People with Life Experience - How best to save/invest in future

gsmyth123

Hello,

If someone has a spare moment I'd appreciate some life saving advice (in a financial sense ha).

My fianc! and I are both freelance graphic designers in working in London, living in our recently purchased first home in Hemel Hempstead (15% deposit on £365k).

We both earn a decent amount of money ~£44k each gross.
Pension balances are quite low for 32/34 yr olds at around £5k each.

Due to the nature of freelance, we haven't climbed up within one company so our salaries haven't risen, and aside from day rate increases in line with costs, are unlikely to go up much more in the next 10-20 years. I see that as we've been lucky enough to earn a decent wage in our 20s/early 30s, that we should be investing it now, in order to make up for lower salaries at a later age (lower than studio owners/directors anyway).

We try to save £3k a month between us, so over the next year we could have say £30k to do something with. This includes a £3k/year pension contribution each.

My preference would be to buy a second place to rent out (possibly up north where my Mum lives) that pays off the 2nd mortgage. Meanwhile we save up another year and buy a 3rd place. Hopefully in 25 years time we can live mortgage free and sell the other places for ready cash to live off. Or keep renting them, see what happens.

Would people advise on:
1. My plan above
2. Chuck the £15k a year each into the pension pot as well, and keep freelancing into our 60s :eek:
3. Something else?

FYI - I've never been keen on ~5% return investments, getting £1500/yr off £30k doesn't thrill me) but feel free to tell me otherwise.

Shoot if you need more info, I may have missed something.

Thank you.
George.

Thrugelmir

gsmyth123 wrote: »

FYI - I've never been keen on ~5% return investments, getting £1500/yr off £30k doesn't thrill me) but feel free to tell me otherwise.

Would you be thrilled to see your £30k of savings wiped out?

With a mortgage of the size you have. I'd channel some savings into reducing the debt owed. Before considering another property.

Saving into a pension maybe boring. Ultimately it's tax efficient. Compounding with the reinvestment of income is what will grow the value over the years.

Maintain some accessible savings too.

Above all. Take a long term view. There's no rush.

Snow_Dog

Thrugelmir has some very good points there.


The most important first step in my book is accessible savings 3-6 months living costs in easy access.


Once that box is ticked it comes down to a number of factors, what is the interest rate you are paying on your mortgage, if its low, ie <2-3% then you can do more with disposable income. (Saying that I would overpay every time).



Paying money into a pension is very tax efficient and doing it through your earnings means paying less tax, so you are effectively getting free money from the government to stick into your pension. The earlier you do this in your life makes a big difference. Over a decent period of time a well invested pension is going to be much higher than 5%.


Stocks and shares ISAs are likely to be your next best bet if you are DIY investing and lots of people would recommend multi fund options like Vanguard life strategy funds. Middle of the road I figure but over the long term probably one of the lowest fee, most likely decent returns options for a stick the money in and let it do its thing options.


Your options on BTL - hmmm, im so on the fence with this one, there has been a lot of legislation in recent years squeezing landlords bit by bit to the point where returns are nowhere near what they once were. Quite a few people I know with rental properties are happy if there is a positive return (I know people with 1 flat up to people with a dozen or so houses). Im sure there are landlords out there making a reasonable return, but just saying its not necessarily a pot of gold.


Mostly it comes down to a balancing act, invest in not just one thing because you dont keep all your eggs in one basket. How would you feel if in 10 years time, 5 BTLets all mortgaged and the housing market crashes through the floor and you need to cash in? Same with stocks and shares, if you have thrown every penny at them and they drop 50% overnight.


So, like life, just a balancing act and spread it about.

AnotherJoe

Don't underestimate how much work risk and hassle there is in BTL. Also there is increasing political pressure against landlords which is not going to go away resulting in more onerous tax and legislation rules. Finally, if you go into BTL like you suggest you've committed the classic sin of putting all your eggs in one basket. Also, you say buy near where you mother lives, is that just because they are cheap there? I hope you arent expecting her to manage them?! And as its long distance you'll have to use an agency which ups the costs.

