When Laura Cheal, 31, was made redundant in February, she decided to take the plunge and go freelance.
"I had always been in permanent employment," says Ms Cheal, who lives with her partner in south-west London. "But I was fortunate to find work quickly, and in April began working as a programme internal communications manager, at John Lewis, earning £300 per day. Nonetheless, I'm never quite sure how long the contract will run for, so I need to be in a position where I could cope if I found myself out of work."
Ms Cheal does put away some money each month, but admits that she could do more. "I do try to save regularly, but see this fund as being for a specific purpose, such as having the house decorated," she says. "As a freelance, I need to build up more of a savings cushion."
One of her big problems is that she is battling with debts. "I still owe £7,000 on a loan with Northern Rock at 8.8 per cent – although I have reduced this from the original £35,000," she says. "I also have an outstanding balance of £4,000 on a Virgin credit card held jointly with my partner, and £1,300 on an overdraft with Alliance & Leicester – although both of these are at 0 per cent.
"I want to clear my remaining debts by May. I've had the loan for about 10 years and feel as though it has ruled my life – so paying it off will be a huge relief. This will also mean I can start thinking more wisely about how I use my money."
With the debts cleared, Ms Cheal says she will have about £2,500 extra a month. "I don't have a pension at the moment, and am very conscious that I need to set one up," she says. "I'd also potentially like to start investing some small amounts too, but don't know where to start."
At present, Ms Cheal lives in a two-bed flat owned by her partner, and contributes half of the cost of the mortgage and bills – about £620 a month. The flat was bought in 2006 for £235,000, and there is £172,000 remaining on the mortgage; this is a fixed-rate deal with Platform at 3.44 per cent until May 2012.
However, the couple have plans to buy a bigger house together later in the year. "I want to make sure I'm saving in the most efficient way for a deposit and other expenses, and also want to ensure we get the best mortgage deal," she says.
Our three independent financial advisers (IFAs) warn that Ms Cheal is in a potentially vulnerable position as she has limited job security, no savings or investments – and is still paying off debts. They recommend that she focus on clearing her debts and setting money aside for both the short and longer term.
Repaying the debt
As Ms Cheal has already reduced her loan from £35,000 to £7,000, she is making good progress, says Adrian Lowcock from adviser Bestinvest. "Clearing off debts is the right approach as it will free up more capital," he says. "But Laura needs to ask herself whether May is a realistic deadline, as if it isn't, she risks putting her finances in greater distress."
As the interest rate on the loan is 8.8 per cent, she should try to make overpayments where possible, he adds. "Once the loan has been paid off, she does need to pay off the other two debts," he says. "They may be at 0 per cent, but they indicate a habit of overspending; getting into the habit of paying off a credit card bill when you receive it will help with saving discipline."
Padding a savings cushion
Despite many savings accounts paying below the rate of inflation, it is still crucial to build up savings which can be called upon at short notice. "This is particularly important for those who are self-employed," says Patrick Connolly from AWD Chase de Vere. "Given Laura's income and expenditure, I would suggest she saves about £10,000 in cash – giving her some breathing space if her job falls through." Mr Connolly recommends Laura open a tax-free individual savings account (ISA).
"The Santander instant access cash ISA is currently paying 2.85 per cent," he says. "For longer-term savings, she should also look at saving into a stock and shares ISA. For example, the Cofunds platform provides access to a wide range of investment funds and flexibility. Good initial funds include M&G Global Basics, Rathbone Global Opportunities and Newton Global Higher Income."
Start pension saving
While it is easy to focus on short-term financial priorities such as buying a new house, Ms Cheal cannot afford to ignore longer-term priorities such as pension planning. She cannot rely on the state to provide a comfortable lifestyle for her in retirement, and as she is self-employed, she will be getting no help from her employer.
"In simple terms, the more that is paid into a pension and the longer it is invested, the greater the return – and therefore the larger the pension," says Danny Cox from IFA Hargreaves Lansdown. "At this stage, there are other priorities, but Laura should aim to put money into a pension at the earliest opportunity. For every £100 saved, the net cost is just £80 because of tax relief; for higher-rate taxpayer, a further £20 can be reclaimed."
Mr Lowcock agrees that once Ms Cheal has rebuilt her savings and tucked away a bit of money, she can invest outside an ISA into a stakeholder pension. "With stakeholder pensions, the charges are limited by the Government, and the structure is the same, irrespective of the provider," he says. "Providers such as Aviva and Scottish Widows both offer stakeholders."
As Ms Cheal is self-employed, she will get no assistance from her employer if she is off work ill or injured.
"Laura and her partner should have life insurance sufficient to repay their mortgage should either die," says Mr Cox. "They should also consider insuring against accident and sickness. Income protection is the preferred solution, but Laura may find it difficult to get cover as she has been contracting for less than 12 months."
Debt repayment of the loan, cards and overdraft is important as their fixed-rate mortgage deal will end in May 2012, says Mr Cox. "This will then revert to Platform's standard variable rate (SVR) which is currently 4.24 per cent," he says. "But this is likely to increase as interest rates rise over the next year or so."
He also points out that Ms Cheal and her partner should see if their current mortgage can be transferred – or whether a new mortgage should be issued. "However, Laura needs to be aware that lenders like to see three full years of earnings for the self-employed or contractors, so this may restrict the amount they are prepared to lend based only on her partner's income," he adds. "This could limit their options when they come to remortgage in May 2012, or when they move house – making repayment of the other debts a bigger priority."
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