Wealth Check: 'How should I invest my first proper salary?'
Saturday 27 June 2009
Chris Watt, 23, works as a junior reporter with the Herald and Times Newspaper Group. He lives with his partner in a modestly priced flat in Glasgow city centre.
Having recently graduated from the University of Glasgow, he is very happy with his current employment situation but he is thinking about his pension and is keen to get onto the property ladder.
"I've never had a salary before, and beyond the basics of feeding myself and renting a flat I don't really know what to do with it," he says. "I guess I should probably think about a pension, though at 23 it doesn't seem like a pressing concern. Looking at how pension funds have behaved lately, I feel like I'd be as well just hoarding Euros in my sock drawer or investing in gold teeth. Outside of that I would like to get onto the housing ladder within the next few years."
As well as starting a pension and getting a home of his own, Chris is also keen to find alternative ways to supplement his income.
"At the moment, I'm really just hoping to stay afloat, but in the longer term I've always fancied playing the stock market," he explains. "I'm unlikely to get rich through journalism, so if I could augment my income with some good investments that would be very helpful."
Income: Chris earns around £22,000 per year
Monthly Outgoings: Around £1,270
Debt: £8,000 to student debt company
Savings: Chris has £8,000 in ISAs
Advice this week is given by Gordon Bowden of Quainton Hills, Alex Pegley of Calculis, and Danny Cox of Hargreaves Lansdown.
The experts agree that Chris should set up a pension and start saving for his retirement.
"Chris knows he should consider pensions, but thinks that at 23 he's too young. By starting pension contributions now he will massively boost his retirement income. Assuming Chris wants to retire at 60, if he starts contributing now his pension will be 99 per cent higher than if he waits 10 years (assuming the same regular contribution) and he won't miss the money he contributes," explains Alex Pegley.
He believes that Chris's employer will almost certainly offer some type of pension arrangement, and recommends that he joins it as soon as possible and look to invest adventurously within it.
"In the unlikely event that his employer does not offer a pension scheme, Chris could start his own private pension such as a low-cost SIPP. A low-cost SIPP offers a huge range of investment choice including shares, funds and investment trusts. Contributions to SIPPs start at £50 per month and these can be built up over the years," says Danny Cox.
Once Chris has established his pension scheme, the experts believe his next step should be to invest in a high-interest ISA. In doing so he will protect himself in a turbulent market by having a financial buffer, should he find himself unemployed.
Gordon Bowden explains: "While interest rates are fairly dreadful at the moment at least his money should be secure and accessible when he needs it. Indeed this money can also provide a cushion for access should he be made redundant and not be able to find work for a period of time. Having a cash cushion as self insurance may prove to be the less expensive option."
Pegley advises Chris to get on the property ladder as soon as possible. "Chris wonders whether now is a good time to be buying property, in short yes – prices are lower than they have been and appear to have started rising. I think we're currently experiencing a w-shaped recovery in prices, ie they are picking-up (mainly as a result of limited supply) but may fall further (as the recession deepens and more jobs are lost). Regardless of whether house prices will fall again, by buying now Chris will pay less than a year ago and, in the long term, that will represent good value."
Gordon Bowden agrees: "My opinion is that Chris and his partner should do everything they can to get a foot on the housing ladder. He will not be able to time the bottom of the housing market but, in the long run, a house or flat purchase should prove to be a good long-term investment regardless of the actual timing. The alternative to buying is to rent, which will involve him paying his monthly rent to a third party and never seeing a return for it."
With regard to unemployment insurance, Chris should shop around carefully before taking out cover. Cox says that unemployment insurance will often only cover debt repayments or other long-term commitments, and then typically only for a 12-month period. Generally, unemployment insurance is inexpensive, which tells you that not many people claim successfully, otherwise the premiums would be considerably higher.
For a free financial check-up, write to Wealth Check, The Independent, 191 Marsh Wall, London E14 9RS; or email firstname.lastname@example.org. To find an independent financial adviser in your area, visit www.unbiased.co.uk
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