Wealth Check: 'I'd like to start a business and buy property'
Saturday 22 August 2009
Rachael Mc-Carthy would like to buy her own house and start her own business - but with the 24-year-old living at home with her parents in Bradford, the prospects look bleak. "I work full-time for two independent bars in Leeds as a back of house manager but would like to be in a position to start my own business in two to three years," she says.
"I'd also like to be in a position to buy a house by then and be financially secure within 10-15 years. Is this possible?"
Rachael says her parents' money worries have been passed on to her and she really wants to save and get financial security as soon as possible. She works in the hotel and leisure industry and hopes her business degree will help her fulfil her dream of working for herself. "I have also been assisting on a business start-up to widen my knowledge of starting a business and gaining the skills and resources I will need to do this for myself," she says.
But she worries about not being able to save enough and is also concerned about getting into debt. Can our experts help ease her worries and guide her towards achieving her ambitions?
Income: £1,170 a month after tax.
Monthly outgoings: £330 tax and NIC, including £22 student loan deductions. £420 car costs, including £150 loan repayment.
Other: £46 a month on the gym.
Rent/mortgage: Lives rent-free with parents.
Debt: Paying off a £7,500 car loan.
Advice this week is given by Dennis Hall of Yellowtail Financial Planning, Kevin Anderson of Budge & Company, and Mike Pendergast of Zen Financial Services...
The experts urge Rachael to get into a savings habit as a matter of urgency. They point out she has £704 left over after she has met her fixed monthly expenses but doesn't currently save any of the cash. "What is happening to this money?" asks Mike Pendergast. He suggests that Rachael keep a record of the bits and pieces that she spends and sets a budget for things like lunch, coffees and clothes. "It may be worth setting up a monthly standing order to a savings account to ensure you aren't frittering your surplus income away," he says.
Dennis Hall advises Rachael to be more proactive. "Rachael should set up a direct debit to save a fixed amount of money to be taken from her account as soon as she gets paid. Normally the best place to save would be in a cash ISA where she can earn the interest without deduction of tax, however right now Barclays has a regular savings account paying 4.25 per cent EAR for 12 months, which after basic rate tax comes down to 3.4 per cent."
Kevin Anderson says: "Staying at home offers the best opportunity to save and it is important to establish a savings culture as soon as possible, even if just a small amount. Cash ISAs offer an excellent savings vehicle. Money does not have to be tied up and access can be immediate if required with no loss of the tax-exempt status. Rachael should set a fixed amount each month and have this transferred to an instant access ISA, such as Britannia Building Society's regular saver instant access ISA paying 3.1 per cent."
"Rachael's desire to own her own property is commendable but is not at the moment realistic. She should stay at home and maximise her earnings potential for as long as possible," says Anderson. Hall agrees. "Rachael's goal of buying a house in two to three years time looks unworkable unless she can start to save enough money for a reasonable sized deposit and the additional fees that buying a property entails."
Rachael is keen to move out of her parents' home so Pendergast suggests she consider renting to begin with. "Renting a property can be seen as dead money as you receive no long-term benefits, but it can be useful in times where property prices are falling as it enables you to time your property purchase and buy at a more financially beneficial time."
Running her own business
Rachael needs to prove she can save and manage money if she wants to fulfil her ambition, says Anderson. "Her current savings culture will need to improve to show to any potential investors in her new venture that she has stuck her own money into her dream."
If Rachael is to succeed in her plan to start her own business, she may have to put off buying a home, says Hall. "Coupled with starting a business the home ownership goal looks even further away, as most people starting out in business find themselves working for very little income in the early years as their business takes off. Not all businesses are successful however, so the burden of a mortgage debt on top of everything else might be too much pressure."
"At some point Rachael is going to have to start thinking about longer-term savings, especially if she wants to retire at 55," says Hall. "Savings made into a pension now, however modest, will have much longer time to work and make the job of saving for retirement that bit easier. A stakeholder pension can be started from as little as £20 per month, with a cap on charges so that they represent good value even for small regular savings. Pension savings should be regularly reviewed and increased as and when circumstances allow, £20 per month for example will not buy much of an income in retirement."
Pendergast advises her to look at insurance. "As a single person living at home, income protection would be useful as it would ensure Rachael still receives an income if she is off sick."
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