Legal eagle spots buying opportunity

Lindsay Wilson
Age: 23
Lives: in London
Occupation: Trainee solicitor
Earns: ?28,500
Mortgage: None
Debts: ?5,250 student loan, ?1,000 credit card
Investments: Tessa, Pep, Isas
Pensions: None
Aims: To get into regular saving habit

Lindsay Wilson has only recently started her first job and already earns £28,500. In January, her salary rises to £32,000, but even this is small beer compared to her potential earnings. When she qualifies as a solicitor in January 2003, she expects to earn about £50,000.

She was attracted to the law after a spell of work experience in a solicitor's office: 'I thought it might be what I wanted to do and I ended up doing law at university.'

At the moment she is sharing a flat and paying rent of £520 a month. She would like to buy her own home in London once she has qualified. Buying in London is expensive, so the main reason to delay is because she needs the higher salary to support a larger mortgage: 'I am planning to buy what I can afford with a mortgage based on my salary after I qualify.'

She also hopes to spend four months abroad next year as part of her training, which is another reason to put off buying a place of her own. She has set her sights on Singapore or Paris, but she has to fight off competition from other trainees before a place can be confirmed.

Earning good money has not given Lindsay any incentive to budget and she never has money left over at the end of the month: 'I am spending what I am earning.'

In fact, she frequently goes overdrawn on her HSBC graduate bank account. At the moment, this includes a £1,500 free overdraft facility, but it falls by £500 a year. She enjoys holidays, in particular visiting European cities including Stockholm, Prague and Paris: 'Quite a lot of my money goes on travelling.'

Lindsay would like to get into the habit of saving regularly when her pay rise, about £230 a month, comes through and before she gets into the habit of spending it. She plans to keep this money accessible because she will probably use it towards a deposit for her flat, although her parents may contribute as well.

Lindsay already has £9,000 in a Vernon Building Society Tessa which is just maturing, £6,000 in a Legal & General Index Tracker Pep and £3,000 in a Britannia cash Isa. She recently started putting away £100 a month into a mini-cash Isa with Northern Rock.

As part of her employment package, Lindsay gets life insurance and private medical insurance but she is not entitled to join the company pension scheme until January 2004, a year after she has qualified: 'You have to work for the firm for 12 months first and your training period does not count.'

The firm has to offer a stakeholder option but does not make any contributions to the fund, so Lindsay is wondering whether she ought to start a stakeholder pension of her own.

Adviser 1: Rob Guy

Lindsay should first pay off any short-term debts and transfer her existing credit card balance to a cheaper company. Egg Visa card charges no interest for six months. She should pay ?166 a month to ensure the balance is paid off at the end of the free interest period. She should not use this card and repay the full monthly bill on her existing card to avoid interest. She can transfer her maturing Tessa to a Tessa-only Isa - Northern Rock pays 5.55 per cent. As she can transfer only the ?9,000 capital, the interest can help reduce the student loan.

Lindsay should find out how long her salary would continue if she were unable to work through ill heath. This is the main risk she is taking with her finances. If it is a relatively short term (three or six months) she should arrange a personal income protection plan with a six months' deferred period payable to age 60. A tax-free benefit of ?1,250 a month from Friends Provident costs her ?27 a month.

The approximate monthly cost of a ?120,000 repayment mortgage over 25 years, fixed for the first five years, is ?725 - less than she is currently spending on rent, student loan and credit card repayments. She should join her employer's pension scheme as soon as she becomes eligible. Meanwhile, it is well worth starting a stakeholder pension for tax relief

Rob Guy is technical director of The MarketPlace.

Adviser 2: Claire Speller

The most a single person can borrow to buy a home is three to three-and-a-half times salary, giving her ?150,000 to ?175,000. She should put down at least 5 per cent of the purchase price as a deposit, as this lowers the mortgage rate.

Her Tessa and Isa should meet most of the deposit and should remain in cash. She can reinvest the original Tessa capital into a Tessa-only Isa, where there is no fixed term. I recommend Abbey National's Instant Access Tessa-Only Isa paying 5.15 per cent.

Lindsay should use her additional earnings to pay off her credit card debt. After that, she should use her overdraft less as this will work to her advantage when applying for a mortgage.

She should set up a standing order to transfer her additional ?230 income straight into a savings account, first using up her ?3,000 annual Isa allowance. This can provide emergency cash or money for furniture and decorating when she buys. When she becomes a higher-rate taxpayer, pension contributions will be increasingly attractive.

As a single person, Lindsay's greatest vulnerability is being unable to work through ill health. Her employer might provide group permanent health insurance but Lindsay should consider a personal plan if not.

Claire Speller works for Advisory & Brokerage Services.

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