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Financial Planning - Determining a bright future

This article featured in the January 2004 issue of Moneywise, a leading financial magazine.

For a 23-year-old, Daniela Miguel has a mature head on her shoulders. She wants a lifelong financial plan that will carry her all the way from university to a secure old age.

Daniela Miguel, 23, studies business and finance at Coventry Business School. Daniela is a true international student – an Italian citizen, she studied in Brazil before transferring to Coventry University in June 2002.

As an overseas student she pays tuition fees of £6,500 a year. Part of this is covered by a scholarship of £2,500, and part is covered by contributions from her parents, which will total £2,000 this year. The rest of her fees and living expenses are met by the £5,200 a year she makes working part-time as a business assistant at a local hearing aid centre. Daniela does not qualify for a student loan, but this suits her, as she plans to graduate without the burden of debt.

Daniela is due to graduate next year, and wants to work in corporate finance. Research indicates that she is likely to earn a starting salary of £23,000 a year plus benefits. Unlike many of her peers, she is keen to get to grips with her finances early in her career and follow a plan to keep her secure into her old age.

David Higgins, an adviser with Glazers Financial Services, offers his advice.

Higgins says Daniela should make plans for the short term, medium term and long term. As soon as she starts work, she has a chance to begin her long-term plans.

Higgins explains: "When Daniela is looking at offers of employment during the coming year, she should consider the benefits packages, including the pension." Occupational schemes can vary dramatically, from generous final salary benefits to stakeholder schemes that the employer doesn't contribute to. Higgins says: "When weighing up job offers, bear this in mind, because a 10% pension contribution is the equivalent of a 10% salary hike."

Daniela should start contributing immediately. Higgins says: "The money invested in the early years has the longest time to increase in value. So starting a pension early means you will pay less overall." In addition, it's a tax-efficient way to invest. The government offers tax relief on pension contributions; so a higher-rate taxpayer contributing £60 will actually have £100 invested in their pension.

Daniela should also ask potential employers about sick pay and income protection, which provides a tax-free income while you are unable to work. If her employer doesn't provide income protection, Higgins says Daniela should buy her own. He recommends Scottish Provident, Liverpool Victoria and Friends Provident. Over time, Daniela will need to review her insurance needs. He says: "Life insurance and critical illness cover will need to be considered when starting a mortgage, or when a first child is born."

Higgins suggests Daniela draw up a budget as soon as she knows what her salary and outgoings will be. This will reveal how much she can afford to set aside as savings. Higgins says: "The first step will be to build an emergency fund equivalent to three months' expenditure." He suggests this be put in a cash individual savings account like that of Kent Reliance Building Society, currently offering 4% interest.

Once she has met her immediate savings goal, Higgins recommends Daniela look to the medium term. In five years, she and her boyfriend would like to buy some land and build their own house, which will cost around £200,000. Higgins says: "She should aim to save for a deposit in the next five years. Daniela will need a specialist self-build mortgage, such as the one available from Britannia Building Society. Its mortgage allows you to borrow 90% of the cost of the land and up to 90% of the value during construction."

This means she will need a minimum deposit of £20,000 as well as additional funds for survey costs, legal fees and stamp duty. Higgins adds: "With self-build houses, running over budget is almost inevitable, so she should also build up an overspill fund for any emergency extras."

Daniela and her boyfriend would therefore need to save £300.66 a month, assuming an annual growth rate of 4%. The best way to do this would be for each of them to open a cash ISA – allowing each to save up to £250 a month and receive tax-free interest on their savings.

If Daniela then wants to start a family, she will need to plan ahead. Higgins says: "She should save enough to enable her to survive without her income when she is on maternity leave, and meet the increased expenditure."

"Finally," says Higgins, "a long-term consideration will be funding education. A degree now costs around £20,000." He suggests saving for this into an equity ISA, as Daniela will have over a decade to build up the fund.

For further information, contact David Higgins on 020 8458 7427.

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