Wealth Check: 'I want to be debt free and a homeowner in five years'
A recent graduate is keen to pay off her university loan, but also has ambitious plans to get on the property ladder within the next five years
Sunday 16 October 2011
Jessica Dixon, 24, is keen to pay off the debts she racked up as a student, totalling about £19,000. For the past 18 months she has worked in public relations earning £23,000.
"I would very much like to pay off my debt within the next five or so years, but I'm not quite sure how feasible this is, especially considering my income," she says.
"Some people have told me I shouldn't worry about the loan as 'everyone has one', but I feel like it's constantly hanging over me, as I will be paying it off for a very long time."
She has some savings, with £5,000 in a Nationwide e-Savings account paying 0.45 per cent, but she is considering moving this into an individual savings account (ISA). "But it's hard to know which one to pick," she says. "Anyway, my savings hardly amount to much."
Over the past eight years Jessica has also held shares with Foreign and Colonial Investment Trust, which were affected by the recent stock market turmoil. At present, they are worth about £3,034 but she is considering cashing these in soon. "I just wonder whether this is sensible or not," she adds. "I am unsure how much was invested in total, as it was an initial lump sum, then over the years I put in £500 here and there."
She pays £540 a month for a room in a three-bed house, but is keen to get a foot on the property ladder as soon as possible. "I feel I'm throwing money down the drain each month, but definitely don't have enough money to buy yet – although I would like to start saving towards this," she says. "Realistically, I probably won't be able to get on to the property ladder until my late twenties, which is frustrating, but it's just the way it is."
Turning to long-term planning, Jessica isn't contributing to a pension as her employer doesn't offer a scheme that will match her contributions. "I'm slightly sceptical about paying into one anyway, in case there isn't a good return,"she says. "I've also heard you might not get back the money you put into a pension scheme on retirement, and wonder whether it would it be better to go down an ISA route for this." Jessica has no protection policies in place.
Jessica faces a common conundrum, says Danny Cox, from independent financial adviser (IFA) Hargreaves Lansdown. "She is paying a high proportion of her income in rent at a time when she would like to be saving more for her future and is paying off student loans." However, with a little tweaking, she can make the most of her financial situation, and plan towards future goals.
Wiping out the student debt is not a priority as it is one of the cheapest forms of borrowing – although for Jessica it will seem a burden that reduces her take-home pay. At present she is paying 9 per cent of the amount earned over £15,000 towards the student loan, amounting to about £60 a month. "Although this means it takes ages to repay the debt, it is not as daft as it sounds because the interest rate is actually pretty low," says Bob Hair from wealth management firm Turcan Connell. "Currently, it is only 1.5 per cent."
However, Jessica should review the rate she is paying every year to check that it remains competitive, adds Philip Pearson from IFA P&P Invest, and that her savings are achieving a greater return than the cost of the loan.
It makes sense to build a savings buffer for emergencies, stress the advisers. This way she will avoid taking out a loan if cash is suddenly needed.
Jessica is doing well on this front, however, as she is living within her means and has already saved a good sum. However, she should take advantage of the tax-free interest in an ISA and switch her savings into one of these accounts.
She can save up to £5,340 in a cash ISA for the current tax year. To search for a suitable account that will allow her to transfer her Nationwide savings she can check comparison sites such as moneyfacts.co.uk.
"Tying some of these savings up for a year or more may improve the rate of return," says Mr Cox. "But then, she might need the money during this time, and in my opinion she should stick to an easy access ISA."
Stock market investments
Unfortunately, the interest rates available from cash savings are below that of inflation, which is currently about 5 per cent. "This means that cash savings are being eroded by the rise in the cost of living," says Mr Pearson. "She might want to consider an alternative approach to cash to guard against the ravages of inflation, and this is where an equity ISA could help."
Up to £10,680 can be invested in the current financial year in an equity ISA, but this reduces depending how much is put into a cash ISA for that year. As a starting point, Jessica should speak to Foreign & Colonial to transfer the shares in this account into an equity ISA.
The advisers agree that the shares should be kept for the time being, particularly as Jessica does not need the money immediately. The investment trust includes a broad portfolio of global companies and has a low charging structure, says Mr Cox.
However, a word of warning; any shares should be regarded as a long-term investment of five years or more. "If Jessica cannot genuinely afford to take the risk that these shares fall in value she should sell them, and hold the money in cash," stresses Mr Hair.
The advisers warn of the difficulties of taking first steps on the property ladder. As a first-time buyer, Jessica will need a hefty deposit and to save for fees associated with house purchase. Without parental support or financial encouragement from the Government, Jessica will be unable to buy for the foreseeable future.
"Although renting property may be seen as dead money to Jessica, it is a good option at this time, until her career is more established," says Mr Pearson. "Most lenders require a minimum deposit of 5 per cent in order to consider a mortgage, and property prices still seem overvalued."
Turning to pension contributions, Jessica is young enough for these not to be a priority. However, she would pay 80p for every £1 that is invested and the funds will grow tax free, which makes pensions a worthwhile long-term investment strategy. But she should beware that the sum she gets at retirement depends on performance and the charges on her pension.
In future, all employers will need to make a pension scheme available, and will have to pay something into it for her. The introduction of the National Employment Savings Trust means that by 2017 every employee will have access to a pension plan.
Do you need a financial makeover?
Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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