Pay rise... what to do with it?

McBenthy

Hello all!

I'm new to this forum, so bear with me

I've just been given a payrise that will equate to ~£500 per month extra. I have every intention to save this with an aim to buy a new care and (eventually) build up a deposit for a house.

I have a few questions regarding what to do. Should I trickle it into an ISA, or a regular savers account, especially with us being halfway through the financial year.

Also, should I save for the car or the deposit first? This is a realistic question to ask as I do a 100 mile round trip to work and a new car (my eye is on a 2.2L Diesel Civic)will save me aprx £100 p/m in fuel. I currently pay £335 p/m in rent, with my flat mate paying £315. So in the house instance I would be looking to buy-to-let (my parents have other property in the same area, so already have contacts with trust worthy contractors and letting agents), or buy-to-live with the aim being that my mortgage would be less than my rent (when split 2-ways).

I have checked with my flatmate and he is happy to pay a set amount per month as rent which would be lower than he currently pays, and slightly more than 50% of the mortgage (to account for repairs and insurence etc).

So, with that brief introduction, please help! lol

p.s. nice to meet you, to meet you nice :beer:

oldvicar

I am ever so slightly jealous of such a nice pay rise, but I'm sure you're worth it.

Keep your eye on the nice Civic, but stick to what you've got or buy something less flashy and more economical.

If you can save £500 per month, then you should have a deposit in a few years time.

opinions4u

McBenthy wrote: »

I've just been given a payrise that will equate to ~£500 per month extra. I have every intention to save this with an aim to buy a new care and (eventually) build up a deposit for a house.

Great stuff. Make sure you've worked out the net value of the rise, after tax and NI.

I have a few questions regarding what to do. Should I trickle it into an ISA, or a regular savers account, especially with us being halfway through the financial year.

Also, should I save for the car or the deposit first?

Take a complete step back and prioritise what you need and what you want.

1) Do you have a contingency fund? Typically 6 months net pay to fall back on in case of disaster (illness, loss of job etc). Ideally using easy access accounts including cash ISAs.

2) Do you have an inevitable expenses fund to set money aside for known expenses that typically arrive annually? Things like car insurance and servicing, an expectation that a TV or kitchen appliance will need replacing each year. A holiday perhaps. Easy access accounts.

3) Medium term savings next. Replacement car. Deposit for house. Special holiday (e.g. Ashes series in Australia for me, rather than the typical two weeks in Spain). Regular saver type accounts, fixed rate ISAs etc.

4) Longer term savings. Such as school fees for kids, university costs, the opportunity to take a career break for a year or two later in life. Very often share schemes at work are ideal for this, but don't leave all your eggs in one basket - so diversify in to stocks and shares ISAs across that aren't exposed to the fortunes of a single company.

5) Retirement planning. This sounds like a brilliant opportunity to give your pension plan a boost. Every pay rise should have something allocated to more in your pension pot. What does your employer offer here? Matching funds?

For me, you really should be doing 1,2,3 and 5 now. Car wise, I'd aim for something second hand that can give you the desired fuel economy, allocating other funds to the house deposit.

But the most important one is (1) as a safety net can give you the opportunity to adjust when things go wrong.

McBenthy

oldvicar wrote: »

I am ever so slightly jealous of such a nice pay rise, but I'm sure you're worth it.

Keep your eye on the nice Civic, but stick to what you've got or buy something less flashy and more economical.

If you can save £500 per month, then you should have a deposit in a few years time.

The civic is picked as the most economical for me at the moment, in part due to its good history as a car for not needing bits replacing and fixing constantly!

opinions4u wrote: »

Great stuff. Make sure you've worked out the net value of the rise, after tax and NI. - already done

Take a complete step back and prioritise what you need and what you want.

1) Do you have a contingency fund? Typically 6 months net pay to fall back on in case of disaster (illness, loss of job etc). Ideally using easy access accounts including cash ISAs. I do not have a contingency fund yet, and this is something I need to build up

2) Do you have an inevitable expenses fund to set money aside for known expenses that typically arrive annually? Things like car insurance and servicing, an expectation that a TV or kitchen appliance will need replacing each year. A holiday perhaps. Easy access accounts. This is already accounted for in my budget, so the £500 is above my inevitable expenses.

3) Medium term savings next. Replacement car. Deposit for house. Special holiday (e.g. Ashes series in Australia for me, rather than the typical two weeks in Spain). Regular saver type accounts, fixed rate ISAs etc. This is what I am mainly aiming to save up for. Although the car is more a slight investment than a treat. My current car is costing £200-£600 a year in repairs, as well as >£200 a month in petrol. It's worth £2k, a Civic with 21k miles is £9k. This would cut my petrol bills almost in half, as well as seriously reducing my repair bill!

4) Longer term savings. Such as school fees for kids, university costs, the opportunity to take a career break for a year or two later in life. Very often share schemes at work are ideal for this, but don't leave all your eggs in one basket - so diversify in to stocks and shares ISAs across that aren't exposed to the fortunes of a single company. This would be nice, but is a long way off yet. I recently graduated so am only 22.

