Wealth Check: Turning a buck is hard enough. Should he move into buy-to-let?

A self-employed video producer has big plans for the cash he doesn't plough into his business. But his debts are shouting for attention.
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The Independent Online

The patient

Campbell Beaton, 26, admits that work for his video production company is hard to find as recession takes hold. "Lots of people are fighting for little bits of work," he says. "But hopefully the company will weather the storm."

He earns £32,000 as a self-employed producer of music videos and online content, and has been ploughing spare cash back into the company to give it the greatest chance of survival. "I put extra funds into equipment for the business, so if it got really bad, I could sell this to get hold of some money."

However, he already has some cash in hand. Campbell, from Finsbury Park, north London, recently sold £2,000 in premium bonds, leaving the proceeds in his bank account. He has also invested £1,000 in the stock of the FTSE-listed drinks giant Diageo.

Aside from ensuring the stability of his business, he is unsure what to do with his money. One possibility is investing in a buy-to-let property with friends, putting spare funds towards a joint deposit. "As prices are plummeting, this may be a good long-term investment," he says. "And we would buy it somewhere in London, where the market should soar again."

He has yet to take a step on to the property ladder, paying £460 a month to rent a room in a four-bed house. However, he is burdened by some debt. He has £1,500 split between American Express and Lloyds Duo credit cards at 18.9 and 15.9 per cent respectively. Besides this, he owes £4,000 in student loans.

As he concentrates on his immediate future, Campbell is choosing not to contribute to a personal pension plan, and he has no protection policies in place.

The cure

As Campbell has an uncertain income, he has "two financial priorities", says Gordon Bowden from independent financial adviser (IFA) Quainton Hills Financial Planning. Wiping out debt and building a savings buffer for hard times will help guard against the economic downturn. As he is in his twenties, longer-term financial planning can be dealt with at a later stage.

Debt

Campbell must rid himself of credit card debt, as he is paying hefty amounts of interest on both cards. "And he may not find he is able to transfer to a 0 per cent deal as these are drying up," says Adrian Lowcock from IFA Bestinvest. The interest he pays on debt is typically far higher than that earned on his savings, so he should redirect much of his personal spending money towards wiping this out.

However, the rate of interest on student loans fell from 3.8 to 3 per cent earlier this month. As it is so low, Campbell can continue paying this debt off gradually at the minimum rate – 9 per cent of his salary over £15,000.

Savings/investments

His next step is to build up emergency cash reserves. "If his business has a poor month, he will still need to pay rent and buy food," says Kay Burt, from IFA Kay Burt Investments. "He needs to be able to provide for himself without selling business assets while he looks for new work."

Ideally, this fund should amount to at least three months' salary. An individual savings account (ISA) is a good starting point as it will enable him to earn interest tax-free. He can invest the £2,000 from the sale of the pre-mium bonds in one of these accounts, in which he can save up to £3,600 each financial year. For example, Egg is currently paying 4.55 per cent on its cash ISA on a minimum deposit of £1.

Turning to his share holdings, Diageo is a "relatively defensive holding", says Ms Burt. "This sector tends to do well in a recessionary environment, as everyone continues to drink."

However, holding individual shares is a risky investment approach, she warns, as he is at the mercy of a specific sector in addition to market volatility. A diversified investment portfolio would be wiser for Campbell, including ISAs, fixed interest and unit trusts.

"If he is determined to put money in the market, saving regularly in a unit trust or open-ended investment company is ideal, as this will smooth out the peaks and troughs over time," says Mr Bowden.

But he should remember that the longer he stays invested, the more likely it is that the stock market will provide a better return than cash. As long as he needs access to his money, though, it is best to steer clear of the market.



Property

Delaying investing in a buy-to-let property would be sensible, agree the advisers. With many experts forecasting another 15 per cent fall in prices next year, waiting a few years could prove more profitable.

At the moment, Campbell does not have the financial reserves to tackle renovations and general upkeep, or to cover periods when there are no tenants, says Mr Lowcock. And "buy-to-let with friends", he adds, "is fraught with difficulty". The implications of Campbell or one of his friends getting into financial difficulties could be severe, or there could be disputes over when to sell the property. A wiser strategy would be to save for a deposit to buy his own home, which he is likely to want at some point.



Retirement

Campbell should start paying into a personal pension when his purse-strings are less stretched. "The longer he delays, the more money he will eventually need to set aside for his old age," says Mr Bowden. However, he still has time on his side.



Protection

As a self-employed business owner, Campbell would be wise to consider some form of income protection insurance when his finances will allow it. This will provide a replacement income in the event he is unable to work due to illness or disability. "The self-employed tend to be particularly vulnerable without the safety umbrella of sickness pay," says Ms Burt.

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