Wealth Check: I want to clear my debts and start saving'
Saturday 19 April 2008
Rory Toner, 24, a software developer from Belfast, is determined to buy a home within four years, but has debts to clear before he can start saving for a deposit. He has five years' worth of student loans and a £1,400 overdraft to clear before he is 27, when his bank will start to charge for it. He also wants to retire on £30,000.
But Rory is unsure of the best way to manage his financial priorities. "The main thing that concerns me is how to maintain a balance between savings and building a deposit for a house and paying off my debts," he says. "I just don't know the best way to approach it."
This week three financial advisers help Rory with his money: Raj Shah of Simply Independent, Arthur Dornan of Carterbar and Mel Kenny of Radcliffe and Newlands.
CASE NOTES: Rory Toner, 24, software developer, Belfast
Income: £21,000 a year.
Monthly outgoings: Rory spends around £1,750 a month, or £21,000 a year, matching his income. His living expenses cost around £1,100 a month, including rent and bills; £50 a month goes on holidays; a further £180 on unforeseen costs and treats – socialising, meals out, entertainment and DVDs; and around £420 of Rory's monthly salary goes on income tax and National Insurance.
Savings and investments: Rory has no investments, and is not contributing to any savings, but wants to start saving for a deposit to buy a house.
Debt: Rory's overdraft is between £1,400 and £2,700. There is also around £18,500 outstanding on his student loan.
Debts and homebuying
Dornan and Shah agree that Rory needs to deny himself some indulgences in order to make inroads into his debt. "He recently managed to pay off £1,700 over a four-month period, so if his living expenses include a few non-essentials, he can cut back," says Dornan. Around £75 a month should clear Rory's overdraft by the time he is 27.
"If Rory is looking at buying a house worth about £100,000 then he is going to need a deposit of at least £5,000 assuming the current mortgage situation does not worsen," adds Dornan, who says Rory needs to be saving around £150 to £200 per month in order to accumulate his deposit.
An ISA would be the best way for Rory to save. Kenny suggests that he saves up to £300 per month with Scarborough Building Society's My Savings ISA, a regular savings ISA with interest of 6.25 per cent variable per annum tax free. In three to four years' time, this could be used to pay off the overdraft and go towards a property deposit. For full flexibility, Egg's cash mini ISA has a 6.05 per cent variable per annum tax free.
Rory could invest in an equity-based ISA which is likely to offer greater returns than a cash-based one. There are pitfalls, however.
"Rory has a cautious attitude to risk and so his options are limited. He may wish to look at the BlackRock UK Absolute Alpha Fund," Kenny says.
He adds that as Rory may need to be prepared not to withdraw funds from an equity-based ISA for at least three to four years, he should not invest in one too heavily as that would mean risking not meeting some of his shorter-term objectives.
The advisers are concerned that Rory's pension plans are too ambitious, but Shah says that putting away £250 a month should be sufficient to generate Rory's desired sum in retirement.
Shah warns, "Should Rory choose to put a smaller amount into his pension, it would be vital that this figure is increased and reviewed annually to ensure that he doesn't get a nasty surprise come retirement."
If Rory's employer doesn't contribute to a pension scheme which he could join, Mel Kenny advises considering making contributions to a personal pension when he becomes a higher-rate tax-payer.
"Since 6 April 2008, contributions made by a basic-rate tax-payer only enjoy 20 per cent tax relief. If Rory sets aside a sum via his ISA and moves this to a pension when he is a high-rate tax-payer, he would enjoy 40 per cent tax relief on the same sum," Kenny says.
To find an independent financial adviser in your area, visit www.unbiased.co.uk
For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail firstname.lastname@example.org
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