Wealth Check: 'Can I see the world and still buy a home?'
Each week we give 'Independent on Sunday' readers a financial makeover
Sunday 18 July 2004
Saving up to see the world while also putting money by towards a deposit on a house - at 24, Adam Burton seems to have a financial mountain to climb.
"I'm looking for a balance," he says. "I know it's important to save for a house in the future, but I do want to go travelling before the age of 30."
Over the past two years, he has managed to put the maximum £3,000 a year in a mini cash individual savings account (ISA) with Nationwide building society. However, he is now in the process of transferring this money to Abbey and its postal mini cash ISA, which offers 5.1 per cent interest. He will probably put this year's maximum allowance there too.
"I've been saving for some years now, as well as having money from an inheritance, and I want to get the best rates I can," he explains.
Adam says he is conservative with a small "c" when it comes to his money. He tries to steer clear of an overdraft on his HSBC current account and keeps a tight rein on his credit card (also with his bank).
"I use the card for big-ticket items, to take advantage of buying on credit in case there's a problem with the purchase later. Even then, I try to pay the debt off by the end of the month."
One debt he does still have to clear, however, is £5,000 in student loans. "The interest rate seems low enough not to worry about," he says. "To be honest, I tend to ignore it - an amount simply goes out of my pay cheque each month."
Since joining the Tetley tea company, Adam has invested in a money purchase pension scheme. He contributes 4 per cent of his salary, while Tetley puts in 8 per cent.
He currently lives in west London, paying £400 a month in rent. "Long term, I'm not sure if my future lies here in this city," he says. "My reasoning is that if I save for the next four or five years, I'll be able to afford a decent place outside London."
Adam would consider investing in shares if the right opportunity came along, either directly or via a fund. He says he has no critical illness cover or income protection.
Adam Burton, 24, lives in Ealing, west London
Job: trainee with the Tetley tea company.
Income: between £25,000 and £30,000.
Savings: £6,000 in mini cash individual savings accounts.
Goal: to travel the world but still save towards the purchase of a home.
The cure: Now make your savings fly
Adam needs simply to put away as much as he possibly can for his two goals - and use every available tax advantage.
"Don't try to separate the two savings targets," says Paul Willans of independent financial adviser (IFA) Blick Rothenberg. "Build up a single deposit."
Adam's responsible attitude to his credit card is praised, but what would happen if he were unable to clear the debt one month? Ben Gibbs of IFA Glazers advises him to consider switching from HSBC, which has a 15.9 annual percentage rate (APR), to one of the many 0 per cent introductory offers.
The financial experts agree that Adam is on the right track with mini cash ISAs, particularly in his decision to switch from Nationwide's 4.65 per cent to a more attractive rate at Abbey.
Since he is likely to use up his mini cash ISA allowance for this tax year, he should consider putting extra money in high-earning building society savings accounts, says Patrick Connolly of IFA John Scott & Partners.
Chelsea building society offers 5.25 per cent gross for a minimum investment of £500, but requires 30 days' notice to avoid loss of interest on withdrawals.
While his long-term aim may be to save for a home of his own, Adam shouldn't bother with any asset classes other than cash until he has finished travelling, says Mr Connolly.
Given that Adam has a fairly cautious approach to investing, Mr Willans suggests that he consider NS&I index-linked certificates, which provide a tax-free return equivalent to the rate of inflation (currently 2.8 per cent) plus 1.25 per cent (ie 4.05 per cent) for three years. If he can keep his money locked away for five years, he will get inflation plus 1.35 per cent on his savings.
Adam is paying an interest rate of 3.1 per cent on his student loans, says Mr Connolly.
As long as he can earn interest at a higher rate than this on his taxable savings, he will have little incentive to pay the loans off early.
With his employer making a contribution of 8 per cent towards his pension pot, Adam is on to a good thing, our panel of IFAs agree. At the moment, he could be receiving as much as £3,600 a year at a cost to himself of just £936 - an excellent start, says Mr Willans.
He could do more, however, suggests Mr Gibbs. "Adam may want to invest more now - particularly as he is unlikely to have spare money to keep up his pension contributions when he is away travelling."
As a member of an occupational scheme, he can contribute up to 15 per cent of his salary.
Since Adam is only 24, with no large debts and no dependants, he has no need for life insurance, says Mr Gibbs. Even so, he should still check to see if his employer offers income protection after he has been in his job for a set period. If not, he should consider taking out some form of protection himself at a later stage.
If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email firstname.lastname@example.org
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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