Wealth Check:'I'm in debt. How can I save for my wedding?'
Saturday 03 November 2007
Maggie Sinclair, 26, is an editor for a political communications company and lives in west London. She is engaged to her boyfriend Graham who bought a flat with her last year. They both part-own the flat and have a 15-year mortgage of £85,000.
Maggie's main financial goals are to pay off her £4,000 credit card debt and save £5,000 for her wedding by October 2008. She also plans to start saving for retirement.
We asked three financial advisers for their advice: Anna Bowes from AWD Chase de Vere; Anna Sofat of AJS Wealth Management Ltd and Ben Yearsley from Hargreaves Lansdown.
Case notes: Maggie Sinclair, 26, west London
Salary: £23,000 annually
Monthly spending: £1,100
Property: 15-year mortgage of £85,000 part share with her fiance
Pension: £40 a month into Sally's personal pension, which currently stands at about £5,000
Credit card debts: £4,000
Desired pension income: £8-10,000 per annum
Bowes thinks that Maggie will struggle to save and pay off her debts within a year but thinks it is achievable if both Maggie and Graham stick to a realistic budget. Bowes has calculated that Maggie will have to save £330 a month and suggests that she put it into a cash savings account as she'll need access to the money.
"One of the best rates available at the moment is with NS&I currently paying 6.3 per cent with a minimum investment of £1,000." She adds that once she has opened the account with the cash she has already saved she can set up a direct debit for her monthly savings.
Sofat also calculates that to achieve her financial goals she must cut down her monthly spending.
"She has an account with Icesave which has a competitive rate at 6.3 per cent so I would suggest she utilises this." Maggie should also use this for the other £800 cash saving she has.
Yearsley points out that to pay off her debts and save for the wedding within a year Maggie needs to save £9,000. To reach this goal she will need to save £750 a month – half her monthly pay.
"She will need to live like a pauper for 12 months."
He says Maggie could save a couple of hundred pounds over the next year by transferring her credit card balance to another company offering a lower rate of interest.
Yearsley suggests Maggie consider equity investing via a stocks and shares ISA, building a balanced portfolio that starts off in the UK, once she is in a better position to start saving long-term.
Yearsley thinks Maggie should put aside more than £100 in emergency cash.
"I think most people should have about six months salary saved up as emergency cash."
Bowes says the most important thing is for Maggie change the card to a low interest rate such as Virgin Money's Mastercard which offers 0 per cent for 15 months with a 2.98 per cent transfer fee.
"If Maggie could afford to pay about £345 a month she could clear the card in a year. If Maggie can't afford this amount,Even £100 a month would clear the debt in three-and-a-half years assuming she maintains the card on a 0 per cent interest rate."
Sofat also suggests Maggie change her credit card. "Natwest and RBS offer a 13-month interest period free with a rate of 13.9 per cent thereafter. There is a fee of 2.5 per cent on the balance transfer."
Bowes says that if Maggie wants to retire early she needs to start saving as soon as possible. She says she should contribute to her company's pension scheme. Maggie feels she will only need the equivalent of half her salary on retirement so she should be able to achieve this goal.
"If she is entitled to the full state pension (currently £4,540 per year), she would only need to produce a further £5,500 pa (this would be £17,500 by the time she is 65 assuming inflation of 3 per cent). As a result she would need to have a lump sum of around £435,000."
To achieve this Maggie will need to save around £260 a month, but she needn't put everything into a pension scheme, as long as she is saving into an ISA and other investments with the same goal in mind.
Sofat suggests that Maggie look at sufficient life cover for the balance of the mortgage. "It would be sensible to look at a cost effective term assurance for the mortgage – life assurance for £80,000, in joint names, which pays out on the first death would only cost around £7-8 a month."
Sofat adds that Maggie should check if she gets sickness benefit from work. "She should look at taking out an income protection plan in case of long-term sickness. It's relatively cheap at £16 a month for a cover of £11,500 paid after six months."
To find an independent financial adviser in your area, visit www.unbiased.co.uk
For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail email@example.com
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