‘At 24, how do I set up my fi­nances for life?’

The Daily Telegraph - Your Money - - MONEY MAKEOVER -

This reader wants to buy a house, sort out his pen­sion and save for an emer­gency fund, writes Laura Suter

Like many first-time in­vestors, Tim Wood doesn’t know where to start. The 24-year-old project man­ager has saved £7,000 of his earn­ings. How­ever, he is about to take a new job, which comes with a de­cent rise on his cur­rent £45,000 salary. He wants to know how to make best use of the ex­tra cash.

Mr Wood is ahead of many others his age as he has no debt apart from a £150-a-month car fi­nance deal that is due to ex­pire in a year’s time.

He cur­rently rents near his of­fice in North Ac­ton, Lon­don, in a house share, pay­ing £900 a month in­clud­ing bills. His sav­ings are sit­ting in his cur­rent ac­count, earn­ing next to no in­ter­est, and he wants to im­prove his re­turns.

He plans to buy a two-bed­room flat in Ac­ton in the next cou­ple of years and to rent out the sec­ond room.

“I’m not in a mas­sive hurry to buy, but I think there is a big op­por­tu­nity to buy around Cross­rail [the new train line] and there are lots of build­ings go­ing up, so it feels like a good in­vest­ment in the next two years,” he said.

He also wants to build up a rainy­day fund, should any­thing hap­pen to his job, and thinks £20,000 is a rea­son­able sum.

Mr Wood is al­ready think­ing about his pen­sion and has around £2,500 in var­i­ous pen­sions from pre­vi­ous jobs that he’d like to con­sol­i­date. He ul­ti­mately wants an in­come of £2,000 a month in re­tire­ment.

He is keen to learn how to start in­vest­ing. His only ex­pe­ri­ence has been putting £550 into cryp­tocur­rency dur­ing the hype about Bit­coin last year – now worth about £300. Mr Wood said he had gam­bled only what he could af­ford to lose.

“I feel like I need a pie chart to help tell me how my money should be saved and how much I should save for each goal. I just don’t know how much I should be al­lo­cat­ing to each,” he said. in­sur­ance. He should check his new em­ployer’s sick pay ar­range­ments and take out an in­sur­ance pol­icy to pro­vide an in­come af­ter statu­tory and em­ployer sick pay has ended.

Mr Wood should speak to a mort­gage ad­viser to as­sess his po­ten­tial bor­row­ing abil­ity. This will help quan­tify the amount of de­posit needed, along with le­gal and mov­ing costs. Once his prop­erty is pur­chased he could earn up to £7,500 in rent tax-free with the Gov­ern­ment’s “Rent a Room” scheme.

Both Help to Buy and Life­time Isas are avail­able to save for a first prop­erty, each with pros and cons.

The an­nual sav­ing limit is higher with a Life­time Isa and the orig­i­nal cap­i­tal and bonus are avail­able on ex­change or com­ple­tion. The Help to Buy Isa is avail­able only on com­ple­tion.

If Mr Wood can save for at least 12 months and is go­ing to use these sav­ings to buy a first home worth less than £450,000, he should save £4,000 each tax year into a Life­time Isa to gain the 25pc gov­ern­ment bonus.

Be­fore em­bark­ing on any “DIY” in­vest­ment he would be ad­vised to learn from the likes of Money Sav­ing Ex­pert, the Money Advice Ser­vice or Can­did Money.

By ask­ing an in­de­pen­dent fi­nan­cial ad­viser for pen­sion advice, he could seek to bet­ter un­der­stand the in­vest­ment process.

Mr Wood wants £2,000 a month af­ter tax from the age of 65. This is in “to­day’s money” – the equiv­a­lent sum, if we as­sume an­nual in­fla­tion of 3pc (and that cur­rent tax thresh­olds in­crease at the same rate), would be £91,000 a year be­fore tax.

Scot­tish Wid­ows’ Quick Pen­sion Cal­cu­la­tor, one of many re­tire­ment plan­ning tools avail­able on­line, es­ti­mates that achiev­ing an an­nual in­come of £91,000 would re­quire monthly sav­ings of £1,065 un­til age 65.

Mr Wood should first look into the pen­sion scheme of­fered by his new em­ployer. Any con­tri­bu­tions he makes are likely to be de­ducted with­out any in­come tax or Na­tional In­sur­ance con­tri­bu­tions. The min­i­mum em­ployer con­tri­bu­tion is 2pc of salary with an ad­di­tional em­ployee con­tri­bu­tion of 3pc. But his new em­ployer may of­fer more.