If I was to do it again I'd do 80% in global equities, picking a low cost index fund, and 20% in a variety of "edge" bets - probably healthcare, solar and wind energy, small companies, emerging markets. Yes markets can and will crash but you can ride that out, harder to do if you get into negative equity with a BTL and need to sell.

In a pension there are also tax benefits which are much harder if not impossible to get in property. Since you are already making a big bet on property with your mortgage I'd say thats a big enough proportion of property to hold..

bostonerimus

If you understand compound interest you should be happy with 5% returns if you get them every year for 30 years.

You have money invested in a house and now I’d put as much as you can into ISAs and SIPPs to b. There is no magic bullet, but there is a good chance of success if you are sensible, save aggressively and stay diversified.

gsmyth123

Thank you for all the replies. Exactly what I was after.

We will keep 6 months accessible savings 👍🏻

We will not buy another property, at least not for a long while, and we’re in a good place in all the other areas mentioned 👍🏻

I was going to pay the extra 10% allowed overpayment on our fixed mortgage (3.9%) for 2 years, then switch mortgage to a lower rate. Would you recommend we keep the same mortgage (it goes to ~5.5%) and make overpayments as much as we can? (There is no overpayment penalty after the fixed period) Or change the mortgage and invest/pay into pension? I read on here somewhere you’re better off having a lower mortgage rate and pay into pension, than trying to overpay on a higher interest rate. What do you think? I like the idea that if we pay the mortgage off earlier we could retire earlier!

Now I’ve looked into compound interest we will look to fill up a few Stocks and Shares ISAs, a low cost index fund and our pension pots.


Thank you all.

jaybeetoo

Are you putting enough in your pensions? Take the age you start your pension and halve it. Put this % of your pre-tax salary aside each year until you retire. So someone starting aged 32 should contribute 16% of their salary for the rest of their working life.

gsmyth123

In that case then no, we're not. Probably doing around 5%.

grumiofoundation

It is definitely better to switch mortgage to a lower rate. The additional cost of a higher interest rate in the short term will wipe out a lot of the savings you will make by overpaying. On 300k 1.6% higher interest is an extra 4800 per year!

steampowered

gsmyth123 wrote: »

I was going to pay the extra 10% allowed overpayment on our fixed mortgage (3.9%) for 2 years,

That's really high. The best 2 year fix available for a £365k property at 85% LTV is 1.57%. So you are paying more than 3x as much interest as the best rate.

It sounds like your financial priority should be to get a cheaper mortgage.

It might even be worth remortgaging immediately and swallowing the break fee - you'll have to calculate the numbers. Otherwise, overpay as much as you can over the next 2 years, with a view to remortgaging onto a better rate as soon as your fix ends.

After you have got your mortgage rate down to something more like <2%, start putting 10% of your gross income into a pension. This is the minimum you will need to be able to retire. Investing in a pension gets you an instant 20% return through tax relief, PLUS a long term average return of about 7-8% per year.

After you have got a cheaper mortgage and are building a pension, put the rest into a Stocks & Shares ISA through a low cost investment fund (such as a Vanguard fund). The average return from the stock markets over the long term is 7-8% per year.

The ISA wrapper will mean your returns are tax free. Compare that to BTL where the likely returns are lower, more effort is required, you will pay income tax on the rent and you will pay higher rate stamp duty each time you buy a property.

ian1246

Personally I'd overpay your mortgage until you have 40% Loan To Value Ratio (Factoring in your property overtime may increase in value whilst your mortgage drops, making it a lot quicker than you might expect to hit 40% LTV). This way you ll make immediate savings on your current & future mortgage interest & then when it comes time to renew it at a fixed rate, you ll be eligible for much lower interest rates which you can fix at - freeing up future cash which otherwise would have gone into mortgage interest payments.

Once you hit 40%, stop overpaying and chuck everything (including the savings made from reduced mortgage interest payments) at your pensions to maximise compounding & tax-rebate.