Wealth Check: 'I want to pay off my debts, build a nest egg and start a family'
Our experts provide the answers for a man who has spent all his money buying a home but now wants security as he plans to have children
Saturday 08 June 2013
Russell Carr wiped out his savings when he bought his first home, and is now keen to get his finances under better control so he can start building up a nest egg once again and think about starting a family.
The 28-year-old works as a senior supply-chain manager on a salary of around £40,000 plus benefits, and has been in this job since leaving university five years ago.
He lives in Abingdon, Oxfordshire, with his wife Amy, who also works as a supply-chain manager.
"Prior to buying the house, I spent many years saving, and managed to amass a total of around £21,000 in a mixture of individual savings accounts (Isas) and other accounts," says Russell. "But I spent all of this on the deposit for our three-bed terraced home. I want to get serious about saving again so I can afford to provide a good standard of living for our future children."
Russell's mortgage is with First Direct and is a five-year fixed-rate deal at 4.7 per cent; this is on a repayment basis. The property is worth £182,000, and the mortgage is for £160,000.
"I chose a five-year deal as I wanted the security of fixing the monthly payments over the longer term – even though the rate was slightly higher," says Russell. "I also work hard to make overpayments of £100 each month."
Over the past five years, Russell has been disciplined about paying off his debts, and has managed to clear £5,000 from three credit cards. However, he still owes £5,500 on three further credit cards.
"I have cards with Tesco and Barclays, but both of these are 0 per cent balance transfer deals," he says. "I'm careful to switch to a new card each time the introductory rate runs out so I only have to pay balance transfer fees – and not interest. The third credit card is a work card, but I don't owe anything on that one."
The only other debt Russell has is a student loan.
"When I got my latest statement last year, there was £12,000 outstanding, but I've been working to pay down that balance," he says.
Russell has a pension through his firm and pays in 4 per cent, with the firm matching his contributions. "This will rise to 8 per cent over the next three years, with my employer continuing to match contributions," he says. "I used to pay 2 per cent into another pension scheme via my employer, but don't know how best to handle this relatively small old investment."
At present, Russell has private healthcare with Bupa, provided free as a company benefit. Aside from this, he has no other protection insurance policies in place.
Our panel of independent financial advisers (IFAs) commend Russell on wanting to pay off his credit card debts but agree that while he did well to build up enough money for a mortgage deposit, he must now start saving seriously again both for short-term emergencies, and also for the longer term.
Deal with debts
Even though Russell is paying relatively little on his credit cards, Patrick Connolly from Chase de Vere urges him to clear this debt as soon as he can.
"He may not be able to access 0 per cent deals forever," he says. "Russell should make a conscious effort to overpay on his credit card each month as he is already doing with his mortgage."
He adds that as the interest rate on student loans taken out between 1998 and 2011 is just 1.5 per cent, with repayments based upon income, paying off this loan is less of a priority.
"That said, Russell should keep an eye the loan and reassess his situation should interest rates rise – meaning he has to pay a higher rate of interest on the debt," he says.
Start saving again
James Robson from Plutus Wealth Management urges Russell to re- establish an emergency savings fund as soon as possible and to accrue a minimum of three months' out- goings in this.
Neil Mayfield from Mayfield Investment Management adds that Russell and Amy should detail all their income and expenditure and get into the habit of budgeting and saving money.
"They should both make use of their cash Isas," he says. "In the current tax year they can each contribute £5,760, and all interest earned will be tax-free. But they should ensure they can access the funds at short notice, and watch out for bonus interest rate offers which might expire after an initial period."
At present, savers can earn just over 2 per cent on a cash Isa with instant access; useful sites for comparing rates include Moneyfacts.co.uk and Savingschampion.co.uk. The Carrs could also make use of a site such as Topcashback.co.uk to earn cashback on their purchases.
Mr Connolly points out that as the Carrs want children in the future, it is even more important to build up regular cash savings. "This is especially important if one of them might stop or reduce their workload when the children are born," he says.
Maintain mortgage overpayments
Russell has been very sensible with his mortgage, according to Mr Connolly, locking into a fixed rate and understanding that while this gives him security, it also means he is likely to be paying more in the shorter-term, with general rates currently at historic lows. "He should continue to make monthly overpayments as this will help him reduce his debt more quickly," he adds.
Look to increase pension contributions
Russell is fortunate having 8 per cent of his salary invested into his pension, but only having to pay half of this himself, says Mr Connolly. "But this shouldn't preclude him from making additional payments," he adds. This is a view shared by Mr Robson who warns the current total of 8 per cent may not be enough to ensure a comfortable retirement.
Mr Mayfield urges Russell to review his old pension and compare it against the new scheme.
"He should look particularly closely at the charges on each and the range of funds available," he says. "Assuming the new scheme offers lower charges and better fund options, it may be worth transferring the old pension to the new scheme.
"However, he should check whether there are any transfer penalties or costs."
Mr Robson adds that Russell should also ensure both pensions are invested in funds that match his attitude to risk and volatility.
Think about other investments
While Russell needs to initially focus on paying off debts and building an emergency fund in cash savings, he could then consider other forms of investment, such as stocks-and-shares Isas, according to Mr Mayfield. Mr Connolly adds that while these don't give income tax relief as pensions do, they can still be tax-efficient and are far more flexible.
Review protection policies
Russell should check with his employer whether other protection benefits, such as life cover, are provided. Mr Mayfield adds that the Carrs should ensure they have sufficient life insurance to repay the mortgage in the event either of them dies. "In addition, Russell and Amy may want to consider income protection and critical illness cover to pay all or part of the mortgage," he says, "particularly if they have children."
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