Finance case study: recently qualified doctors
Simon and Paman qualified with combined debts of £43,000. A year later they've reduced their student debt to just over £34,000. They are renting their own place but ultimately, once their careers are more settled, hope to have saved enough for a deposit on their own home.
Simon keeps about £4,000 in his current account and is due to receive an inheritance of £25,000. Paman has been saving £250 per month for the last year, in a building society. They each pay a contribution to the NHS Pension scheme.
They eat out quite a bit. Paman admits she enjoys buying shoes and Simon is thinking of trading in their three year old VW Polo for something more upmarket. They would like to take holidays around the world, while they can, before starting a family when the time is right.
We asked Money Adviser Jeff Brown what his advice to Simon and Paman would be:
Assuming this is mainly debt to the student loan company and they are both employed rather than self-employed, both Simon and Paman will be repaying their student loans directly from their salaries via the Revenue's pay as you earn (PAYE) scheme. The rate at which they repay their student loans will be 9% of their gross (before tax and NI deductions) income above £15,000.
If, for example, Simon's gross income is £41,285 (basic salary plus 50% banding supplement) his student loan deduction will be 9% of £26,285 = £2,,365.65 (£197.14 pm). Annual interest is very cheap (RPI - cost of living) so I would not advise making additional voluntary payments to repay the debt more quickly. This also means more money available for a deposit when they come to buy a house.
They should both ensure that they are getting as much interest as possible on their savings. Simon's current account probably pays little or no interest, so maintaining a balance of around £4000 means that his money is not working as hard as it should be.
Paman should now have approximately £3,000 in her building society savings account. The first building blocks of saving should be a mini cash ISA for each of them, as ISAs often pay good rates and are always tax free. They could save £3,600 each tax year (lump sum or regular payments) into their individual mini cash ISAs.
Simon's inheritance of £25,000 will help provide a deposit for their first property purchase. Assuming they have filled their mini cash ISAs, Simon could shop around for a savings account or fixed term bond from a building society or bank to invest any unused portion of the £25,000. Money comparison websites such as Moneyfacts.co.uk, This is Money and Money Saving Expert all provide excellent information and advice on the best deals around.
Simon and Paman should work out a monthly budget to help plan essential (and see what's left for non-essential) expenditure. The budget will help them to calculate how much they can save for a property deposit and for holidays. The Money Advice Service has a really useful range of budget tools and calculators.
An annual travel insurance policy will be a good idea if they take quite a few long trips and short breaks abroad; it will be much cheaper than buying insurance for each trip separately.
Parkersguide.co.uk provides excellent background information on car types and costs for both new and second hand vehicles. Beware of high insurance groups and low mpg, both of which will mean expensive running costs. Simon could use some of his £25,000 to purchase a car or, alternatively he could earmark the £25,000 to keep towards a property deposit and shop around for a best buy loan at the websites mentioned earlier. Avoid loan payment protection insurance which is often expensive and difficult to claim on.
The bigger the deposit Simon and Paman can save the better as this will allow them access to the best mortgage deals. By shopping around using the websites mentioned above and/ or using a "whole of market, fee free" broker they could save £1,000s. Remember to budget for costs like survey fees and stamp duty.
The NHS pension scheme remains a final salary scheme and so provides excellent value.
Jeff Brown, Advice Works