5) Retirement planning. This sounds like a brilliant opportunity to give your pension plan a boost. Every pay rise should have something allocated to more in your pension pot. What does your employer offer here? Matching funds? Tbh, I have no idea! I started here a year ago and am only 22, so I'm pretty behind on the pensions issue! My ideal pension would be a nice property portfolio backed up with some shares as I personally prefer them.

For me, you really should be doing 1,2,3 and 5 now. Car wise, I'd aim for something second hand that can give you the desired fuel economy, allocating other funds to the house deposit.

My main aim is to get into my own house asap. Like I said, I'm 22 and have no debts (bar the student loan), so I would like to get a place that needs some work doing to it and make a start on it whilst I've still got the energy to enjoy doing it! :rotfl:

But the most important one is (1) as a safety net can give you the opportunity to adjust when things go wrong.

Answers in red

oldvicar

To be honest, I bought myself a brand new mini metro when I was your age, using exactly the same logic that it would be cheaper to run due to mpg etc. Of course back then a Honda Civic was also a small car! I'd also just got a motgage on a flat - huge LTV and high % interest - but I think they all charged the same back then, and only building societies not banks had mortgages (you 'queued' for them).

So good luck McB ! However, because mortgages do require a significant deposit, remember that unless you have eg bank of mum/dad behind you spending £9K on the car will delay your property purchase by possibly 18 months.

Thrugelmir

If a house purchase is some years away. Consider locking your money away in fixed term cash ISA's every year.

McBenthy

oldvicar wrote: »

To be honest, I bought myself a brand new mini metro when I was your age, using exactly the same logic that it would be cheaper to run due to mpg etc. Of course back then a Honda Civic was also a small car! I'd also just got a motgage on a flat - huge LTV and high % interest - but I think they all charged the same back then, and only building societies not banks had mortgages (you 'queued' for them).

So good luck McB ! However, because mortgages do require a significant deposit, remember that unless you have eg bank of mum/dad behind you spending £9K on the car will delay your property purchase by possibly 18 months.

I am aware that I'll be putting myself back a fair bit... that's the question really, better car with less associated costs, or keep saving for the deposit, which looks like it'll have to be around £25k to live around here (I live in Rusholme, manchester)

crittertog

Personally, I'd build up a contingency fund (I'd be looking to build up 3 months' worth of expenses quickly, and then build it up to the recommended amount from there more slowly), and then look at the other important stuff from there. Pension's worth looking at sooner rather than later - if you start paying in when you're young, you don't notice the money "going missing" when you're older.

Just one thing to add with the car ... Honda have a good reputation for reliability, but they are apparently expensive to service (I have 2 colleagues who have them, both of whom complain about the dealer labour rates and cost of parts) - probably worth looking at the TCO (total cost of ownership) when deciding.

atush

1- contingency fund, 2- car fund 3- deposit fund, and a psnion boost should come as well.

You could split and put 250/m into both one and 2 if you like. As long as you pay tax, always start with a cash isa then put excess into a regular saver.

McBenthy

Okay, I've had a much more detailed think and here are my conclusions:

1) I need to split what I'm saving for as I lack what many of you feel is needed, and I'm inclined to agree: A 'OH-HOLY-MOTHER-OF-FUNK! It's all gone wrong!' fund. I think I will put £250 p/m into that, probably through a First Direct Savings Acc as I'm looking to open a normal acc there for my normal income and the interest rates beat an ISA even with tax accounted for.

2) The remaining half I would like to see work for me in an ISA, but also perform well and would be a longer lasting investment (I can always save up a deposit after my danger-fund is large enough, not to mention I have a substantial inheritance coming my way, but hopefully that is still a long time off yet.) As such I am considering placing it into a tracker fund as a Stocks and Shares ISA which will; a) use some of my ISA allowence, stopping it going to waste, and; b) allow me to save over a longer term.

3) I am also looking to start tutoring, this money will go into a car/deposit fund from the start.

So, basically, I am planning to save £250 p/m into a high interest savings account, £250 p/m into a Tracker Fund as an ISA, and any extra income earned will be placed into a saving account (the first direct one if possible) with an aim to start on saving up for the car/house deposit.

Views?

qpop

If your intention is to buy a house within five years (minimum) - don't bother with equity based investment. There is a reason real-asset investment is usually referred to as "long-term investment" - aim for the highest risk-free return you can make with your money, and sacrifice the potential gains from real assets to protect your capital.

I'm in the same situation, giving myself a 3-4year timeframe to save a 10% deposit for a house (I'm 22, and supporting a partner who is studying full-time and working part-time). I also work in the financial advice industry, and would love to plunge all my savings into this "cheap" stock market - but I do want to buy a house in a few years, and be certain I'll have the cash.

Inflationary risk is less of an issue with a 5yr time-frame.