Paul Baker, 25, lives in Edinburgh with his partner. He became a commercial airline pilot 18 months ago and earns £36,000 a year. His main goal is to pay off two HSBC professional studies loans that helped him train to be a pilot, whilst still having enough spare cash for a comfortable lifestyle. However, he is also interested in getting on the property ladder and wants to know if it is the right time for him to buy a flat.
We asked three financial advisers to take a look at Paul's financial situation: Martin Bamford from Informed Choice; Mike Pendergast from Zen Financial Services; and Danny Cox of Hargreaves Lansdown.
Case notes: Paul Baker, 25, Edinburgh
Salary: Paul is a commercial airline pilot on a starter salary of £36,000.
Monthly outgoings: Paul spends about £2,700 on paying back a large loan that paid for his training, as well as rent and living expenses.
Debts: Two professional studies loans totalling £70,000. One of £65,000 with 7.75 per cent APR, the other £5,000 with 8.5 per cent APR.
Pension: Paul contributes roughly £150 a month into his employer's pension scheme.
Debt & Savings
At the current rate of repayment, Paul's loans will be cleared in six years. Bamford and Cox both agree that this should be Paul's priority and is the best use of any spare income he has in the short term.
Paul has £2,500 in a bank account and Bamford says that although it might be worth keeping it there as an emergency fund, Paul should focus on using all his resources to pay off the loan with the higher APR because it is costing him the most to service. "People often feel more comfortable having some savings when they are in debt but in reality this is financial madness," says Bamford.
Cox and Pendergast both advise Paul to move the money from his bank account into a mini cash ISA, as the interest tends to be higher than in standard bank accounts and is tax free. Both Abbey and Barclays are recommended, offering 6.25 per cent and 6.31 per cent on their Direct ISAs respectively.
All the advisers are concerned by the uncertainty of the market and Bamford advises Paul not to rush into buying a property as it would result in more financial pressure and debt.
Paul does not have a deposit and if he were to buy a property, he would either have to raise one from his limited spare cash, or borrow 100 per cent of the value of the property. "Mortgages that lend the full purchase price tend to be more expensive and have higher fees, including high loan to value fees," explains Cox.
Because of the falling demand for rental property, all three advisers agree that if Paul does buy a property, it should be viewed as a place to live rather than a short-term investment.
Paul's current pension scheme is projected to provide £9,000 a year if he retires at 60. While this represents only half the amount he needs, Cox accepts that his priorities are currently elsewhere.
Furthermore, Paul is only at the early part of what should be a long and lucrative career as a pilot, and his earnings should increase dramatically over the next 10 years. Therefore, Bamford says that pension saving should take a back seat for Paul in his twenties and even thirties while he focuses on debt repayment.
Cox advises Paul to increase his pension savings when he gets pay rises, either through additional payments to his present scheme or by paying into a low-cost self-invested personal pension (Sipp). Pendergast agrees, but stresses that if he uses a money purchase pension, he should ensure that he spreads his contributions between at least five or six funds to spread the risk.
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 email@example.com