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