Sep­a­rately, he could make per­sonal pen­sion con­tri­bu­tions, claim­ing 20pc tax re­lief at source and a fur­ther 20pc higher-rate tax re­lief through his tax re­turn.

Mr Wood should re­view his car fi­nance deal care­fully rather than sim­ply rolling into the next one of­fered by the same com­pany, where he may not get the best deal.

Cryp­tocur­rency is ex­tremely risky for many rea­sons. How­ever, wait­ing for the in­vest­ment to re­cover be­fore sell­ing is called “an­chor­ing” and the re­main­ing money could be bet­ter in­vested else­where for a quicker, less risky re­cov­ery.

Any losses should be writ­ten off as a les­son not to fol­low the herd! Mr Wood is about to in­crease his earn­ings, which should give him some scope to ad­dress his fi­nances with­out Would you like a Money Makeover? If you’d like to (in as much be con­sid­ered, de­tail as pos­si­ble please email please), de­tails money@ of any debts tele­graph.co.uk (in­clud­ing with the sub­ject mort­gages) line “Give and how you me a Money would de­scribe Makeover”, your at­ti­tude and pro­vide to in­vest­ment the fol­low­ing risk in­for­ma­tion: Your cur­rent

Your name, age in­vest­ments, and tele­phone in­clud­ing cash num­ber (we will and prop­erty. not share this You must be with any­one) will­ing to be

Your main pho­tographed fi­nan­cial goals for the ar­ti­cle.

af­fect­ing his cur­rent lifestyle. If he can save the ma­jor­ity of the pay in­crease it will put him in a great po­si­tion.

A pen­sion has the long­est in­vest­ment time hori­zon and con­tri­bu­tions have the long­est time to ben­e­fit from growth, so this should be a pri­or­ity. With some mod­est ad­di­tional sav­ing, it should be pos­si­ble to achieve his de­sired re­tire­ment in­come.

To ob­tain a favourable mort­gage rate Mr Wood should aim for a min­i­mum of 10pc de­posit. Al­low­ing for ad­di­tional costs such as stamp duty and le­gal fees, he needs to save around £48,000 to cover the de­posit on a £400,000 home. If he plans to rent out a room he will need the per­mis­sion of his mort­gage lender, which may re­duce the num­ber of lenders open to him.

Buy­ing a prop­erty makes sense as the rent Mr Wood is cur­rently pay­ing could in­stead go some way to ac­tu­ally get­ting an as­set he will even­tu­ally own, in ad­di­tion to the in­come he will re­ceive from rent­ing a room.

He is cur­rently al­lowed an in­come of up to £7,500 a year tax free from rent­ing a room, so this could be a valu­able source of in­come to help achieve other ob­jec­tives such as restor­ing his emer­gency fund and fi­nanc­ing hol­i­days or fu­ture cars.

The ex­ist­ing £7,000 rainy-day fund could be used in part to pay into a Life­time Isa im­me­di­ately. A £4,000 in­vest­ment will at­tract a bonus from the Gov­ern­ment of £1,000, which can ul­ti­mately be used to­wards Mr Wood’s prop­erty de­posit. He can re­peat this over the next two to three tax years. If he plans to buy in three years he should keep his money in cash be­cause the in­vest­ment risk is ac­cen­tu­ated when the time frame is short.

‘Cryp­tocur­rency is ex­tremely risky – any losses should be writ­ten off now’ ‘Mr Wood should re­view his car fi­nance – as he may not be get­ting the best deal’

The other £3,000 could be di­rected to his re­main­ing Isa al­lowance for this tax year, as shel­ter­ing this money from any tax, as a higher-rate tax­payer, is likely to be ben­e­fi­cial.

Once Mr Wood’s prop­erty pur­chase is com­pleted, fu­ture sav­ings can be split into longer and shorter-term in­vest­ing. Short­term sav­ings, for an emer­gency fund, should be held in cash, Pre­mium Bonds or fixed-term sav­ings ac­counts, where there is no in­vest­ment risk. A typ­i­cal emer­gency fund is six to 12 months of ex­pen­di­ture.

Longer-term in­vest­ments, which should be viewed as hav­ing at least a five-year time hori­zon, should be held in tax- ef­fi­cient “wrap­pers” such as a stocks and shares Isa and can be in­vested in mul­ti­as­set in­vest­ment funds, which put money in var­i­ous as­set types across the globe.

These can be ac­cessed for a very rea­son­able an­nual cost from an on­line fund shop and are sim­ple and straight­for­ward in­vest­ments that can form the core part of his in­vest­ment strat­egy.

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