Wealth Check: 'How do I build up my savings after buying a house?'
An IT worker emptied his account last year when he bought his first property. Now he wants to know how best to put away more money now and for the future
Sunday 04 September 2011
Taking the first step on to the property ladder last November left Chris Tufts with a big hole in his finances and he's now keen to build up his savings once again.
The 26-year-old, who works in technology support for a firm which helps people solve their computer problems, takes home about £1,500 each month after tax. He has been in this job for almost five years.
Last year, Chris bought a two-bedroom semi-detached house in Preston for £115,000. He has a three-year fixed-rate mortgage with Halifax at 5.69 per cent. This costs him about £600 a month. While Chris used to have an emergency fund squirrelled away in a Halifax individual savings account (ISA), there is very little left after buying the house.
"Being a first-time buyer has wiped out most of my savings, and there is only around £50 left in the ISA," says Chris. "I've found it very expensive buying my first house on my own, and there's been a lot of outlay as I've needed all sorts of furniture."
Chris also owes about £479 on a Halifax credit card with an annual percentage rate (APR) of 15.9 per cent, and currently makes the minimum repayment of £10 a month.
Aside from his mortgage and credit card repayments, Chris pays £133 a month for his energy bills, £20 for his water bill, £45 for TV, broadband and phone, £77 for council tax, £20 for his mobile bill, and £12 for his TV licence. He also pays £65 for his car insurance, £16 for his home insurance and £60 a month to pay off his sofa.
"After all of this expenditure, I have about £465 to live on a month," he says. "I'd love to reduce my fixed outgoings to increase the amount I have to live on." Chris is keen to clear his credit card debt, and start amassing savings both for the shorter term and the longer term. "This is the first time in my life I've not had any financial security," he says. "At present, I'm not paying into a pension, and want to get this sorted to ensure that I can live comfortably when I'm older."
In terms of protection, Chris gets critical illness cover as a taxable benefit from his employer.
Our panel of independent financial advisers (IFAs) agrees that given his financial goals, Chris is already on the right lines in wanting to repay expensive credit card debts, create a cash reserve and start saving towards retirement. They add that while it's good that he's been with the same employer for almost five years, earning a reasonable salary for his age and line of work, he needs to take steps to ensure he can enjoy today without having to worry about tomorrow.
Clear the card debts
Chris needs to focus on clearing his credit card debt as a priority, according to Duncan Clearwater from Clearwater Financial Planning.
"Chris doesn't have a huge balance on this card, but the interest rate charged is still about five times that which he will receive on equivalent savings," he says.
Kusal Ariyawansa from Appleton Gerard adds that Chris needs to pay off more than the minimum £10 a month. "At this level of repayment, assuming he takes on no further borrowing on the card, it will take six years for him to repay his current balance," he says. "If he were to increase his monthly minimum payment to £50, this would take him 11 months."
Reduce his outgoings
Given that Chris's fixed costs are about £1,000, Malcolm Lyons from Music Media IFA recommends cutting these. "Chris should get online to shop around and find the best deals for his energy bills, TV and broadband package, and car insurance," he says. "It's worth talking to your existing providers and threatening to leave, as they may find you a better deal."
Mr Ariyawansa adds that Chris should also prepare a spreadsheet showing his income and outgoings to get a grip on his finances – and to help him with his budgeting.
Build a cash reserve
In addition, Mr Clearwater urges Chris to build a sum equal to between three and six months' take-home pay to create an emergency buffer.
"This will act as a fall-back in the event of unexpected costs or loss of income," he says. "It would be a good idea to use a cash ISA for this money."
Get into the savings habit
Mr Clearwater also advises Chris to think about savings. "Starting to save any amount is a good idea, and is also the way to begin a long-term savings discipline," he says.
Mr Ariyawansa adds that Chris should set up a direct debit so a set amount goes out of his current account on the day after payday.
"It only takes a few months for this pattern of savings to become habitual," he says. "Once Chris has built up a suitable emergency fund in a cash ISA, he can look into other areas, such as long-term investing through stocks and shares ISAs."
When Chris has built up some savings in a cash Isa and paid off his credit card debt, he could then direct some of his monthly savings to a pension.
"It's worth paying even a very small amount into a pension plan each month," says Mr Clearwater. "Stakeholder plans can accept a minimum of £20 per month – and the sooner you start the better. Most leading pension providers offer stakeholder plans, and at his age, Chris can afford to take higher risks to try to boost returns."
Mr Lyons points out that at some point after 2012, depending on the size of the firm, Chris's employer will be obliged to contribute to a pension for him – and Chris will also need to contribute. "Chris should ask his employer if they plan to take action earlier," he says. "Once the compulsory employer contributions come into effect, this will be a big step towards ensuring a comfortable retirement."
Generate more income
Mr Clearwater suggests Chris should think too about other ways to generate more income. "One option may be to take on a second job," he says. "Another is to take in a lodger. Provided you are offering furnished accommodation, you can receive up to £4,250 a year tax-free."
Mr Ariyawansa recommends that Chris asks his employer whether they will pay him in the event of temporary incapacitation through illness or accident, and if so, for how long.
"For about £13 per month, he should be able to start an income protection policy which will pay about 60 per cent of his salary, minus state benefits, until he returns to work or reaches age 60," he says.
"This will give him the comfort of knowing that his mortgage payments will be covered should he be unable to work due to illness or disability."
Do you need a financial makeover?
Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF firstname.lastname@example.org
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