Wealth check: How to prepare for the trip of a lifetime
Travelling the world is on the cards for Jennie Hill, but she should not forget long-term plans for her finances.
Sunday 28 March 2010
Jennie Hill, 28, from north-west London, is planning the trip of a lifetime. Once the trainee clinical psychologist's current role ends in September, Jennie is all set to travel the world for six months.
"So far I have saved £4,000 for travelling," she says, "But given that saving rates are low at the moment, I need to know how to maximise my returns short-term so I can save for my trip in the most effective way.
But Jennie also needs to be able to manage her money while she is away. "I'd like to know the best bank to be with while I am away," she explains. "I know that Nationwide used to do free withdrawals abroad but no longer do this. I don't want to carry too much cash on my person while I travel, but also don't want to pay high fees to withdraw my money."
Jennie's top priority is to save as much of her monthly income as possible into her travel fund, but her financial planning shouldn't come to a halt while she's away, warns Duncan Carter, an independent financial adviser for Clearwater Financial Planning.
"Jennie should look at both the short-term intention of travelling in October as well as what she intends doing upon her return in the next 12 to 15 months," he says. "Travelling while you're still young is a fantastic thing to do, but the longer term also needs to be considered."
She has done well to save £4,000 so far, but Jennie is keen to step up her saving and interest rate as her departure date draws near. Her take-home pay is around £1,700 after tax every month, but as she only spends around £1,400 on her mortgage, bills, food and other living costs, there is plenty of room to add a significant sum to her travel money every month.
"To help identify where additional savings can be made, Jennie should keep a note of every penny spent each day throughout the month," says Philip Pearson, an independent financial adviser for P&P Invest. "This will highlight unnecessary spending, help set her monthly budget, and maximise the savings she could add to her travel cash before September."
Jennie's travel money is currently split between an Alliance & Leicester cash ISA and a savings account linked to her Alliance & Leicester current account. "My cash ISA is full for this year so I need another one for the coming tax year that I can access instantly when I go away," she adds. "I'd also like to keep £500 aside for emergency cash."
To make the most of her savings interest, Jennie is right to put her money into cash ISAs, the advisers agree. "Jennie's current ISA provider, Alliance & Leicester, offers an instant access ISA of 3.5 per cent, which is very competitive," says AJ Somal, an independent financial adviser for Uniec Financial Solutions. But if she can't access that offer as an existing customer, Barclays currently offers 3.1 per cent instant access, and Nationwide's instant access ISA is paying 2.75 per cent. Allowances for cash ISAs are increasing to £5,100 from April, so Jennie should make the most of the new limit to ensure she has the money she needs."
"Having access to sufficient funds to support their travelling, without having to carry huge amounts of money around is a big dilemma for many travellers," says Mr Pearson. "The most obvious choice would be to consider a debit card, where transactions can be charged against an account and deducted automatically. The Clydesdale Bank International Current Account will be an ideal choice. A minimum balance of £2,500 is required to open the account – significantly less than normally needed for an offshore account. And the account can be used in sterling, euros or Australian, US or New Zealand dollars."
Jennie could also apply for a credit card to reduce the amount of cash she has to carry around. For example, the Post Office Mastercard doesn't charge customers for overseas use, but with a typical APR of 19.9 per cent, Jennie should start to clear that debt as soon as she returns.
Insurance, and a will
Meanwhile, to protect her from the financial effects of accident, illness, theft or loss of her possessions while she's away, Jennie's travel insurance should be as comprehensive as possible. This should cover worldwide travel, repatriation to the UK if necessary, medical treatment including any necessary hospital stays, lost luggage and personal items including her passport and travel documents.
Within the EU Jennie is covered for healthcare as long as she has a European Health Insurance Card (EHIC) which can be applied for online at www.e111.org.uk/ apply.html. She should also check the details of her home contents and buildings insurance policies to make sure she's covered for periods of extended absence.
Jennie is keen to create a will before she leaves for her trip – which is crucial for anyone who will be away for a long period – but because her property is jointly owned with her former partner, Jennie should change this to a "tenancy in common" so that her share goes into her estate in the case of her death.
Medium & long-term planning
While she is away Jennie will need to temporarily stop repaying her student loan. This should happen automatically as she won't be receiving a salary, but alongside any other standing orders or direct debits, Jennie needs to make sure she's only paying her mortgage and associated bills while she is abroad.
Jennie wants to keep £500 aside for emergency cash while overseas. However, once she returns, the advisers urge her to increase this amount to the equivalent of between three and six months of her salary – around £5,100. This will cover her mortgage and living costs if she is made redundant or becomes unable to work.
"Jennie needs to start thinking about longer-term goals and objectives for her life after travelling," says Mr Carter. "I know that retirement seems a long way off, but it will happen. Jennie needs to think about her ambitions for a retirement income and put a plan in place."
As an NHS employee, Jennie currently has an enviable final-salary pension scheme. But once she leaves her current post she will need a new way to save for older age.
"Once she is back in the UK, Jennie should continue with the habit of regular saving in order to build up her financial security over the longer term," Mr Pearson suggests.
"She could do this through an equity ISA and stakeholder pension. The ISA will provide access to capital if Jennie needs money in the medium term, whereas the pension will provide a boost to the benefits available from the NHS scheme at retirement.
"A stakeholder pension is designed to provide a straightforward, simple approach to saving towards your retirement. There is no initial cost involved, low annual management charges, and the plan benefits from tax relief, which will boost Jennie's personal contributions by a further 25 per cent for basic rate taxpayers," adds Mr Pearson.
Do you need a financial makeover?
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