Wealth Check: I want to buy a house of my own – but I also love going on holiday
PA wants to reconcile her desire to own a property with her love of foreign travel and shopping. Our three financial experts help her out
Saturday 04 January 2014
Lydia McDaid is keen to start saving more so she can continue to afford regular holidays, but she also wants to start salting more money away so she can buy her own house in the next few years.
The 27-year-old from Hornsey, north London, is a personal assistant to a managing director and earns about £25,000. She has been in her current role for two-and-a-half years and is now looking for a new PA job on slightly higher pay.
She has two savings accounts, both with NatWest. At present, she has £900 in her main account and £100 in an Advantage Gold account. "My savings can fluctuate from £1 up to £3,000, depending on what crops up along the way," she says. "Paying for Christmas and car insurance renewal – along with this month's rent – will mean my balance drops."
But Lydia is set on building her savings again. "I want to squirrel money away into a fund I can use for 'luxuries' such as clothes shopping and holidays. If I'm disciplined, this will hopefully mean I can continue to go abroad three times a year, as I did last year when I went to Las Vegas, Ibiza and Greece.
"In recent years, I've been able to afford this by carefully planning my saving and spending budget. In addition, I try to take advantage of discounts and deals on my grocery shopping, and make use of cashback sites such as Topcashback when buying online."
Lydia has no overdraft or card debts, but she has just started a finance plan for her car, and is now set to pay £180 a month until 2017.
In September last year, she moved into a three-bedroom apartment with two friends. "My share of the rent is £377 a month," she says. "However, my boyfriend Blain lives with me, so we halve this. I pay around £60 for bills.
"Eventually, I would like to move into a place of my own – but know I will need a lot of time to save for this. That's why, alongside my shorter-term savings, I want to start saving in a 'house fund.'"
At present, Lydia has no investments and does not pay into a pension. She also has no protection policies in place.
Our panel of independent financial advisers commend Lydia for living within a budget and for not having an overdraft or credit card debt, especially as she is quite focused on short-term goals.
However, they urge her to focus more on her longer-term financial priorities, such as building cash savings both for short-term needs in a rainy day fun and for the longer term in a house deposit fund. They also advise her to join a company pension as soon as she can.
Check the car finance plan
Patrick Connolly from Chase de Vere says Lydia must understand exactly what interest she is paying on her car finance plan, and what penalties she might face if she wanted to pay off her debt early.
"If there are penalties, she might be best continuing to make payments until the plan ends," he says. "But in future, to avoid debt, she could consider building up savings which would leave her having to borrow less on a finance plan."
Balance short-term costs and longer-term planning
While Lydia's main objectives involve savings to meet short-term costs, John Ditchfield from Barchester Green urges her not to neglect her longer-term financial planning.
"I'm concerned she may be living a little beyond her means in prioritising car purchase and frequent travel ahead of regular savings, retirement planning and property purchase," he says. Mr Connolly agrees Lydia must make sure she gets the balance right between living for today and planning for tomorrow. "On the positive side, Lydia seems very organised and has a good understanding of her income and outgoings," he says.
Build savings for the future
Mr Connolly suggests Lydia should start putting money away for the future by splitting cash savings into three pots.
"The first could be used for short-term expenses such as holidays and the second to build an emergency fund," he says. "In the third, she could build savings towards longer-term goals such as a house purchase."
He says Lydia should look to save longer-term cash savings in a cash Isa, as all interest is tax-free.
Mike Lavin from Helm Godfrey adds that Lydia's potential increase in salary represents an excellent opportunity for her to increase her monthly savings. "But she should establish a savings arrangement soon after her new income kicks in to avoid getting used to having more disposable income," he says.
Save hard for a house deposit
As Lydia's rent and household bills are low, she should start saving for a house deposit.
Mr Lavin urges Lydia to think seriously about the sort of property she'd like. "She will then have a much better idea about the deposit she will need," he says. A mortgage adviser could give her an idea of how much she may be able to borrow – and what her repayments might be.
Mr Ditchfield adds that the Government's Help to Buy scheme might be an option worth considering. "This will mean she only needs a 5 per cent deposit," he says.
Start paying into a pension
While Lydia has other priorities, Mr Lavin says it is important she starts contributing towards a pension as soon as possible.
"The older she is when she starts contributing, the less time her pension money will have to benefit from investment growth," he says. "The cost of delaying is more significant than people think due to the compounding of investment returns."
Mr Connolly says the start point should be an employer's scheme – especially as many will pay in on behalf of employees. "Lydia should aim to join her new workplace scheme as soon as she starts working there," he says.
Look at investing a little further down the line
While Lydia's main priority should be building cash savings, Mr Connolly says she should also think about other longer-term investments, including regular savings into a stocks-and-shares Isa.
"This type of account works well alongside pensions, as pensions give upfront income tax relief but aren't flexible," he says. "Equity Isas can also be tax-efficient but are far more flexible – meaning Lydia could access her money when she wants."
Mr Ditchfield adds that saving as little as £50 a month into an equity Isa could be beneficial. "If Lydia did this over 10 years, this could produce savings of around £8,500," he says.
Check protection policies offered at work
Mr Lavin says Lydia should check what protection benefits are offered by her potential new employer.
"If income protection is not provided, she should consider taking out a policy, as this would provide a monthly income if she were unable to work due to ill health," he says. "Once she's on the property ladder, she will also need life cover to ensure the mortgage is covered should anything happen to her."
Mr Connolly adds that while a will is not urgent at this stage as Lydia has no dependants and relatively little to leave, she should think about drawing one up in future.
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