I am 26 and have just started my first full-time job. I qualified from university three years ago and, after some world travel and a series of part-time positions, feel it is time to settle down. What should my financial priorities be?
You should certainly continue to enjoy yourself. Most people in their mid-20s will have plans to go on holiday, purchase a car – or a better one if they have one already – and to eat out and entertain friends.
But it may well be that you have outstanding loans used to fund your further education and possibly bank overdrafts or credit cards debts incurred while at university.
Your first financial priority should be to clear any debts you have. While this might not represent the most exciting use of any spare cash you may have, outstanding debt will constitute a drain on your future finances.
They may also prevent or restrict your future borrowing powers when it comes to raising a mortgage. Calculate which of your outstanding debts have the highest interest rate and pay off those first.
More and more, I find that young people are concerned about their long-term financial future and want to do something about their retirement planning. I think, however, that the first step is to secure your short-term financial future by getting into the habit of saving. A high-interest deposit account into which you transfer a regular amount of savings is a good start.
Use these accumulated funds to buy items you need in forthcoming years rather than build up more debt. If you want to avoid tax on any interest accrued, you could use the tax wrapper known as an Isa.
If your employer offers membership of an occupational pension scheme or a contribution to a personal pension or stakeholder plan, then consider joining such an arrangement, particularly if you intend to remain with that employer for some years to come.
There may be supplementary benefits associated with membership of the employer's plan, for example, life insurance and long-term income replacement insurance. It is better to get your employer to pay for these add-on benefits rather than paying for them yourself.
If you have no one who is financially dependent upon you, you may consider that life insurance cover is inappropriate. The risk of long-term illness or a critical illness is greater for a person of your age than the risk of death.
In these circumstances, you should consider insurance that will pay out for your own benefit. Critical-illness cover pays out a lump sum on diagnosis of a dread disease such as heart attack, cancer or stroke. It will also pay out on permanent disability, perhaps as a result of an accident. It is not cheap but is well worth considering.
In the event that you are off work with sickness or a disability, your employer may well continue to pay your salary for some months. However, many employers will terminate employment after about six months of absence.
To make sure you have continual income, you might consider taking out your own income-replacement policy if such cover is not provided by your employer. Such a policy will provide income – after a waiting period – until you return to work. If you are self-employed or have a mortgage, both criti-cal-illness cover and income-replacement insurance are very important.
If you are a smoker, give up. Not only will you find it cheaper to pay for insurance cover but you can use the savings to pay off your debts and build your savings.
Once you have worked out your debt repayment schedule and started to save for the short term, and assuming there is still some money left over, you might want to consider investing for the future.
Putting some money into a savings plan invested in a unit trust, investment trust or Oeic, with or without an Isa wrapper, will provide you with the potential to build capital for the future.
The longer you can invest in this way and the longer you can have such a fund invested, the bigger the capital value you might be able to accumulate. Investing in such plans means you can tap into the investment management expertise of the fund managers at low cost.
Your regular savings can then accumulate a basket of different shares. This is something which might not be available to you with modest sums if you go directly to the stockmarket.