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Needing advice -future planning(3 Posts)
As a little background dh and I are both around 30, have a mortgage (probably in negative equity though) and both have full time, reasonably paid jobs.
We're currently awaiting the arrival of our first child and as a result have been thinking about the future. Our house is quite small but we've decided to try last here as long as we can with the little one as it makes no sense to sell and lose money for a bigger house and mortgage and likewise I'd be worried about the stress of two mortgages if we rented ours out.
The past 5 years have been focused on paying off DHs debts etc that he was left with from being a little mad with his wages when younger and also a large amount of debt his ex left him with. I haven't minded this at all but think now is the time to look forward.
Neither of us have a pension through work (both small private companies) and each have a small amount in savings. I'm only taking a couple of months off work for maternity as is SMP only and don't want to mess up my career and so this shouldn't impact us too badly.
What I'd like to ask is what you think we would be best doing moving forwards? Are there standard pension schemes we should set up ourselves or would we be better off just saving in ISAs and saving accounts? I'm guessing we should have a 'mortgage deposit' pot for next house, some sort of savings account and then also look at the future ie a pension or something but I know nothing about investments nor where to start. Am hoping someone can make some suggestions in laymans terms?!! Thanks and sorry it's long.
Definitely set up a tax-free ISA savings account(s) as a rainy day fund. However, if you have a mortgage or other debts, it doesn't make a lot of sense to stockpile too much cash earning 2% if your loans are costing >6%. You'll save more money paying down the mortgage and reducing the term than you'll gain in a savings account.
A pension is slightly different because it's a long-term measure. The earlier you start contributing the better, plus any contributions are bumped up by the tax element of 20% or 40% if you are a higher rate taxpayer. Independent financial advice can be useful with pensions - there are a lot of products on the market and it can help to get professional advice. You also might want to consider is a 'college fund' for your baby. Education is expensive and planning ahead pays off.
It's a balancing act really. Keeping enough accessible cash back so that you can enjoy life and not worry if there's a costly emergency vs paying down expensive debts vs salting spare money away where it can work best for you.
Its always a good idea to have some money put aside for a rainy day. I think the advice is generally enough to see you through for 3 months. But if you have debts and a mortgage you will almost certainly be better clearing those first before you start saving seriously.
ISAs should be your first bet once your debts are gone. Cash IASs are secure and the interest you earn is tax free (although the money you put in will have been taxed before it arrived in your bank account of course)
A pension is different since for most people the benefit is that your employer will have paid into it (this is free money effectively) but at the moment small employers don't have to make contributions. If you are paying in, the benefit is that you are paying in gross income (if you pay in net amounts then you will get a credit for the tax which was deducted at source). The downside is that pensions are a stock market investment which carries risks and also that most of the income you get out at the end is taxed.
Clear your debts (which are bound to be charging you at a higher rate than you could get in savings) but put a little aside each month for a rainy day. Then once your debts are gone and your mortgage is more manageable focus on savings and think about pensions. People often forget that actually in the current financial climate many savings pots are actually losing money since the interest rates are ridiculously low and inflation erodes the value of the money you have put away.
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