Wealth Check: 'I want to buy a house, pay off £23,500 debt - and retire at 45'
Saturday 15 July 2006
Paul Batchelor, 27, from Orpington in Kent, has recently started work as a currency trader. He is single with no children and is renting a property with a friend on a six-month contract. Now that he's earning a good salary, he hopes to be able to purchase a flat with his brother within the next year - his parents have offered to act as guarantors on the mortgage.
Paul has £10,000 saved to put towards a 5 per cent deposit on the purchase price of a property but he has no other savings or investments. He expects to be earning approximately £70,000 a year in his new job, assuming that he hits his commission targets, and has, therefore, agreed to take on the larger share of the mortgage repayments.
Paul also has a small pension fund valued at £3,000, held in an occupational scheme at a previous employer. He is keen to retire early, but at the very least would like to save enough to generate an income worth £30,000 a year in today's terms by the time he is 65.
Paul, therefore, wants to know how to build up his savings - in the long term, he assumes he needs to invest his money in stocks, shares and property especially, because, in ideal terms, he would stop working by the age of 45.
Paul also has debts to consider. These amount to approximately £23,500, including a student loan of £6,500 and a car loan of £12,000. Should he pay these off before he starts general saving and rejoining a pension scheme?
We asked two independent financial advisors for their suggestions: Justin Modray, of Best Invest, and Andrew Swallow, of Swallow Financial Planning.
Paul and his brother should be able to get a good deal if they shop around carefully, as the mortgage market remains fiercely competitive, says Modray. He suggests a discounted variable-rate mortgage would keep the brothers' initial repayments down. If they choose a deal where there are no penalties to pay for switching lender once the discount has come to an end, they will be able to move to a more attractive offer when the discount ends.
Modray also urges Paul and his brother to put a legal agreement in place to determine what happens if one of them wants to sell or finds that they cannot afford the mortgage repayments in the future.
Swallow also thinks this is important, but he suggests that Paul and his brother need to give the whole purchase a bit more thought. They may be better off renting for a year together before buying a property to make sure that it will work.
Alternatively, since Paul and his brother have debts to pay, moving back in with their parents for a year would be a good option - they'll get used to living together and have more money to get what they owe paid off. Another option, if it is possible, would be to borrow money from their parents, so they get a deposit worth 10 per cent of the purchase price - this will give them access to better mortgage deals.
Finally, Swallow says that if, as expected by some analysts, interest rates rise this year, the housing market could slow - in which case, delaying their purchase might be quite a sound move.
Either way, Paul and his brother need to build other costs into their plans: stamp duty, legal fees and the cost of life assurance, for example.
Both advisers believe Paul needs to concentrate on clearing his debts as soon as possible and that he should forget about adding to his savings until he has done this.
Swallow wonders if it would be possible for Paul to borrow around £7,000 from his parents and combine this with his own money to repay his overdraft and most expensive debts. If so, he could be substantially debt-free within a year or so.
Swallow does not include the student loan in this assessment of Paul's debts, as this borrowing accrues interest only in line with inflation - in other words, in real terms it is interest-free.
Modray says there are other ways for Paul to ease his debt burden - transferring his credit card balance to a 0 per cent introductory offer, for example, would make sense, with www.moneyfacts.co.uk a good place to start looking for deals. Moving bank accounts could also cut Paul's overdraft fees - for example, Nationwide's FlexAccount charges just 7.75 per cent.
Once Paul's debts have been reduced and his repayments come down, he can invest his spare cash into a tax-free cash individual savings account (ISA) in order to rebuild his savings.
Paul has ambitious plans for his retirement. Modray says Paul would need to accumulate a sum of £226,000 by the age of 45 for it to then grow into £600,000 to give him £30,000 a year in today's terms. This means Paul will need to be saving approximately £7,400 a year.
As a first step, he needs to join his employer's occupational pension scheme, if one is available. If not, a low-cost stakeholder pension is a good place to start.
Modray suggests Paul works on the basis of needing £125,000 of assets for every £5,000 of income he wishes to draw. Paul will need plenty of surplus income to facilitate early retirement and should aim to have a wide range of assets, including equities, corporate bonds property and commodities to spread the risk and increase his chances of achieving his goal.
The good news is that time is on his side - he can afford to take more investment risk while he is younger.
Paul Batchelor, 27, currency trader, Kent
Income: £70,000 a year, assuming targets for sales commissions are hit
Monthly spending: £1,480 on general living expenses but Paul also spends around £2,000 a year on holidays and saves around £250 a month.
Savings: £10,000, held in a building society account and intended for use as a deposit on a house.
Debts: In total, around £23,500. £2,500 on credit cards charging 19.9 per cent a year, £2,500 on an overdraft at the same rate, a £12,000 hire-purchase car loan, costing 12.9 per cent a year, and £6,500 of student loans.
Property: Currently renting but planning to buy with his brother.
Pension: £3,000 held with previous employer.
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