LJ wrote to us as, while on maternity leave, LJ has had time to think about the next financial goals for her and her family and needs some direction on where to start.
LJ, 35, is married to Alessio, who is 38. They live in St Albans with their 3 children – Phoebe, 4, Margaret, 2 and baby Florian. She is currently on maternity leave, but plans to go back to her job as a careers consultant four days a week. Her husband works as a management consultant.
After a long time where their house ate all their money they are finally starting to save again. They already have a rented cottage in Devon, which makes them a small amount of money. Paying off their mortgage is a top priority, but they want to look at saving into an ISA, initially in cash and, when they’ve saved up a bit, into stock and shares. Her husband is pretty clued up on the stock market. Pensions are also a problem. LJ has a work pension, but Alessio is on a fixed term contract and doesn’t have any real provision.
A final hurdle for the couple is that they would like to send their children to private school, but they haven’t started saving yet. While they have life insurance, LJ is also nervous that they don’t have wills in place – Alessio’s job takes him to some unusual places!
It sounds like LJ is in pretty good shape financially, particularly for someone with three children under 5. I seem to remember getting dressed was a pretty big challenge when my children were that age. That said, there are a few areas they should prioritise.
We handed the question to a friendly financial adviser we know. Patrick Connolly, a chartered financial planner at Chase de Vere, says: “As their house is no longer ‘eating up’ all of their money they should start building cash savings. Everybody needs some available money in cash, at the very least to cater for any short-term emergencies or requirements. For many people the best way to do this is to set up a monthly direct debit from a current account to a savings account, with the money being transferred shortly after pay day. Previously cash ISAs were the default choice for cash savings, but as many people can now benefit from tax-free savings through the new Personal Savings Allowance, they should focus on savings accounts that provide the best returns.”
Patrick agrees that paying off their mortgage quicker is likely to be a sensible choice, once they’ve built up some cash savings. He adds: “It is likely that the interest rate they’re paying on their mortgage will be higher than the rate they earn on their savings, so by focusing on reducing their mortgage debt, their money will be working harder for them.”
For many people the best approach for longer-term savings is a combination of pensions and stocks and shares ISAs. Patrick says LJ should make sure she understands her work pension and particularly how much her employer will invest into her pension. If she puts in more, will her employer add more?
He adds: “Just because Alessio doesn’t have access to a company pension scheme, it doesn’t stop him investing into a pension and benefiting from tax relief. Many of the pensions available today have competitive costs, a wide range of investment options and are flexible so that he’ll be able to increase, decrease or stop contributions, if necessary in the future, without any penalties.”
As they currently have little in the way of investments, they can look at the default fund choices on their pensions and consider low cost trackers funds or diversified international share funds for their ISAs and pensions. They can afford to take risks as they’ll be investing for a long time and also putting in regular premiums and so don’t have to worry about market timing.
Finally, Patrick urges them to start planning for private school sooner rather than later, getting an idea of costs now and allowing for the fact that school fees tend to rise quicker than inflation over time. He says: “They need to start investing money for this as soon as possible. If they can be disciplined they can even use some of their own annual ISA allowances for this, if they’re not using their full allowances anyway. They should invest in shares as this has better growth potential than cash over the medium term.”
I’d just add one thing to all this sage advice: It is worth signing up to an investment platform such as Hargreaves Lansdown or Fidelity FundsNetwork. From there, they can get all their ISAs, pensions and manage them online. They are no more difficult to navigate than investment banking and are so much more convenient than filling in lots of paper forms. See our platform guide here.