Wealth Check: Can a frugal lifestyle lead to a deposit for a flat?
Free of debt and already in the habit of putting aside money, a marketing employee wants to buy a property in the next five years
Sunday 17 April 2011
Luke O'Mahony is keen to save up enough money for a deposit so he can get a foot on the first rung of the property ladder in the next few years. The 23-year-old has worked in marketing for the past 18 months, and currently earns about £21,000 a year plus bonus.
Originally from Oxford, Luke now rents a room in a shared flat with three friends near West Hampstead in north-west London. "I pay £615 a month in rent and am on an 18-month contract at this property," he says. "But I would hope to get a mortgage within the next five years."
Having worked all the way through university, Luke is in the fortunate position of having no debts. "My day-to-day costs are also pretty low as I cycle to work, so don't need to pay for a car, or for the Tube," he says.
Luke has been disciplined about building up his savings, and currently has £2,000 in an online account with HSBC.
"I normally put away between £200 and £300 each month, but as the rate is around 0.2 per cent, this is earning next to nothing," he says. "My current account is also with HSBC, and I try to keep between £500 and £1,000 here. I like the idea of having all my money with one bank to keep things simple, but know that this approach is losing me interest. I'm ready to move my money elsewhere to get a better return, but not sure where the best place would be."
Aside from these accounts, Luke has £1,000 saved with the Funding Circle, a social lending platform where savers lend money to small businesses. "I find this a really interesting way of saving, and like the fact you can choose the rate you want to lend at," he says. "This money is currently earning a rate of 9.3 per cent."
Looking to the longer term, Luke does not yet have a pension. "I'm always getting nagged to think about saving for retirement, but have no idea where to start," he says. He also has no protection policies in place.
Our panel of independent financial advisers (IFAs) agrees that Luke is in a good financial position. However, they say he also needs to think about saving for the longer term and protecting his income.
Saving for a deposit
As Luke has a fairly frugal lifestyle, he can afford to focus on his main goal – building up enough of a deposit to get a mortgaged property of his own in the next five years, says Nick Lincoln from Values to Vision Financial Planning.
"Five years is a short time in investment terms and means that Luke's savings will need to remain in low-risk cash or cash-like accounts," he says. "He simply can't afford to take any investment risk with this timescale, and needs to get his savings working hard for him, although this is not easy in the current environment."
Use your ISA allowance
Luke should move the £2,000 held in the HSBC online savings account into a cash individual savings account (ISA), says Danny Cox from Hargreaves Lansdown.
"The interest rate should be much higher than he is currently getting, and the interest will be tax free," he says. "Savers can now save up to a maximum of £5,340 into a cash ISA, but HSBC doesn't offer the best ISA rates, so Luke could shop around to find a better deal." For example, Santander is offering 3.3 per cent on an ISA which tracks the Bank of England base rate. "Santander offers this account online as well as in branches, so Luke should be able to continue to manage his financial affairs easily," says Mr Cox.
Going forward, Luke should continue to save into a cash ISA, but keep an eye on the rate of interest, and be prepared to transfer this to a different provider if the rate falls significantly on the first anniversary.
Mr Lincoln adds that if, as announced in the Budget, National Savings & Investments (NS&I) begins offering index-linked savings certificates once again in the near future, this could be an option.
"These are tax free and offer an inflation-busting return," he says. "I would suggest five-year certificates if Luke is sure that he will not be buying a property before five years have elapsed."
Consider your attitude to risk
Robert Forbes from Plutus Wealth Management says that while the Funding Circle and similar arrangements do look attractive from the potential returns that are available, Luke needs to exercise a little caution.
"The online peer-to-peer lending model cuts out a significant proportion of the costs associated with lending that a traditional bank would incur," he says. "This allows the interest rate the lender receives to track more closely the rate the borrower incurs. However, you do need to take note that this has more risk associated with it than with a traditional high street bank account due to the potential lack of liquidity and not having access to the Financial Services Compensation Scheme."
Nonetheless, he points out that it is possible to manage the risk. "You can do this by limiting the percentage of your total assets that are involved, and by lending to a spread of different borrowers, rather than a single business," he says.
Saving for the longer term
Luke should check whether he is able to join an employer's pension scheme, so as to benefit from any pension contributions, says Mr Forbes.
"Within limits, your contributions will be entitled to tax relief, helping to increase the speed with which your fund should grow," he says. "However, once in a scheme, you will be unable to start to draw on these funds until you are at least aged 55." If there is no employer's scheme, Luke should consider starting his own private pension, says Mr Cox.
"Stakeholder pensions are the simplest and have the least investment choice," he says. "Charges are capped at 1.5 per cent for the first 10 years, and 1 per cent thereafter. Personal pensions have a wider choice of investments but with no charge caps. A self-invested personal pension (Sipp) has the widest choice of investments and a low-cost Sipp can often be cheaper than a stakeholder pension."
When selecting funds, this should be based on a number of factors such as personal attitude to risk and predicted time to retirement.
"Most people start with relatively modest contributions aiming to increase them over the years," he says. "The longer Luke saves into a pension and the more he saves, the better and potentially earlier retirement he will be able to afford."
Given that illness could significantly hamper Luke's future earning potential and associated lifestyle, Mr Forbes recommends he consider products such as income protection – which pays out a regular income when the policyholder is unable to work for medical reasons – and also critical illness cover. "It is important to consider what your employer offers as part of the staff benefits, and then to ensure that any personal insurance arrangements you put in place dovetail with these," he says.
Do you need a financial makeover?
Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London, W8 5HF
- 1 Malaysia Airlines MH17 crash: Pro-Russian rebel 'admits to shooting down plane'
- 2 Israel has discovered that it's no longer so easy to get away with murder in the age of social media
- 3 Israel-Gaza conflict: The myth of Hamas’s human shields
- 4 Amy Winehouse unpublished 2004 interview: ‘Ten years from now I’ll be 30, so I’ll maybe have one baby’
- 5 Dutch paedophile club to fight their ban at the European Court of Human Rights
Malaysia Airlines MH17 crash: Vladimir Putin is given 'one last chance' to end hostilities in Ukraine
The 'scroungers’ fight back: The welfare claimants battling to alter stereotypes
The truth about conspiracy theories is that some require considering
Malaysia Airlines MH17 crash: Ukrainian military jet was flying close to passenger plane before it was shot down, says Russian officer
Malaysia Airlines MH17 crash: Massive rise in sale of British arms to Russia
Malaysia Airlines MH17 crash: victims’ bodies bundled in black bags and loaded onto trains
iJobs Money & Business
£350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...
£300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...
£35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...
£475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...
Day In a Page
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar