Small Steps Out Of Massive Debt!

GeorgianaCavendish

I've been playing around a bit with a pensions calculator and I'm not as completely off track with retirement saving as I feared! I do need to increase my contributions to keep on track, but not by a completely outlandish amount which is a relief. The house deposit is my #1 priority, but I will increase the pension contributions a little bit for now and keep reviewing it. 

GeorgianaCavendish

Hmm ... I'm thinking about LISAs / retirement savings etc, I currently have a cash LISA to save for the house deposit but is it also possible to open an investment LISA for retirement saving (even if I don't save anything into it for a few years?) Or can you only have one 'active' LISA at a time? Just for info at the moment  
I'm wondering if it might be worth saving into an investment LISA in the future, if I would be able to get a 25% bonus on amounts saved up to £4000. (And assuming I had saved into my pension first and didn't have other savings priorities). Or at least would it be worth opening the account while I'm eligible and having the option there, rather than regretting not opening one when I'm 40. 

GeorgianaCavendish

Opened an instant saver with Atom Bank for my emergency fund, I've also added the moving fund (rental expenses) into there as might as well earn some interest over next few months. The interest rate is 0.75% (for now - who knows what will happen if we get into negative interest rates) but I feel better with it being in a separate account and it means my Monzo can be for saving for upfront expenses etc. I did have a moment of thinking "is it really worth it for a few pounds a year?" but I don't have that attitude when I'm doing surveys or using cashback sites, and it is better for it to be a few pounds going into my account

Can't quite believe that has taken up so much headspace but I'm still getting used to the idea of having savings and am a bit neurotic about it  

I also did some admin on my pension today and finally added the new fund I was researching earlier in the year. I'm keeping the pot in the existing fund for now, as it was a With Profit fund there is a penalty on switching out and I'm not comfortable with the idea of 'losing' money from it, but new contributions are going into the new funds. I might take the plunge and switch it over in the future, but I'm getting used to the idea of the 'riskier' fund for now, and to be honest I think I need a bit more of an idiot's guide to investing so I can weigh up the penalty vs potential growth. Also set up the pension as a payee on my bank account so I can make extra payments. 

enthusiasticsaver

I think with pensions small changes can make a difference as it is long term investing.  Can you explore the possibility of increasing your contribution by 1% a year or every few years until you get to a  total of 15% including employer contributions? Getting forecasts to see what the difference would be might be worthwhile. 

Assessing risk is important as you do not want to be panicking if the stock markets fall but they do go up and down and generally the younger you are the more time you have to make up any shortfalls if the markets dip for a period of time. However at the moment you would think they would be low but our investments have risen drastically since April after a short dip in March. Unfortunately due to the governments economic policies at the moment interest rates are low but I imagine inflation will not be increasing massively so that is a plus. Regular savers are often paying higher interest. I don't think you can have more than one LISA.  Normally the cheapest way of adding to a pension is to use your employers one as that will be most economical fees wise. 

GeorgianaCavendish

The suggestion to increase pension contributions by 1% a year is a really good one, I'm currently at 10% (5% me / 5% employer) - I think 1% per year would be achievable. Paying via payroll is a good idea too because it takes the mental energy out of it! 

enthusiasticsaver

OK so  10% isnt bad (although I am not sure how old you are).  Can you work out how much you need for a deposit on a suitable property as it stands now?  Having financial goals is great but you need to be careful you do not overwhelm yourself with goals so you end up actually doing nothing because you cant decide what to prioritise.  If you are close to 40 your decisions may be different to if you are under 30. Having a  separate account for emergencies is great as is having a pot for annual expenses up front.  It seems like you have two main priorities, saving long term for retirement and buying a house/flat.  My feeling, given you are putting 10% into your pension is to maybe increase it gradually but really focus on buying a house first. Leave the investing (other than pension)  until you have sorted that out. 

Re the LISA they sound great for buying a property but I am not sufficient educated in them to know whether you would be better putting money into your pension rather than the LISA for retirement savings.  I would use the one you have for saving for your house and use the pension for now as retirement savings vehicle. 

astrocytic_kitten

I was thinking about a LISA for retirement savings the other day, but the MSE guide on them isn’t too keen - they said an employer pension is normally a better bet. I don’t feel particularly educated on pensions so am taking their word for it.

