs, some of whom work for Amazon and Google, and others work for unlisted companies who provide RSU compensation.

Chances are you work for a tech company and you've been awarded RSUs as part of your compensation. Great, but what are they, how do they work, how are they taxed, and what should you do with them?

What Is An RSU?

RSU stands for Restricted Stock Unit and is an award of shares in your company that are transferred into your ownership, according to their vesting schedule.

For an RSU to vest, you must meet specific requirements set out by your employer although they are more commonly tied to simply staying employed with the company for a set amount of time.

What Does RSU Vesting Mean?

Vesting is simply the act of shares that you are due to receive, actually becoming your shares, that you can choose what to do with.

Before the RSUs have vested, they are more of an intention to become shares. By giving you your shares over a period of months and years, it can act as an incentive to stay in employment with the company who gave you the RSUs. This may be where you have heard the expression 'gilded cage'!

By vesting over a number of years instead of in one go, this also reduces the amount of income tax payable up front and instead spreads it over the number of years as specified in the vesting schedule.

RSU Vesting Schedules Explained

Your vesting schedule should be set out for you. Often you'll get a guide and a brokerage account to log into, which shows when RSUs are set to vest and the estimated amount you'll receive, based on the current share price and amount of shares you are due to receive on vesting.

Often, these will vest over a period of 2 or 4 years, and typically vest in equal increments. An example would be 25% of your shares vesting every 6 months over a 2 year period.

With most brokerage accounts, you'll be able to clearly see which RSUs have yet to vest, and which have vested and their current value.

Often, your employer will give a guide share price over the coming years, helping you understand what these shares could be worth in the future.

Are RSUs Taxed And If So, How?

RSUs are not taxed when awarded, only ever when they vest. So if you've just been awarded some, please don't panic!

When RSUs vest they are liable for two types of tax; income tax and employee’s National Insurance Contributions. More often than not, you will unfortunately also be liable for a third type of tax: Employer's National Insurance Contributions.

Employer's like to give you shares, but don't like paying the tax due on them!

To pay the tax on RSUs, you often have the option to sell down the required number of shares to cover the tax bill. This can usually be done by the employer through the PAYE system to make it easier for the RSU recipient.

If your employer handles the tax in this way, you shouldn't see a difference in your take-home pay as a result of receiving the RSUs, as the sold-down stock should cover your liability.

RSUs can be lucrative on the face of it, particularly if the value of the shares go up in value since award.

The tax rate ends up being around 55% for most people.

This is the combination of additional rate income tax, Employee NI Contributions and Employer NI Contributions.

If you are a basic rate or higher rate tax payer, the tax rate will be lower.

What about Capital Gains Tax and RSUs?

RSUs also become liable to Capital Gains Tax from the moment they vest. 

In the current tax year (2024/25) each person has £3,000 Capital Gains Annual Exempt Amount, which essentially is the amount of gain you can sell without being taxed.

Should you hold on to your shares upon vesting and they rise significantly in value, you could be liable for Capital Gains Tax upon selling them.

If you were to sell them down immediately upon vesting, you should avoid Capital Gains Tax.

As a reminder, Capital Gains Tax rates increased as a result of the October 2024 Budget. Basic rate Capital Gains Tax is now charged at 18% on the taxable, and 24% for the Higher Rate.

Can I Reduce The Tax Of My RSUs?

You absolutely can reduce the tax burden of your RSUs and better still, there is a way of potentially reducing both your income tax and capital gains tax liability.

As we have outlined above, there are tax implications from the moment the units are vested, and you now hold them as company shares. As any vested RSUs count against your total income for that year, the value of the RSUs increases your total taxable earnings for that year.

To reduce the income tax burden, you can make a pension contribution. A pension contribution reduces your total taxable income, by the amount of contribution you make.

Can my RSUs expire?

No. Once you have received the RSUs and their vesting schedule, you will be entitled to these as per the agreement terms laid out.

The only circumstances in which your RSUs would not eventually vest is if you left your employer whilst you still had unvested RSUs, or if the company is sold.

Can my RSUs lose value?

Once an RSU has vested, it will behave exactly like any other company shares, so the value of them will rise and fall in-line with the company's share price at the next valuation.

What Happens To My RSUs If I Leave My Company?

If you leave your company, you are very likely to lose all your unvested shares, but you'll keep any shares already vested.

Should I Sell My RSUs Immediately?

The best way to think about it, is to ask yourself this question:

If you were given the amount of money your RSUs are worth in cash, would you go and buy the company stock you've been given?

If yes, they may be worth hanging on to. If not, then perhaps selling them makes more sense.

Like all aspects of financial planning, there is never a one-size-fits-all solution and the answer to this question depends on your personal circumstances.

That said, the seemingly more popular option for clients, in my experience, is to sell them down as soon as they have vested and use the post-tax proceeds to invest in something more tax-efficient like their ISA or pension, or simply use this money to fund that year's holiday!

