Wealth Check: With a business, a mortgage and debts, he strides into the storm
John Gregory-Smith added variety to his life by starting a spice company, but with his finances exposed on all fronts, can he withstand recession?
Sunday 07 December 2008
John Gregory-Smith, 27, is an entrepreneur who chose to plough spare cash into a start-up business despite the gloomy economic outlook. Over the summer, he launched The Mighty Spice Company, making a range of fresh spice mixes, and its products are already stocked by Sainsbury's as well as an array of independent stores.
"I put everything into this venture, and until I am confident about the business, I won't be taking a salary," he says. "This makes finances very tight for me at the moment."
Fortunately, he is able to live rent-free in Richmond, south-west London with his parents, who also gave him a £40,000, interest-free loan to help get the business off the ground. He moved back home two years ago to save towards setting up his own business.
Beside the debt to his parents, John owes £3,000 on a Virgin credit card at 16.6 per cent, and £7,000 in student loans. "I'm confident the business will work as planned, and when it does, I intend to pay back all my personal debts, starting with my parents."
John uses the £15,000 a year he receives in rental income from a two-bedroom flat he owns in Chiswick, west London, to cover general living expenses. He bought this property in April 2005 for £310,000, and reckons, optimistically, that it is now worth £350,000 despite the housing market slump.
"It's rented out for £330 a week, but a hefty proportion of this is taken in agency fees," he says. "I pay my mortgage from the remainder, leaving only around £6,600 a year for other expenses and travel bills."
He pays £700 a month for a 25-year, £150,000, interest-only mortgage on a two-year, fixed rate at 5.54 per cent. The loan is with Abbey. "There is one more year left on this rate before I will look to remortgage," John says. "But once I can start saving again, I will repay some of my mortgage and look to invest in more property."
He has no pension or protection policies in place.
As the world battles a financial storm, John has been celebrating the launch of his company and seeing its products appear on the shelves of some big-name retailers.
"Yet while he's been creating his own success, his finances haven't been immune to the general economic downturn," warns Dennis Hall from independent financial adviser (IFA) Yellowtail Financial Planning.
With personal debt, a property at risk of plummeting in value, and a new business to manage and build during turbulent times, John faces some financial strain.
Clearly, money is tight at the moment, but John should make wiping out debt his priority, stresses Darius McDermott from IFA Chelsea Financial Services. "It's admirable that he would like to repay his parents first, but if at all possible, he should start clearing those debts with the highest interest rates," he says.
At a rate of 16.6 per cent, the interest on his credit card borrowing is "crippling his meagre budget". To help curb John's spending, social activities and holidays should be put on ice until he can free himself of this debt.
The rate of interest on student loans is 3.8 per cent and is set in line with the retail price index each September. John can continue paying this low-cost debt off gradually.
He has great faith in the future of his start-up. "But given the historical success of such ventures, he should tread carefully," warns Mr McDermott.
Keeping personal spending under control is important, but once his debt has been dealt with, John must also set aside some savings to guard against any emergency needs. A cash individual savings account (ISA) will enable him to earn interest tax-free.
In the meantime, he can make use of sites such as Moneysupermarket. com and uSwitch.com to check that he is getting the most competitive deal on everything from savings to insurance, says Christopher Wicks from IFA N-Trust.
When he is in a position to do so, John could consider a stocks and shares ISA for longer-term growth potential as part of an investment portfolio. A fund supermarket such as Cofunds will provide access to a wide range of fund choices.
John should reconsider his attitude to property investment in the current climate. "If the market continues to slump then the £40,000 that John reckons he has in his flat could disappear," says Mr Hall. "And he could even face the spectre of negative equity. If that situation arose, he would experience difficulty in remortgaging to a decent rate when his current deal ends.
"He also risks periods when the property is empty, putting a big dent in his income as he relies on having tenants to fund his day-to-day costs," says Mr Hall. "And with no emergency funds to fall back, on this could result in a personal financial storm." This makes setting aside some cash a vital first step for John as recession kicks in.
Putting all his eggs in one basket by relying on a property portfolio to fund retirement is a dangerous strategy, say the advisers.
"Falling house prices should highlight to him that bricks and mortar is not always a stable asset," says Mr McDermott. "He's also ignoring the extremely attractive tax incentives a pension offers, and the options as to where you can invest your money to build that retirement pot."
As the current turbulence demonstrates, predicting which asset will be a top performer in the future is tricky. So building a diversified portfolio by adding cash, equities and bonds to the mix is a wise approach. John should start paying into a personal pension when his purse-strings are less stretched. A low-cost self-invested personal pension gives the greatest choice of assets, including more esoteric options such as commercial property.
As a self-employed business owner, John should consider some form of income protection insurance when his finances will allow it. This will provide a replacement income in the event that he is unable to work due to illness or disability.
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