Wealth Check: Beats for sale: how to set up a recording studio

Music producer Katriona Weekes dreams of raising enough money to build her own recording studio so she can turn her part-time passion into a full-time independent music label.

The 23-year-old from east London, who goes by the name of Dorn Korus, is well qualified for a career in the entertainment industry having already collaborated with artists such as KyRA Rox and Ryze Devinci.

However, a lack of savings and limited earnings have prevented the ambitious producer from turning her dream – to build a bespoke recording studio within 12 months – into a money-making enterprise.

Currently living rent-free with her parents, Katriona earns between £550 and £600 per month working part-time in television. Her outgoing costs total £400, including £250 in bills, £70 on hair, £30 on mobile phone rental and £50 on travel. She estimates that the cost of building a small recording and production studio will be between £5,000 and £10,000 and she aims to fulfil this goal within one year. Unlike many other graduates, Katriona has been careful to avoid all debt, so despite having no savings, she is in an excellent position to begin raising capital.

Increasing income

Keith Churchouse, a director of Surrey-based Churchouse Financial Planning, says Ms Weekes's goal is realisable but she may have to extend her timeframe and consider taking on more paid work to avoid taking out a loan.

"Clearly, Katriona has a passion for music and its production, but she must treat this as a business from the start to give herself a chance of seeing the project through to profitability," he says. "From a cashflow point of view, income vs expenditure indicates that she could save about £200 a month net at a push. This will create the problem of not meeting her target of getting her studio off the ground within a year as it will take her a minimum of two years to reach £4,800."

"I would suggest that she puts the project on hold for six months and tries to take on extra paying work between now and, say, just after Christmas, possibly filling a temporary part-time role to complement her existing employment. This may not sound appealing; as she has used her nil rate income tax band of £6,475 in this tax year, any additional income she receives will be taxed at 20 per cent. However, if she could both earn extra cash over the next four to six months and save £200 per month from her existing income, her dream would and should take a huge leap forward."

In order to make the most of her savings, Mr Churchouse recommends Ms Weekes consider tax-efficient savings options which offer greater interest than that generally available through a standard savings account.

"Using a cash ISA option would seem appropriate as the maximum that can be held in this type of saving has increased to £5,100 in a tax year. Some savings rates that are available under cash ISAs are subject to tight access and time limitations, so Katriona will need to read the small print. Examples of this might be fixed-rate terms over two to five years and introductory 'bonus' rates that may disappear if she accesses her money in the shorter term."

One current offering that he suggests is with National Savings, which is offering a direct ISA account at 2.5 per cent with instant access and the interest paid annually. Because the minimum deposit is only £100, Ms Weekes would be able to take advantage of this, unlike with other ISAs that have higher deposit requirements.

And while she is not yet fully self-employed, Mr Churchouse says she should keep records of all her outgoings, and collect receipts which may be used later to offset tax charges.

"From a business planning point of view, she should keep all her receipts and details of any expenses that she incurs because she should be able to offset these for tax against any income that she receives that would normally be taxable," he says. "She may need an accountant or bookkeeper at some point, but not until she is ready to really start the business. However, she will need to declare income for tax purposes and she will need to start thinking about this to ensure that she accounts for this correctly."

Long-term goals

While Ms Weekes's main financial goal is to build her own production studio, she would be wise to consider her more long-term financial needs as well. As Britons continue to live longer in retirement, the need for a secure pension in old age has never been greater. Ian Hudson, the principal of Salisbury-based Hudson Green & Associates, says there is immense benefit to be gained from Ms Weekes beginning to save into a pension now.

"Katriona is young enough right now to have a considerably positive impact on her retirement planning and for it to be relatively cost effective," he says. "As she has inexpensive monthly costs, she should take advantage of her ability to pay large sums into a pension fund while she can.

"The key to long-term savings is ensuring that you continue the contributions for the long term. Thus setting the amount she pays at a level which is affordable and sustainable into the future is absolutely vital. For example, contributing £100 per month into a pension until age 60 could produce a fund of £160,000, which might yield a pension of £6,500 per year plus a tax free cash sum of £40,000. However, increasing the premium each year by just 3 per cent could increase the fund produced by 50 per cent to £240,000 with the tax free cash sum increased commensurately along with the pension."

Protection

It may take a few years for Ms Weekes to establish her own recording studio, but when she has raised the requisite capital she would do well to consider how she can protect herself.

Alex Pegley, a chartered financial planner and director of Hampshire-based Calculus Limited, says insurance should be an important consideration for Ms Weekes if she relinquishes her part-time job as it will mean the loss of a safety net and base line of earnings.

"Once Katriona has established herself, she'll need to protect herself from the unforeseen. This is particularly important for the self-employed, because if they can't work then they don't earn," he says

"My first recommendation would be for Katriona to take out an income protection insurance policy. These pay a replacement income to people who are unable to work through sickness or ill health after a waiting period. I recommend that, wherever possible, people take these policies on an 'own occupation' basis. The benefits are payable until the policy's expiry, the policyholder's return to work or their death. The maximum benefit is linked to earnings, although insurers normally limit it to 65 or 75 per cent of earnings – as they want to incentivise claimants to return to work. Based on Katriona's age, she could take out an 'own occupation policy' to age 60, with a three-month deferred period and benefit of £750 per month (£9,000 pa) for £16 a month."

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Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF

j.knight@independent.co.uk