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
Independent Partners: See how much you could save by switching credit cards. Compare now
food + drinkMichelin-starred Tom Sellers on being this year's hottest property
tvParents (and kids) rejoice! A new wave of fantastic family entertainment is here
booksGeese, gorillas, grandads... and growing up
food + drinkHow one grocery e-tailer is gearing up for the Yuletide rush
food + drink
travelFor broadcaster Mishal Husain, a long-haul Club Med holiday was a chance for her family to explore its sense of 'zen' and 'animation'
- 1 Hundreds arrested as Canadian police smash worldwide paedophile ring
- 2 Sherlock series 3: Benedict Cumberbatch and Martin Freeman provide teasers for the biggest comeback in British television
- 3 Why Barcelona chose Everton to educate their latest prodigy
- 4 Mass murder in the Middle East is funded by our friends the Saudis
- 5 Japan cracks down on leaks after scandal of Fukushima nuclear power plant
- < Previous
- Next >
iJobs Money & Business
£25000 - £50000 per annum + Benefits + Bonus: Harrington Starr: C++ Server Dev...
£300 - £350 per day: Harrington Starr: Leading Electronic Trading Software Ven...
£80000 - £100000 per annum + benefits + bonus: Harrington Starr: Project Manag...
£50000 - £60000 per annum + benefits + bonus: Harrington Starr: Business Analy...
Day In a Page
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew
A two-bedroom maisonette set on the top two floors of a period building, close to Kentish Town Tube.
Take advantage of the extra space provided by former stables and outbuildings at this five-bedroom farmhouse.
This three-bedroom Victorian terrace is near to Queen’s Road Peckham station, Nunhead station.
A five-bedroom modern house with terrace, swimming pool, Zen treehouse and large carp pond
An unexpected gem with four bedrooms, remarkable vaulted reception and a galleried study area
A five-bedroom house in one of Lymington's most sought after tree lined avenues, moments from the marinas and sailing clubs
A grand early 19th century B&B close to the historic harbour, with four en suite bedrooms
A four-bedroom, 17th century home with walled gardens, a landscaped terrace, cellar and open fires
A six-bedroom house with five bathrooms and four reception rooms spread over 4,000sq ft of luxury living space
A stunning three double-bedroom apartment with two decked terraces in the exclusive gated community, Bromyard House
A 10-bedroom period, family home amid beautiful surroundings in the centre of the Wentworth Estate in Longcross village
A stylish three-bedroom apartment with two bathrooms and private landscaped garden, moments from Fitzroy Square
A Grade II-listed Elizabethan barn with landscaped gardens, exposed elm beams and four bedrooms, all with lovely views
A six-bedroom family home, dating back to 1280 with four reception rooms, barn, swimming pool and tennis courts in Harwell
A spacious two-bedroom flat, refurbished to a very high standard with private landscaped garden, close to Kentish Town station
An exceptional two-bedroom apartment with balcony and underground parking in the centre of Richmond
A one-bedroom, luxury, duplex apartment in the grand landmark building, Imperial Hall
Run a fabulous boutique shop, live above it in a one-bedroom flat and let a second one-bedroom flat that comes part and parcel
A Grade-II listed, thatched cottage in Hundleby village, with five bedrooms, a coach house and three and a half acres
A spacious two-bedroom flat in the heart of Hoxton Square with wooden floors and roof terrace
A five-bedroom family home with stunning pool and gym complex set among two acres of land
A six-bedroom period house with heated swimming pool and a separate two-bedroom annexe cottage in Townlake, £795,000
A spacious and contemporary two-bedroom flat arranged over three floors, with garden patio close to St George Square, £600,000
A one-bedroom flat in a beautiful Regency building opposite the beach in Kemp Town, £190,000
A two-bedroom flat with London skyline views close to Surrey Quays. £395,000.
A seven-storey tower with three bedrooms and a stunning roof terrace. Guide price: £850,000.
A 16-bedroom country pile with nine reception rooms, four self-contained flats and a 13th century Peel Tower. £850,000.
A classic six-bedroom Victorian Manse house 10 miles from Edinburgh. £495,000.
John Lennon's childhood home in Liverpool to be sold at auction. Guide price: £150,000-£250,000.
A six-bedroom detached period property with secluded gardens, ample parking and a double garage in Rye, £675,000.
A large split-level property with three double-bedrooms and roof terrace, close to Crouch End Broadway, £625,000.
A charming barn conversion in the picturesque Cotswold village of Ilmington with three bedrooms, a detached garage, workshop and beautifully manicured gardens £675,000.
A three-bedroom new build, ground-floor flat with two bathrooms, close to Bermondsey tube, £445,000.
A three-bedroom house in an enviable new development moments from Oxshott High Street, with secluded garden and decked area, £385,000
A two-bedroom split-level flat with stunning south-west facing roof terrace in the popular Brondesbury Conservation Area, £549,950.
A charming 16th century, three-bedroom detached house in Bidborough with picturesque garden