Wealth Check: 'Should I clear my debts or save as much as I can?'
Saturday 01 August 2009
Katie Ratcliffe, 23, is a social work graduate who is looking for her first job as a social worker. She lives in student accommodation but is moving back home to save money. Katie says: "I am fairly good with money, but would like to know which type of bank accounts are best for my savings."
Katie wants to save enough money to put a deposit on a house, which she would then rent out, and have enough money left to go travelling. She would like to do this within the next two or three years.
Income: £12,434 per year.
Monthly outgoings: Tax and NICs £200, general living expenses £200, holidays £800, regular savings/insurances £250, pensions £45 (total: 1,495 per month).
Debt: £18,000 student debt.
Savings: ISA with £3,600 in Katie's name, a savings account started in June that she pays £250 into each month, and a share-save scheme through working part-time at Esure, to which she contributes £35 each month. This was started in 2007 and runs until 2010.
Advice this week is given by Danny Cox of Hargreaves Lansdown, Adrian Lowcock from Bestinvest and Steve Laird from Carrington Wealth Management...
Katie's main goal is to save enough money for a deposit on a house, as well as paying off her £18,000 student debt. Danny Cox says: "Simply, the bigger the deposit, the better the range of deals that will be available to Katie, the cheaper the monthly repayments and potentially the cheaper the associated mortgage fees.
He advises Katie to investigate shared ownership, which, as a social worker, Katie may be given priority for: "Katie would buy part of the property and rent the remaining part, with the option to buy a greater share later. This often works out cheaper in the short term, allowing Katie to make the first step on to the housing ladder," says Cox.
However, Steve Laird advises against buying a property until Katie has finished her travelling: "Even if she were able to cover the mortgage with the rent, there could be problems finding suitable tenants and dealing with maintenance issues while she's travelling, all of which is a hassle she could do without. In any case, she may well need some of the savings to live on while she's travelling."
Katie has an ISA, a savings account and a share-save scheme. She wants to know which bank accounts can give her the best returns. Adrian Lowcock says there are several bank accounts available, but points out the importance of being flexible and having access to the savings, so building up an emergency or rainy-day fund is the first priority: "Cash ISAs are a good starting point. However, the best ISA rates available require high minimum sums invested and have longer notice periods.
"With rates up to 3.26 per cent (Newcastle Building Society), you may be better off looking at regular savings accounts, where Barclays tops the table at 4.17 per cent. Even after tax, that's 3.33 per cent, beating the best ISA rates out there currently."
Steve Laird recommends Manchester Building Society's cash ISA, which pays a rate of 3.26 per cent (variable rate with a 45-day notice period) for a minimum deposit of £1,000: "She could perhaps start it off by transferring her current ISA, assuming that there is no penalty for doing so. She can save up to £3,600 per annum this way. If she's already used her 2009/10 allowance there are some good deals available for regular savings accounts – such as the Barclays' account, although the interest rate reduces to 2.99 per cent in any month during which she makes a withdrawal."
Danny Cox adds: "Continuing to use her cash ISA allowance (£3,600 for 2009/10) is important, as tax-free savings are worth 25 per cent more interest than taxed savings."
The experts agree that Katie needs to look at reducing her student debt as it can become a problem. Adrian Lowcock says: "Look to reduce the amount owed each year to make sure the debt doesn't get out of control. It would be better to pay off the whole amount first as any interest on it reduces your total savings amount."
Steve Laird doesn't see Katie's student debt as too much of a problem, as the interest on loans from the Student Loans Company will drop to zero for the year beginning in September. Danny Cox agrees that it is not particularly worrying at this stage: "It is more important to repay debt than to save. However, with interest rates at an all-time low, this is less of a problem, and it is not hugely motivating to see all your spare cash being used to pay debt rather than save. A balance between paying off the student debt and building further savings would be a good solution."
Katie pays into a pension scheme through her part-time job, which lets her retire at 65, but as she doesn't work full time, her contribution is often small. She wants to retire at 60 and live comfortably on her pension. Danny Cox says that Katie should join a pension scheme with her employer as soon as she finds a job as a social worker: "If her employer is the local authority or NHS, she should join the final salary scheme and not the money purchase scheme. Under this type of scheme, Katie is not exposed to any investment risk, and her pension is backed by the taxpayer. Under a money purchase scheme, the amount of pension is based primarily on how much Katie invests, how much her employer invests, and the returns."
For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email firstname.lastname@example.org
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