Darren Banks is a 22-year-old entrepreneur from Bradford. He recently started up his own IT company, and is saving up in the hope of making a move down to London within the next six months. He is also hoping to have as much as 10,000 put aside to go travelling in March 2009.
Having lived with friends after leaving home a few years ago, he moved back in with his parents this summer in a bid to keep his costs down to a minimum, and he now wants some advice on where he should be putting his extra cash to ensure it is working as hard as it can for him.
Having only recently started his company, Darren is also trying to get to grips with being self-employed for the first time and is struggling to know exactly how much he needs to put aside for tax and national insurance.
We asked three financial advisers to take a look at his case: Jason Witcombe of Evolve Financial Planning, Matthew Woodbridge of Chelsea Financial Services, and Dane Halling of Arcturus Investments.
Darren Banks, 22, Bradford
Salary: around 77,000 a year
Monthly expenses: 2,250
Personal savings: 1,600
Business savings: 30,000
Savings & Investments
Witcombe suggests that one of the best ways for Darren to maximise the performance of his investments, is to ensure they are tax-free. Consequently, he says Darren should make full use of his annual Isa allowances each year. Although Darren has already put 1,600 in a cash Isa this year, he can still invest a further 1,400 in the account before April, as well as a further 4,000 in a stocks and shares mini Isa.
Woodbridge says that given Darren's medium to high risk appetite for investing, he should consider putting most of his stocks and shares Isa allowance into a fund such as Invesco Perpetual Income. He says that he should also allocate around 5 to 10 per cent of his equity portfolio into a riskier fund such as Allianz BRIC, which invests in emerging markets, or JP Morgan Natural Resources, which invests in the mining and energy sectors.
Halling says that given the current volatile state of world equity markets, Darren should make a very cautious approach to starting a portfolio. "We are now in the fifth year of a sustained rise in emerging markets which has been the major theme in recent years, along with property," he says. "One year ago, you could not move for property fund adverts, now some are down as much as 30 per cent from their peaks. So it's vital to not fall into the trap of investing in today's big story. For now I would steer Darren to a short list of low cost funds which would allow him to capture the potential upside of future waves of growth in the global economy."
He suggests that Darren looks at exchange traded funds, which track the FTSE 100, offered by company's such as Barclays Global Investors, or consider generalist investment trusts.
All three advisers agree that if Darren hopes to enjoy a comfortable retirement, he should start saving for a pension as soon as possible.
Woodbridge and Witcombe agree that Darren should appoint an accountant to help him structure the income from his business in the most tax-efficient manner. "They will be able to tell you the best way to deal with your proposed overseas trip in 2009," says Witcombe. "They should also be able to guide you on Companies House annual reporting requirements, which are one of your responsibilities as a director. Importantly, there could be a number of expenditure items that you currently pay for out of your personal accounts that could be classed as business expenses and therefore paid by the company, thus reducing taxes."
Woodbridge suggests that Darren should not think about buying a property before he goes travelling, as he will struggle to get a mortgage if he is planning to stop working in the short-term. "Given the current state of the housing market, Darren may want to bring his travel plansforward, while house prices are showing signs of slowing. He may return and secure more affordable housing and cheaper rates."
Witcombe adds that even if Darren wasn't going travelling, he may struggle to get a mortgage at the moment, due to the fact he has an unsteady earnings stream, and has only recently started up his new business. "The more you can do to build up a deposit and a consistent earnings history, the better," he says.
Witcombe suggests Darren consider taking out some income protection insurance, to protect a proportion of his income should he find himself unable to work.
Woodbridge says Darren should work on building up an emergency cash buffer, because his earnings are unsteady. Witcombe says Darren should also consider drawing up a will.
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