Wealth Check: Personal trainer needs to put some muscle into his savings
Our experts advise 31-year-old Luke Grahame to build up his funds again after paying out a deposit on a two-bedroom house
Saturday 28 September 2013
Luke Grahame from south Wales wants to be able to provide a comfortable future for his five-month-old daughter, Freyja.
The 31-year-old is single, and has been a personal trainer for the past two years.
He has been freelancing for the past six months, running his own firm, Tough Love Cardiff Personal Training, but does a small amount of employed work as well.
He earns about £25,000-£30,000 a year, and pays monthly support to Freyja's mother with whom she lives.
At present, Luke has no money slotted away in savings as he used what he'd amassed to put down a deposit on a two-bedroom house.
He has a fixed-rate mortgage, and makes payments of around £500 per month.
While he doesn't have any money put aside in savings or investments at present, he is in the fortunate position of having only a small amount of debt.
"I have a £750 overdraft on my current account with HSBC," says Luke. "My only other debt is my student loan where I owe around £10,000."
As Luke is part-time freelance and part-time employed, he has a workplace pension into which he pays £100 a month.
He doesn't have any protection policies at the moment, but has been looking into taking out life insurance.
"I'm keen to put money aside so I can provide for Freyja's education and inheritance," says Luke. "I would also love to have enough disposable income to be able to take her on holiday each year. I also want to build my own savings pot both for my short-term needs and for my future."
Our panel of independent financial advisers (IFAs) agree that while Luke has done well to buy a property while also managing to keep his debts to a minimum, he needs to build his savings again. In addition, he should look at protection policies to ensure his daughter is catered for financially, and also consider investing in stocks and shares for her future, as well as increasing pension contributions for his own future.
Start building savings again
Patrick Connolly from Chase de Vere commends Luke on building up the deposit of £20,000 which enabled him to buy his property.
"However, this was two years ago, and he really should be focusing on savings again," he says.
Aj Somal from Aurora Financial Planning adds that everybody should have some cash savings for any short-term emergencies.
"Luke should look to build up an emergency fund of at least three months' expenditure in an accessible-savings account," he says.
At the same time, the advisers agree that by making regular cash savings, Luke can then plan on having sufficient money to take his daughter on holiday.
"For cash savings, Luke should look to utilise his cash individual savings account (Isa) allowance," says Derek Baillie from FSC Investment Services. "For the current tax year, the limit is £5,760, and all interest is tax-free."
However, Mr Baillie adds Luke should also think seriously about making mortgage overpayments.
"In today's low-interest environment, it makes more sense to reduce debt than accumulate large cash balances," he says. "If Luke reduces his mortgage by as much as possible today, this will mean his monthly outgoings in the future remain more affordable."
Consider investments when saving for children
While Luke is keen to put money aside for his daughter's future, Mr Connolly points out that if he is looking to save over the long term, it is unlikely that savings accounts will give him the best rate of return.
"This is especially true with accounts paying less than the rate of inflation," he says. "If he's looking to save for five years or more, he is likely to get a better return by investing in stocks and shares. The best approach will depend on how long he is looking to save and the level of investment risk he is prepared to take."
If Luke is happy to tie money up until his daughter turns 18, Mr Connolly recommends a junior Isa.
"He and other family members can put away up to £3,720 in the current tax year," he says.
Equally, our advisers point out that if Luke is worried about his daughter having access to the junior Isa money at 18 – and the freedom to spend it as she wishes – Luke may want to consider an investment account in his own name instead.
"This will give him control over the account," says Mr Connolly. "However, unless he is using his own Isa allowance (up to £11,520 in the current tax year) to invest, he will be liable for any tax that arises."
If Luke is happy to take risks, a sensible, low-cost option could be a tracker fund such as the HSBC FTSE All Share Index, according to Mr Connolly, as this simply follows the performance of the UK stock market.
Keep an eye on debts
While it may be useful for Luke to have an overdraft on his current account, Mr Somal says he should try not to use it, as the charges can be very steep.
At the same time, Mr Connolly adds that Luke shouldn't be overly concerned about his student loan.
"The rate he is paying will be considerably less than the rate on his overdraft, plus he will be 'chipping away' at the money he owes through his earnings," he says.
Increase pension saving
While it is positive that Luke is saving into a pension, our advisers agree he needs to do more.
"As Luke is part-freelance and part-employed, he needs to find out from his employer whether he will be eligible to join the workplace auto-enrolment scheme which his employer will have to offer," says Mr Connolly. "If not, he may be able to look at making additional pension contributions through his own company. Either way, he needs to increase the amount he is saving into a pension over time."
"Luke has made a start to his pension provision but should seek to increase his contributions over the next few years," says Mr Somal.
Prioritise protection policies
As Luke has a young daughter, Mr Somal urges him to consider his protection needs as a priority.
"Luke should look to put life cover in place, as this means his daughter will be financially protected should he die," he says. "A family-income benefit policy could be an option as this is relatively cheap. In the event of his death, this will provide Freyja with a regular income until she is no longer financially dependent."
Mr Baillie adds that Luke could also take out critical illness cover in conjunction with his life policy. "This would pay out a tax-free lump sum on diagnosis of a list of critical illnesses," he says.
Given his part-employed, part-freelance status, Mr Somal urges Luke to check if his employer will provide him with any protection benefits.
"He may then want to look at taking out additional income protection which will cover any long-term sickness or absence from both his employed and self-employed earnings," he says. "This is particularly important given he is paying monthly support for his daughter."
In addition, if Luke hasn't made a will, he needs to do this to ensure his assets are distributed according to his wishes.
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