Lisa Bryant, from Clapham, south London, is keen to invest her money wisely after starting a new business venture. The 27-year-old founded BumpPR just over a year ago, specialising in public relations for the baby sector.
"I'm not seeking huge growth," she says. "But I'd like the company to enable me to work and have a family in the future – and I don't think I'm making the most of my money."
During the first year, she paid herself a salary of about £12,000 topped up by dividends for basic living costs, and managed to avoid taking out a bank loan to set up the business. She has yet to calculate the first year's profit, but hopes it amounts to about £50,000, with much of this money ploughed back into the business, and she has one member of staff.
She has managed to build up a surplus fund across several accounts, all with Norwich & Peterborough. This includes £18,000 in a business account paying 0.1 per cent, £10,000 in a current account set aside for tax purposes, and another current account for living costs. "I want to have a structure to help me save the tax payments, but feel I could be cleverer with the money," she says. "It's just sitting there making me nothing, and I'd like to set aside savings."
Lisa attempts to keep outgoings to a minimum after rent, which costs her £670 a month for a room in a two-bed flat in Clapham. Last year she moved back in with her parents to save enough to kick-start the business. She admits to being keen to buy, but is focusing on the company until she is in a position to apply for a mortgage. "Eventually, I would like to buy a flat outside London for about £200,000," she says.
She is not paying into a pension scheme. "I am more about the here and now, although perhaps once I own a home I will think more about it." She has no protection policies in place.
While Lisa is in a good financial position to build the business with no debts and a small cash pile, she is wise to seek advice, says our panel of independent financial advisers (IFAs). She could make more of her money and must also consider protecting her income.
"The key thing for Lisa will be balancing saving for medium-term goals, such a house deposit, while reinvesting profits back into her business to help it grow – as well as protecting it," says Dennis Hall from IFA Yellowtail Financial Planning.
Use your ISA allowance
"Lisa is wise to get into the practice of setting aside money for corporation and personal tax early into her business career," says Lorreine Kennedy from IFA Carematters. But if she hasn't already done so, she should consult an accountant to determine future and past tax liabilities.
Mr Hall says: "I am assuming that she has been paying herself £12,000 on a PAYE basis, and making payments to HMRC for national insurance. If she hasn't, and has simply been drawing the income, then she needs to deal with this quickly."
Aside from the company, Lisa's personal goal of buying a property must be considered. Ms Kennedy says: "Lenders today will not lend to anyone without a decent deposit, and for a first-time buyer with a new business it will prove almost impossible to secure a mortgage without at least two years of accounts and a substantial deposit on a property."
Lisa should prepare a business plan to show how she will manage to grow her income and savings over the next few years. Even with a deposit of £50,000, she will still need an income of about £40,000 to £45,000 – whether by salary alone or including regular dividends – to secure a mortgage of about £200,000.
Matthew Rich from IFA Alan Seward Financial Services says: "Keeping her money in basic savings accounts rather than seeking returns from the stock market is sensible, as her timescale is not long enough to safely cope with potential stock market volatility."
While N&P offers what many small businesses want – online banking and low transaction fees – for those businesses with surplus funds, the rates are not attractive. Going forward, Lisa should switch to a higher-paying account and save into a cash individual savings account (ISA), keeping an eye on the rate of interest. She should be prepared to transfer this to a different provider if the rate falls.
"Lisa could switch to the Santander Business account, giving her £100 cashback and paying 5 per cent on balances up to £2,500 for the first 12 months," says Mr Rich. "And money her business doesn't require can be withdrawn with £5,340 put in a tax-free cash ISA such as Santander's flexible ISA, currently paying 3.3 per cent."
Protect your business
Lisa should consider insurance contracts. "While being your own boss gives you a huge amount of freedom, it also means that if you fall ill your business grinds to a halt and soon after so does your income," says Mr Rich.
Given that illness could hamper Lisa's future earning potential and lifestyle, she should consider products such as income protection, which pays out a regular income when the policyholder is unable to work for medical reasons. "She would have to be careful as if she made a claim – with a new business it could be difficult to prove her income – but her interim accounts could be used to do so," says Mr Rich.
The policy costs will vary depending on the contract specifics. But for Lisa's age and occupation she could get cover to pay out £1,500 per month tax free once she is unable to work for two months at a starting cost of about £25 per month.
"Lisa should also consider professional indemnity insurance if she hasn't done so already," says Mr Hall. PI insurance protects the business against claims for loss or damage made by a client or third party if you make mistakes, or are found to have been negligent in some or all of the services you provided. PI insurance will also cover legal costs.
Employer's liability insurance is required by law if a business employs any staff. The cover is normally at standard limits. This insurance enables businesses to meet the costs of compensation and legal fees for any claims from employees.
Planning for the future
Lisa has many more decades of work before she will be eligible for a state pension. Given this, she has a number of choices when it comes to planning for the future, says Ms Kennedy.
"In the first few years of building the business, Lisa is wise to consider saving for her future using ISAs rather than pensions," says Mr Rich. While she will lose valuable income tax relief on any pension contributions, at least the capital within her ISAs will remain available if the business runs short of cash. While pensions are granted valuable income tax relief when a contribution is made, the downside is the pension cannot be tapped until age 55 at the earliest.
However, as her business and income grow, she could make use of a self-invested personal pension (Sipp), add the advisers. This has the widest choice of investments and a low-cost Sipp can often be cheaper than a stakeholder pension.
Do you need a financial makeover
Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF