Tell me where I should be spending my money

[junglesepa]

Hi, I'm 24 and I am currently on £35k, I move to a new job in September on £52k with 20% bonus. I need some advice on how to spend my money so that I can live more comfortably and build up a passive income.

At present I have £7k on interest free credit cards. I COULD pay this off with my savings but at present don't see the point.
I have a mortgage, after all expenses I have about £1k a month to spend.

I would like to move soon from my 2 bed flat to a house, budget for that would be £475k. Partner earns £40k but no savings.

Where should I be putting my money?

Thanks.

p.s. I put 5% in pension, employer matches up to 5%

Wow you are doing very well salary wise for your age, congratulations.

Firstly how much longer do you have to go on the 0% interest rate on your credit card. Seems fair enough to not pay it off now but if/when you start to get charged interest you'll probably want to clear that debt.

Secondly how much equity do you have in current flat and how much savings? As you want to trade up to a bigger property you probably want to make saving for that a priority rather than income building at your time in life. Although £1k is a huge amount to save relative to many people's income (lots of people I'm sure only have £1k a month to live on!), it'll be quite a while before you see any 'passive income' to speak of from that level of investment so reasonable to focus on housing for now.

On your salaries you can probably comfortably borrow £350k, maybe £375-£400 at a push. So if the budget is £475k and you have less than £100k equity then you're going to need to bridge the gap. Remember also that you'll need to pay estate agent fees, legal fees, purchase costs and stamp duty so plenty to save for there - probably £25-£30k on your £475k house. I would go for a managed investment fund ISA (I use nutmeg) to save - you won't make a huge amount of interest but money accessible when you need it and tax free.

You should also think about having a rainy day fund of at least 6 months mortgage payments - ideally at the higher rate mortgage you'll be paying on the bigger house.

I would say, pay off any debts first. Then put as much as you can into property. Also, you are only 24, so try and use some of your money for fun stuff.

I need to stop with the fun stuff as that's where the debt is from (holidays)!

I'm wondering how much more I'd need to save to keep my current flat and rent it out instead of selling? Anyone know how this works in relation to buy to let as I wouldn't be buying a house to let, my current mortgage would need to convert.

I will look into Nutmeg, thanks! At the moment I'm using Tandem, Moneybox and Plum. I love all these apps!

Don't forget that if you keep your flat when you buy a new property, the stamp duty is much higher, which could make the buy to let uneconomical. Do the sums carefully in terms of rental yield on the flat and make sure you take the extra hit of the stamp duty into account.

Pension savings are good, but they are inaccessible until you are pension age (or very expensive to take out earlier) so they aren't going to help with your passive income plan.

Depends on how you are on risk. Safest would probably be a mix of tracker ISAs, fixed term savings, cash, premium bonds etc, but growth might not be spectacular.

Your use of the word 'spend' is odd though. Spending implies exchanging the money for goods, but it is saving and investing that you are looking at.

Something else you might want to think about is the Moneysavingexpert Money Makeover. A lot of it will be irrelevant as it's more aimed at people who need to cut their expenses, but if you follow the principles of cutting expenses, maximising income and always thinking about not wasting money (using discount codes, not wasting food, not spending loads on things that aren't good value to you, general shopping around) you can increase your disposable income significantly and free up money to save and spend on fun stuff.

Re keeping your current flat as a BTL when you move, it really comes down to my earlier question of how much equity you have in it (ie what is its value and how much is left on the mortgage) and also how much other capital/savings you have?

BTL mortgages are normally based on a much lower loan to value % than ordinary residential mortgages (70-75% normally the absolute max), so unless you have a lot of equity in the flat, you probably won't be able to release much cash towards your next purchase, so you'll need to find the deposit + fees for your new house out of savings which as per my calc above is going to be significantly in excess of £125k?

Also, bear in mind that BTL is a much less tax efficient way of earning an extra income than it used to be. You'll need to pay tax at 40% on pretty much all the rental income, that alongside the mortgage, maintenance costs, service charge, EA fees and any void periods or unpaid rent are going to make a big hole in your profits. Plus unless you want to pay a big management fee you'll need to ensure you are available to tenants at all times in case of broken appliances, emergency maintenance etc which alongside full time work can be a headache.

I know amongst many people a BTL is 'the' must have investment and the headline figures in terms of rental income can look attractive but really unless you have a particular reason for wanting to hold onto the property or the housing market in your area is massively booming, there are easier and potentially more lucrative investment methods. Overall I probably wouldn't recommend BTL, if you think of your capital as a 'pot', a substantial amount is going to be invested in property already in the form of the equity in your new house so it's not as though you are out of the housing market. You can then look at diversifying your remaining investments according to your investment goals, could be things like government bonds (low return but super safe), stocks and shares, additional pension contributions. Depending on the interest rest you are able to secure on your new mortgage it may also be worth putting more capital towards that purchase and therefore paying less interest. If you have a substantial amount to invest it may be worth paying for some proper independent financial advice...

Aim to up your pension to at least 7%. 10% better.

Save an out-of-work fund. This needs to include enough to pay off the 0% cards as well should you need to for any reason quickly e.g. getting a new mortgage.

Figure out the costs of BTL on your flat - it may be much more hassle than it’s worth.

Plan not to spend your bonus.

That's amazing. What do you do (roughly)? I would pay off your debt and build up your cash savings first. Ideally you would have at least 6 months income set aside in case of an emergency. I have a stocks and shares isa with nutmeg that pay a small monthly amount in to that does well. You could also pay £4 a year to your £20k isa allowance into a LISA for either a house deposit or retirement. The government top this up by 25% up to £1k. If you want a passive income could you consider a house big enough to have students or maybe buying a small rental flat before you go for a bigger house?

I was going to ask what the credit card debt had been spent on and whether it was historic or whether your current lifestyle expenditure exceeds your income. Sounds like the latter if it's holidays. So you need to get your current expenditure under control.

Emergency fund: conflicting advice but my rule of thumb is a minimum of 6 months worth of outgoings (not mortgage alone). And think about funeral costs - amazing how so many people save for nice things like holidays or new kitchens but it doesn't occur to them that someday they are going to incur funeral costs. Hopefully not for several decades but still, one day.

It makes sense not to pay off the credit card while it's on zero interest, but only if you are building up the amount in savings and can pay it off before it switches to interest. And that means savings in addition to your emergency fund.

Your partner needs to build up some savings too.