Richard, 31, works in the IT department of a pharmaceutical company, earning £16.50 an hour on a contract basis. He is looking for a new job paying around £25,000. However, Richard is considering taking a career break next September to study for a Professional Graduate Certificate in Education (PGCE), the first step towards becoming a teacher.
With £8,000 invested in a private pension fund from a previous job, Richard is hoping, with further contributions, to receive a retirement income worth around £15,000 a year in today's money.
Personal: Works in IT for a pharmaceutical company on a contract basis. Looking for permanent employment and thinking of becoming a teacher.
Income: £16.50 an hour. Desired salary - c £25,000.
Property: Rents in Horsham, Surrey at £310 a month but plans to buy his first home in 2006.
Pension: Not in any scheme but has £8,000 invested from previous employer. Aims to start saving £250 a month.
Savings: £2,200 in HSBC current account.
Monthly expenditure: £310 on rent plus £600 on general living costs.
We asked three independent financial advisers for their help: Lee Pimblott of Plan Invest, Drew Wotherspoon of Charcol and Sarah Windsor-Lewis of Punter Southall.
As Richard's main priority is to purchase a house in 2006, he should start to save as much as possible towards a deposit and moving costs, suggests Lee Pimblott. Most lenders will offer a loan equivalent to 3.5 times his income but he should try to find a minimum deposit of 5 per cent of the property price. He will also have other costs as part of the property purchase - survey fees, legal costs and stamp duty - and he should ask a solicitor for guidance on how much these might total in his area.
Richard should begin by looking at repayment mortgages, where the loan reduces year by year and he would not be relying upon any investment vehicle to repay what he owes.
However, before signing a mortgage agreement, Richard should satisfy himself that the payments are affordable, particularly as he is considering taking time out to study in 2006. If his income drops markedly while he is studying, which seems likely, he could quickly run into trouble with his mortgage provider.
Drew Wotherspoon agrees that with home ownership high on Richard's agenda he would benefit from putting money aside for a deposit. Failing this, he does have the option of taking a 100 per cent mortgage. Doing so, however, will mean paying more expensive interest rates because lenders reserve the best deals for those with the largest deposits.
With the income he is aiming for, using traditional income multiple calculations, Richard could borrow approximately £87,500. It is fairly obvious that this will buy little in Surrey. Some lenders base what they will offer on affordability, so he could possibly raise as much as £100,000.
On a 100 per cent mortgage, he should expect to pay an interest rate of around 5.5 per cent. The monthly cost for this would be around £620 on a repayment basis. However, if he could raise even a 5 per cent deposit, the savings would be considerable. He could get a rate around 1 percentage point lower, reducing his monthly payments £560. Keeping payments down will be particularly crucial if Richard does decide to do the PGCE.
Sarah Windsor-Lewis would not recommend making such a financial commitment during a period of career uncertainty. Richard must first decide whether he is going to follow his dream and become a teacher. Once his financial position is clearer, his planning needs will be easier to assess, she suggests.
Richard has no savings but does have a fairly considerable amount of money in his current account, says Wotherspoon, even though this pays almost no interest. He suggests that Richard immediately moves this cash into a different account that provides instant access as well as a better rate. Doing this will also help him to build up an emergency fund.
It is always sensible to have three months' salary in an instant-access account in case of emergencies. For Richard this will be around £3,000, of which he already has a fair proportion saved.
He should consider saving using a tax-free individual savings account (ISA) that allows instant access. Cash ISAs are risk-free and operate in just the same way as any bank or building society account, but without any tax to pay on interest.
The best accounts pay quite generous rates of interest - certainly far more than Richard is currently earning in his current account. First Direct, for instance, pays 5.5 per cent on the maximum £3,000 investment, though this is an internet-based deal, so he will need to have online access to take advantage of it. If not, the best non-web accounts currently pay around 4.5 per cent.
Windsor-Lewis thinks that as Richard can afford to save £250 a month, it would be helpful for him to prioritise his short, medium and long-term strategies. For example, short-term savings could include accumulating cash for a deposit or increasing his emergency float.
Medium-term savings objectives could include a career change or property purchase up to five years in the future.
For the longer term, Richard could consider an equity-based ISA - although these plans have more risk attached, they also provide the potential of better growth. It is possible to invest up to £3,000 each year in both an equity ISA and a cash ISA, so saving for the future does not need to be at the expense of building up short-term funds.
Windsor-Lewis adds that long-term retirement objectives are best met by pension funding because the tax breaks on these plans are so valuable.
Richard has already built a pension fund of £8,000 and the employers he is considering joining will contribute around 3 per cent of his salary towards a pension, says Pimblott. To secure a pension of around £15,000 a year in retirement, Richard will need to contribute a great deal more than £250 a month - Pimblott suggests around £1,000 a month would be more realistic.
However, his main priority is to buy a house, so saving more may not be affordable for now.Reuse content