Wealth Check: Uprooted from the classroom to grow a vegetarian business

The patient

Jane Marshall from Leeds started her own business in January last year, and is keen to pay off the debts she built up getting this off the ground so she can start taking a salary – and eventually buy a house.

The 44-year-old used to work at Bradford College teaching health, fitness, personal training, nutrition and workplace health.

"This was a great job for me and I worked there for eight years," she says. "But in 2011, I decided it was time to follow my dream of running my own business."

She now runs Planet-v.co.uk, an online vegetarian and vegan marketplace that offers ethically sourced and produced goods, and a community for those interested in the vegetarian lifestyle.

At present Jane is not taking a salary, as she's waiting for the business to start making money.

"I'm just about making ends meet by living on voluntary redundancy money and by selling belongings," she says. "I've had to learn to live on hardly anything and it's been a very steep learning curve."

As Jane has invested all her money in the business, she has nothing squirrelled away in savings accounts or investments. She is also not paying into a pension at present and has no protection policies in place.

"I used to have a pension when I was teaching, but this was frozen when I stopped," she says.

While Jane did take out a sizeable £70,000 loan from the bank to start her business, she has no other debts on cards or loans. The loan is over 30 years, and the rate is 5 per cent.

Jane is selling the one-bedroom detached bungalow she owns to pay back the money she borrowed.

"The mortgage on this property has been paid off in full," she says. "I'm now looking to sell this for £105,000 and am currently waiting for the sale to go through. Once this happens, I'll use the proceeds to pay off the loan."

At present she is living in a two-bedroom apartment that belongs to her family.

"I only pay the bills, which cost around £1,500 a year," she says. "I plan on staying there until I'm earning again. The business is projected to make money in two or three years' time and I don't plan on taking a salary until then. Once that happens, I'd also like to begin investing more in the business – and then eventually be able to buy a property again. This is going to be impossible for a few years, but I do want to be able to have a place of my own at some point."

The cure

Our panel of independent financial advisers (IFAs) agree Jane has taken a huge step in leaving a good job to fulfil her dream of creating a new business. They also warn she's put herself in a vulnerable position, having invested almost everything she owns in this venture while taking nothing out. They urge her to start building her cash savings again as soon as she can, and also remind her that she needs to think about retirement planning, as well as having the right protection policies in place.

Keep an eye on how the business is progressing

While Jane's outgoings may be low, Patrick Connolly from Chase de Vere is concerned that she is not earning at present.

"This is far from ideal," he says. "Jane needs to ask herself whether the business is on track to make money in year two or three, and whether she has enough to support herself until that happens."

Mr Connolly adds that while Jane has ploughed a lot of her own money into the business and is determined to make a success of it, she must keep a rational head to ascertain whether it's working as she intended.

"If progress is quicker or slower than she expected, she might need to consider making changes," he says. "She could, for example, take on some additional part-time work in health and fitness to supplement cash flow."

Nick Evans from One Life Wealth Planning agrees that Jane needs to get herself to the point where she has a reliable source of income.

"Jane needs this so she can then focus on rebuilding financial security," he says. "She must be as sure as she can that her business will ultimately make money, as there's a risk it could consume every penny she has. If she's in any doubt, she should seek professional help in stress-testing her business plan."

Focus on building up savings

Once Jane does start earning, she needs to focus on building cash savings, according to Mr Connolly.

"When she's taking money from the business it's likely her earnings will be variable," he says. "If she has cash savings, these can act as a buffer to prevent her from having to borrow money or sell more of her belongings to pay the bills during times when she is earning less."

While her business is in its early stages, it's important for Jane to keep her finances as flexible as possible, Mr Connollyadds.

"This is best achieved by putting money in cash rather than investing it or locking it away."

It's a view shared by Lorreine Kennedy from Carematters.

"At present, Jane has nothing in reserve," she says. "She could consider setting aside some of the money from the house sale into a tax-free cash individual savings account [Isa] to cover emergencies."

She adds Jane should check if she's eligible for working tax credit, which is paid to those earning under £13,000 and is worth up to £1,920 per year.

Think about how best to clear debts

Mr Connolly commends Jane on her plan to use the proceeds from the sale of her home to pay off her loan.

"This sounds sensible, although she should find out whether there are any early redemption penalties," he says.

As the loan rate seems relatively low, Ms Kennedy suggests Jane could consider not repaying all of the money borrowed immediately.

"Obtaining business loans can prove difficult, and if Jane suddenly needed money in the future, she may find she can't access further loans," she says. "Jane should think about how much she repays now, and balance that with her need for cash for day-to-day living or emergencies."

Don't ignore pension planning

At age 44, Jane should ideally be saving towards her retirement, according to Mr Connolly.

"But given her current financial situation, this isn't viable at the moment," he says. "While she may be thinking that her business is her pension, it's usually sensible to focus on retirement planning separately. Jane's immediate focus must be on getting to the point where she can both pay herself an income and build cash savings."

Once she's earning, she will also need to play catch-up with her pension arrangements, he adds.

"She should put a strong emphasis on retirement planning, investing into both pensions and stocks-and-shares Isas," he says.

Ms Kennedy points out that final salary pension schemes – such as the teacher pension scheme – are incredibly valuable.

"While Jane cannot add to it, this pension is likely to increase in value – albeit not by a huge amount," she says. "As and when Jane has spare cash, she should think carefully – and seek advice – on how best to proceed to meet her long-term goals and retirement dreams."

Plan ahead for a property purchase

When Jane does eventually come to buy a house, she will not only need to have a sizeable deposit saved up, but will also need to demonstrate that she has a reliable income.

"Most lenders will require her to show proof of at least two years' income before giving her a mortgage," says Ms Kennedy.

Get protection policies in place

While income protection and critical illness cover may not be products Jane can consider at present, these should become a big priority for her and her business as the firm begins to grow, according to Ms Kennedy.