Investing in your 30s - the young family
If you want to ensure you can meet your shorter-term financial goals and enjoy a decent standard of living in later life, it's crucial to put the right financial foundations in place now. So how much do you need to stash away each month and where should you invest it?
In the first of a three-part series, we take a look at the options for people in their thirties. Each of our three case studies is relatively new to investing, but although they have different priorities, all share relatively long investment time horizons - due to their age.
Case study: Richard and Rachel, a couple in their late thirties with children
There have been a lot of changes for Richard and Rachel Hughes since they both turned 30, and the task of keeping track of their finances has fallen behind the demands of running a home and looking after their two young children.
Money has become tighter: on the one hand, there's mortgage and nursery fees to pay; on the other, Rachel has recently taken a substantial pay cut to go back to work part-time so she can spend time with the kids.
The couple have a combined gross annual salary of £60,000, but have only limited savings in place.
Richard and Rachel's immediate financial need is to generate a supplementary income, while their longer-term goals include building up a nest egg for family needs and ensuring they can earn enough of an income from their various investments to contribute to major family expenses in the years to come, such as university fees.
Richard and Rachel's objectives
Both Richard and Rachel should be taking advantage of tax-efficient ISAs and pension plans as far as they can, but any other savings should be held in Rachel's name as she is a basic-rate taxpayer so there will be no additional tax to pay on dividend income.
Holding cash as an emergency fund makes sense, but they should also consider a mix of property, bonds and equities - all with a bias towards producing higher levels of yield - in their overall portfolio.
To build suitable pension pots, they each need to put in additional contributions of up to 20%, but because of their situation this could prove a challenge. Given this, they need to invest as much as they can realistically afford.
It's not so easy to find a good level of income in the current climate, but there are some funds that set out with that objective. Something reliable with potential for longer-term growth would suit them.
The couple are nervous about losing money, so don't want too much risk. However, they'll need to accept some exposure to growth markets in order to boost the level of income they receive in the future.
Invesco Perpetual High Income fund
Financial adviser Mel Kenny says: "The manager of this fund aims to provide a high level of dividends, so he primarily invests in large, well-established pharmaceutical, utility and tobacco companies. A distinctive feature is his willingness to shift the fund's emphasis between UK dividend and growth stocks, depending on the market cycle."
Artemis Income fund
The fund's aim is to produce a rising income, combined with capital growth, from a portfolio primarily made up of UK investments. "While its holdings are mostly in large companies, it may also invest in small or medium companies, depending on their potential," says Kenny.
Neptune Income fund
Kenny says: "This is a concentrated and therefore conviction-based portfolio, where the overall return comes primarily through dividends. The manager also has the ability to invest up to 20% overseas."
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.