I remember Martin also used to suggest increasing pension contributions at pay rise time each year so you don’t miss the money.

GeorgianaCavendish

Thank you @enthusiasticsaver - you are helping me work my way through the muddle! You are completely right in that I have a number of financial goals and I am procrastinating because frankly having a goal other than "not having a panic attack every time a credit card statement arrives" is really alien to me. 
I'm mid-30s so pension saving is more of a priority for me than it was 5 years ago. Saving for a deposit is the main goal but I don't want to ignore any easy wins I could be making on the pension contributions / retirement saving while working towards the deposit goal. Your suggestion to gradually increase the contributions makes a lot of sense (and thank you @astrocytic_kitten for the suggestion to increase in line with annual pay rises - that is a great idea!) and would take a lot of the stress out of it. Does it sound reasonable to aim to increase to 15% by the time I'm 40? That gives me a timeline of 1% a year while sorting out the deposit and house purchase, and then I can revisit the goal and increase (I know there is another 'step up' in pension contributions at my current workplace, but have a feeling this may not be until 46 by which point I could be working elsewhere - I need to check anyway)

I've been scared of digging into the details of deposit saving as it felt so unachievable, but between the two of us we need to save at least £35,000. We've been fortunate to be able to gain a measure of financial security this year that I honestly didn't expect to happen (emergency fund settled, money for another rental move set aside and making inroads on the pots for annual expenses) so now the priority is deposit saving and clearing the credit card debt.

I suppose my first priority is that we both utilise our LISA allowance this tax year because the £1000 bonus is too good to miss, and after that to continue to save the max amount into the LISAs while paying down the credit card debt. Alongside this goal, making a sensible amount of progress towards retirement saving, but not at the expense of delaying the first two goals. 

enthusiasticsaver

As you started this diary with over £35k of debt 3 years ago and you are now down to less than £10k I would say a £35k deposit is definitely possible. You have an opportunity while living with relatives to save on rent, there are presumably two of you saving for the deposit and there is every indication property prices will stall or even go down as the inevitable  economic recession takes hold and the government stops interfering by offering stamp duty holidays which is the only reason it hasn't stalled so far.  So buying in a few years time could be a distinct possibility and if you are mid 30s you still have time to get on to the ladder. So maximising the Lisa's sounds sensible. I think gradually increasing pension contributions is the way to go while you are dealing with other goals like saving for a house and paying off the rest of the debt. As I say I would not look at investing yet until the other goals are sorted. There are no guarantees with investments and I definitely think a house is more important. 

GeorgianaCavendish

Thank you so much @enthusiasticsaver - your posts have really helped me put everything in perspective (not just now, but throughout my time on this board!) and help me feel a bit calmer about everything. I recognise that I've been procrastinating with too many goals (also maybe putting a bit too much stock in the advice on different personal finance podcasts) but giving ourselves permission to concentrate on the house deposit and debt paydown as the main goals for now (with the 1% pension contribution increase tagged for January 2021) is a big relief. 
DH and I will both be saving towards the 35K target, we both opened LISAs this year and will use these to gain the bonus, and once the cards are gone we can also save in addition to the LISA (maybe into a regular saver account or similar). I know our living expenses will go back up again next year, so I want to use this time with our relatives to get the LISAs funded for this year and tackle a big chunk of the credit card debt. 

I agree with you about house prices stalling or even falling once the stamp duty holiday ends. I don't see waiting a couple of years to buy as a huge disadvantage because we want to explore new areas before committing to buy somewhere, and I don't want to be saddled with a huge mortgage in an area we don't like. I know that this is all conjecture, because we didn't have the deposit anyway, but if we had been in a position to buy at the beginning of this year we would have ended up paying a lot for somewhere that was better suited for our pre-lockdown lives but maybe isn't ideal now. So much has changed for us in just the last 6 months, just one example but we are both intending to work from home at least 3 days a week each in the long term (luckily both our jobs can accommodate this!) and our idea of our long-term home has changed a lot. I think it might change even further as we get used to remote working in "normal" circumstances (I think to start with I would prefer to be within easy commute of a train station, but maybe after experiencing commuting into London 2 days a week for a few months I would be comfortable with a more rural setting)