If you want to discuss your situation to get a clear answer as to what you should do with your RSUs, we're happy to chat.

We'll consider your broader financial picture and objectives to understand what is right for you to do.

Get in touch via one of the buttons at the top of the page.

Permission to Spend

Let's play a quick word association game.

I say 'budgeting'. 

What connective words does your brain come up with?

---

If we were playing Family Fortunes, and you said 'permission', I think very few, if any, of our audience survey will have said the same.

I don't know that for certain of course, I'm not Les Dennis.

But from my experience of conversations I have with clients about budgeting and spending on certain things, it seems that the word "budget" often carries a connotation of restriction and deprivation. 

For many, it evokes images of tough times, cutting back, and denying yourself the things that make life enjoyable. 

When done right, a budget isn’t necessarily about limiting spending; it’s about empowering yourself to spend wisely. By embracing a budget, you can give yourself permission to spend on what truly matters, without guilt or anxiety. 

---

Understanding the Purpose of a Budget

A budget is not merely a tool for curbing spending—it's a framework that helps you allocate your spending in a way that aligns with your values and goals. 

Think of a budget as a personalised spending plan, designed to ensure that your money is working for you, not against you. It helps you identify your priorities, whether they be saving for a deposit on a home, travelling, investing in your education, or simply enjoying life without financial stress.

By establishing a budget, you can see clearly where your money is going and ensure that it reflects your true priorities. This clarity can be liberating, as it allows you to make informed decisions about where to cut back and where to spend, without the lingering guilt that often accompanies unplanned spending.

---

Shifting the Mindset: Permission to Spend

One of the key benefits of a budget is that it gives you explicit permission to spend. 

Setting aside money for specific categories—such as entertainment, dining out, or hobbies—you’re essentially telling yourself that it’s okay to enjoy these aspects of your life and allocate both your time and money to these things. 

You’re not overspending; you’re spending within the boundaries you’ve set, which is both responsible and empowering.

For instance, if you allocate £150 a month for dining out, you can enjoy meals at your favorite restaurant without worrying about whether you can afford it. That money is there, set aside specifically for that purpose. 

The beauty of this approach is that it eliminates the anxiety that often accompanies spending because you know you’ve already accounted for it in your budget.

---

Prioritising Joyful Spending

A crucial aspect of giving yourself permission to spend is identifying what brings you joy and fulfillment. Your budget should reflect your personal values and passions. 

If traveling is what makes you happiest, then prioritise it in your budget. Conversely, if certain expenses don’t bring you much satisfaction, reallocate that spending to something that does. Clearly I'm not talking about council tax here, that one's got to be paid if you want the bins taken away each week.

The concept of “joyful spending” involves focusing on expenditures that enhance your life, rather than feeling pressured to spend on things that don’t. This approach encourages mindful spending, where every dollar spent contributes to your overall happiness and well-being.

---

The Balance Between Saving and Spending

While it’s important to give yourself permission to spend, it’s equally crucial to maintain a balance between spending and saving. A healthy budget should incorporate savings goals, whether they be for an emergency fund, a home move, retirement, or other long-term objectives. By doing so, you ensure that your future self is also taken care of.

The balance between spending and saving can be fine-tuned by regularly reviewing and adjusting your budget. Life circumstances change, and so should your budget. If you find yourself consistently under-spending in one category, you might consider reallocating those funds to another area that brings you more joy or towards increasing your savings.

---

Practical Steps to Implement a Balanced Budget

1. Assess Your Income and Expenses: Begin by calculating your total monthly income and listing all your expenses. Categorise your expenses into fixed (rent, utilities) and variable (entertainment, dining out).

2. Set Financial Goals: Determine what you want to achieve with your money, both short-term (e.g., saving for a holiday) and long-term (e.g., retirement). Your goals will guide your budgeting decisions.

3. Allocate Funds Mindfully: Distribute your income across different categories, ensuring that you’re covering essentials, saving for the future, and allowing yourself room to enjoy life.

4. Review and Adjust Regularly: Your budget should be flexible. Review it every so often, say once a year, to ensure it still aligns with your goals and make adjustments as necessary.

5. Celebrate Small Wins: Acknowledge when you’ve successfully adhered to your budget and treat yourself within the limits you’ve set. This reinforces positive financial habits.

---

Giving yourself permission to spend within a budget is about more than just managing money; it’s about reclaiming control over your financial life and using your resources in a way that maximises your happiness. 

Embrace the freedom that comes with a budget—it’s not about limiting yourself, but about living a life that’s rich in the ways that matter most to you.

---

If you'd like to talk to us about your budgeting and ensuring it aligns to what is important to you, you can book in a free initial consultation here:

https://calendly.com/labfp/intromeeting

Otherwise, see you next time.