Wealth Check: 'Please help me fulfil my freelance dream'
Our panel of experts recommends that Nita Patel builds up her funds before she takes the plunge into the uncertain world of self employment
Sunday 09 December 2012
Nita Patel from south-east London is keen to get her finances in order so she can take the plunge and go freelance a little further down the line.
The 31-year-old currently works in corporate responsibility, and earns around £50,000 a year.
One of the issues holding Nita back is the fact she has no money in savings at present. While she does have money in investments, it's in the form of around £5,000 in shares with Barclays; this was part of her remuneration when she worked there.
Although Nita has worked hard to pay off some big debts, she still has a little way to go.
"I did have a £13,000 debt, but paid off a big chunk of it this year and made my last loan repayment this month," she says. "I'm now focused on trying to clear the £5,000 on my credit cards with Barclaycard and Lloyds TSB. "
In addition, Nita owes £2,500 to her family. She is also keen to build up her pension savings.
"I paid into a pension at Barclays, but there is only a small amount in this pot," she says. "I've also just started paying 5 per cent of my salary each month into my company scheme, managed by Aviva."
Looking to the longer term, Nita would also like to buy a property abroad in either Spain or Italy as a second home or holiday let.
In the meantime, she already lets a one-bed flat in Brockley, south-east London, which she bought in June 2008 for £190,000.
"The mortgage was originally for £170,000, but I'm in the process of remortgaging as I'd moved onto Santander's standard variable rate," she says. "I'm now looking to move this mortgage onto a five-year fix with Leeds building society at 3.99 per cent."
Nita pays £500 a month to rent with a friend; this includes all bills and sundries.
Our panel of independent financial advisers agree that Nita has been sensible about dealing with her debts, but urge her to establish a sound foundation including greater savings and protection benefit to get herself on a sounder footing. In addition, they recommend she draw up a business plan ahead of becoming self-employed, and that she visits an accountant to ensure she gets her billing and accounts right from the outset.
Continue to clear debts
While Nita currently pays no interest on her cards, it is unlikely to last indefinitely, so she needs to address this, says Patrick Connolly from adviser AWD Chase de Vere.
"I would suggest she consider selling her Barclays shares and use the proceeds to pay off her debt," he says. "The performance of individual shares can be incredibly volatile."
Minesh Patel from EA Financial Solutions, urges her to monitor the share price to obtain the best price for these before the interest-free period expires on her credit cards.
Focus on building up savings
Everybody needs some cash savings for short-term emergencies, says Mr Connolly.
"Nita should aim to build cash savings into an individual savings account (Isa) where interest is tax-free," he says. "She can invest £5,640 in a cash Isa in the current tax year."
However, Ian Hudson from Hudson Green & Associates says she should only consider building a savings pot once her debts are repaid.
Save hard before going freelance
Mr Connolly commends Nita for taking steps to build up her work portfolio, pointing out that this should prove very helpful in giving her an indication of the likely initial interest in her services.
Mr Patel suggests Nita should save at least six months' of income for emergencies, and as much as one year's net income if she plans to become self-employed.
Review property arrangements
As Nita owns one property but lives and pays rent in another, this has a number of financial consequences which she needs to understand, says Mr Connolly.
"She has sensibly reviewed her mortgage rate and is remortgaging at a competitive rate for five years," he says.
"A fixed rate is most appropriate for those who want certainty. However, Nita must ensure her lender knows her property is rented out. She also needs to be aware the rental income she receives is subject to tax – although there are a number of allowable expenses which she can offset against this income."
Mr Hudson also points out that as Nita's flat is not her main residence, she could face capital gains tax when she comes to sell.
Mr Connolly advises Nita not to consider buying a property abroad at this stage.
"These plans should be put on hold, as she has more important financial considerations at this time," he says.
Increase pension saving
Nita's pension saving is in a good place, according to Mr Hudson, as she is contributing regularly to her company pension scheme, and her company is making contributions.
Mr Patel recommends Nita request a projection of what her Barclays pension will give her in retirement, as well as a projection of her state pension.
"She should then undertake a thorough analysis of her current income and expenditure as this will provide a clear picture of additional income she can save into her pension and equity Isas," he says.
Mr Connolly adds that the more Nita is able to invest when she is younger, the easier it will be meet her longer-term saving objectives.
Think about protection policies
As Nita has no dependants, she should focus on protecting her income in the event illness or disability preventing her from working, according to Mr Patel.
"As a starting point, she needs to find out whether her employer offers benefits such as income protection and critical illness cover," he says.
Mr Hudson recommends Nita consider income protection as a matter of urgency, especially as she has no savings.
"Nita has a number of debts which require servicing every months. This could prove draining if she was no longer able to work," he says.
In addition, Mr Patel encourages Nita to write a will.
"She has assets and should define who she wants to benefit from those on her death," he says.
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