Wealth Check: Start by paying off the debts that carry the highest interest
Saturday 09 December 2006
Peter Reynolds lives in a house in Chichester that he bought six months ago. He earns a decent salary, but the £179,500 purchase price left him stretched, and his mortgage is interest-only. That makes the monthly payments more affordable but for now the capital he owes is not being repaid.
Also, Peter doesn't have the money to pay a £10,000 service charge due in 18 months for new double-glazing he was required to install shortly after moving into his new home.
Saving for a pension is Peter's final financial priority - currently he has no retirement savings at all.
We asked three firms of financial advisers - Chase de Vere, Hargreaves Lansdown, and JSP Towry Law - for their help.
Peter Reynolds, 29, Chichester, West Sussex
Personal: Peter works in the oil industry, earning between £30,000 and £40,000 a year
Savings: £500 in an online account; no investments or pension
Mortgage: £162,000 Northern Rock loan costing 5.99 per cent a year
Debt: £1,300 on NatWest credit card; £8,000 car loan costing £179 a month
MORTGAGE AND DEBT
"Getting the mortgage sorted is the priority," says Ben Yearsley of Hargreaves Lansdown. "His options are to change to a repayment mortgage or to start a savings plan such as an ISA to cover the mortgage capital."
If Peter puts £200 a month into a stocks-and-shares ISA, Yearsley says, he can still open a cash ISA, which could be a good savings vehicle for needs such as the double-glazing bill. With 23 years to go until the mortgage is due to be repaid, a stock market ISA could be a good bet.
There is a risk the ISA might not grow enough to repay the mortgage, though Peter will be able to monitor performance. But the total monthly payments on this model will be smaller than if Peter switches to a straightforward repayment mortgage. JSP Towry Law's Patrick Connolly adds: "The initial focus should be to pay off the debt where the highest interest is charged - the car loan or the credit card."
Peter is worried about the double-glazing bill, but there's no point saving money if he earns a lower rate of interest on the cash than he pays on his debt. At the very least, Connolly suggests, Peter must consider cheap credit-card deals such as 0 per cent offers and move his NatWest account.
"Raising £10,000 won't be easy, and the only option may be to take out another loan, maybe added to the mortgage," says Susan Hannums of Chase de Vere. "Peter should also put as much as he can into a high-paying savings account."
Peter must be more organised about money. "Budgets are not simply about saving money; just monitoring it is important," Hannums says. "This shouldn't stop him going out or buying clothes, say, but if Peter puts by a set amount each month to spend on luxuries, he's less likely to overspend."
Hannums' colleague Anna Bowes says a low-cost pension could be a good starting point: "A stakeholder pension could be right, if Peter chooses one with a good choice of funds, such as Legal & General or Standard Life." These plans will allow Peter to make contributions of as little as £20 a month, though Bowes suggests he tries to save more.
Yearsley adds: "As a broad rule, you should save half your age as a percentage of your salary each year." In other words, Peter should be saving 13.5 per cent of his salary, which equates, after tax relief, to about £240 a month.
This may not be realistic for Peter, but the earlier pension money can be saved, the more it will produce in old age.
Yearsley says Peter must address the issue of protection; he has no insurance that would pay out if he was unable to work due to ill health or an accident.
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
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