'I want to get on with my life without £9,000 debt'

Wealth check: Our panel of independent advisers prescribes a dose of monetary discipline as the best treatment for self-confessed big spender Jonathan Newman
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The Independent Online

The patient

Jonathan Newman admits to being a big spender, but after amassing debt he is keen to work on changing his money habits. The 28-year-old, who works in process development for a finance company on a salary of £28,500 a year in Bournemouth, owes around £8,700, made up of personal loan, overdraft, and credit card debt.

"My financial goals are very simple, as once I've cleared the debt I've built up over the last five years – all of which was squandered and is regrettable – I simply plan to not get into debt ever again," he says.

"This might be unrealistic, but being someone that has lived in debt for a period of time, the thought of being completely debt -free, and that result is not too far away, is just too much of an incentive."

He pays £244 a month for a personal loan with Tesco at 6 per cent, with £3,000 left to clear.

"This was originally taken out over five years to consolidate a Lloyds loan and to pay for a holiday," he says. He also pays around £87 a month for a personal loan with Lloyds.

"It was taken out about a year ago to fund moving house and pay for the deposit. It was originally £1,000 and the rate is 9 per cent – there's only around £220 left to pay," he explains.

In addition, he has access to a £3,000 overdraft on a Platinum current account with Lloyds.

"I don't feel it's urgent that I clear this as I never go over my limit so don't get charged – I pay for a packaged account for the interest-free overdraft facility," he says.

He also has £2,500 on a Lloyds Advance credit card, at 11.9 per cent.

"I don't pay off the balance every month – I just pay what I can," he says. "I want to believe that the salary I'm on will be enough to support my sometimes-lavish lifestyle – but I realise I have to start making sacrifices."

Jonathan pays £280 a month for a room in a three-bedroom house, and believes he has little chance of stepping onto the property ladder in the near future.

"When debt-free I will look to save for a rainy day to have something set aside," he says.

"But I don't believe that in the next five years I'll be able to put aside enough money for my first house purchase. The scary truth is that with the current cost of living, being able to save enough for a deposit just doesn't seem likely."

He doesn't currently contribute towards a pension.

"Our company is considering offering a pension but at present there isn't one," he says. "The sad thing is that I believe that once debt-free I would much rather live a comfortable life now rather than struggle towards a secure life in the future."

However, he adds: "Whether it's a generation thing, lack of responsibility, or just fear of falling behind again, I just know that debt is not somewhere I want to be."

The cure

Tackling debt before dealing with other goals is wise financial planning, agree our panel of independent financial advisers (IFAs), and it appears that Jonathan has realised the urgency of this.

While not alone in being saddled with debt, he needs to reassess his approach to his finances to ensure he doesn't burden himself with a further sum in the future.

Dealing with debt

Jonathan's key priority is to reduce his debt and the quicker he can do this, the less interest he will pay and the cheaper it will be, says Danny Cox from Hargreaves Lansdown.

"He should set himself a target for the amount he will pay off his debts each month – starting with the most expensive, which is the credit card debt. This should be realistic and as much as he can afford."

While Jonathan says he is in no rush to pay off his overdraft, he should check if he is paying interest on this every month – as although he pays no fees, he may be unaware that this is incurred.

Nick Evans from One Life Wealth Planning says: "Overdrafts are often seen as 'comfortable debt', but in reality they are perhaps the most dangerous type, as while loans and credit cards demand minimum payments each month, overdrafts are in danger of racking up."

Drawing up a budget to calculate how much he can afford to set aside is a priority.

"This will act in two ways: it will help him to stop frittering – he is far less likely to spend unnecessarily if he has to write it down, and it will help his budgeting," says Mr Cox.

"He may also be able to make savings by, say, switching energy suppliers and buying cheaper food."

Christopher Wicks from Bridgewater Financial Services recommends cancelling the overdraft facility so Jonathan isn't tempted to use it, and sticking within his means.

He needs to muster up some discipline to get rid of the debt as quickly as possible, stresses Mr Evans.

"Once cleared, he should close down, or at least reduce, the lines of credit open to him to help with this."

One option is debt consolidation.

"This gives a clear and definite end to the debt by structuring the loan so it is affordable in one pot – although it doesn't tackle his propensity to rack up debt and Jonathan must be aware of the disadvantages."

Saving for a rainy day

Once his debt has been reduced or wiped out, he can set aside money for an "emergency fund" for use should he need it.

A cash individual savings account is the sensible option for this, allowing interest to build up tax-free with an annual allowance of £5,640 for the 2012-13 tax year.

If he is disciplined, there is every chance he has the potential to build up a deposit to buy a property later down the line, stress the advisers, as his salary should increase as his career progresses.

Retirement planning

As Jonathan approaches 30, he should consider pension planning.

With a bleak, economic landscape and rising financial pressures to contend with, this should be a priority. People are living longer and enjoying a lengthy retirement – so the earlier he starts, the better.

"Jonathan is late in starting to save for his retirement," says Mr Evans. "Small amounts now will be easier to manage, and, of course, he will then have a longer period over which his money will be able grow.

"I would encourage him to start saving as soon as possible."

Despite no access to an employer scheme, he may wish to contribute to a low-cost, personal pension rather than wait for auto-enrolment. This will be phased in from October, and companies with the largest number of employees will be first. The employee will pay 4 per cent of their salary and the employer 3 per cent, in addition contributions will attract 1 per cent tax relief.

While the details are still emerging, Mr Evans said we know that by the end of 2016 Jonathan should be able to join a company pension scheme – but he may not want to wait that long.

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