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Loans & Credit

Wealth Check: 'I need to pay off my debts and start saving'

A business analyst, whose student loan and credit card spending have left him nearly £12,000 in the red, is keen to be clear by next autumn

The patient

Mark Rooney from Leicester is keen to clear his student loan and outstanding debts so that he can start getting serious about saving.

The 34-year old works as a senior business analyst, and currently earns £38,300. He has been in this job since the beginning of April having worked in the same company for the past four years.

The problem is, Mark is still saddled with a number of debts – including student debts. "I owe around £10,000 on a credit card and £1,300 on a loan," he says.

"I also still have £4,500 to pay on my student loan. My aim is to get these debts cleared by autumn 2013, so that I can start focusing on saving."

Despite his debts, Mark has worked hard at saving, and has already managed to squirrel away £4,500. "I have £3,000 in an account with Santander and £1,500 in an account with NatWest; both pay around 3 per cent," he says.

"I also try to make further savings on my outgoings on a day-to-day basis."

Mark pays into a pension offered through his employer, and contributes £159.58 a month through salary sacrifice and his employer invests a comparable amount into this pension scheme.

Mark lives with his partner in a three-bed townhouse which they bought in May 2001. "There is around £70,000 outstanding on the mortgage," he says. "This is a fixed-rate repayment mortgage at 3.2 per cent with ING Direct."

Mark pays around £5 a month for life insurance with Legal & General and £14 a month for a payment protection insurance policy with Pinnacle. "But I'm not sure if these are the best protection policies to cover in myself, my partner, and our home," he adds.


The cure

Our panel of independent financial advisers agrees that Mark is being very sensible in prioritising clearing his debts and setting himself a target date by which to do this.

However, they also urge him to take time to review his protection policies, draw up a will, and, once his debts are repaid, to increase his pension contributions.


Clear the debts

As Mark already has a repayment mortgage with a fixed rate, his focus should be first on paying off the credit card and personal loan, followed by his student debt, according to Martin Bamford from Informed Choice.

"Targeting the debt which charges the highest interest rate first will result in the biggest savings," he says. "However, Mark first needs to work out his budget and ensure he is not adding to the problem by living beyond his means each month. He should also check if there are penalties for paying off his loan early."

Danny Cox from Hargreaves Lansdown adds that before deductions of pension contributions and student loan payments, Mark is currently earning around £2,380 a month after tax. "This level of income provides decent scope with which to reduce his borrowings," he says. "But Mark should also cut back on luxury spending, and use the surplus income to repay debt.

"This may mean taking some tough decisions on holidays and social spending, but unless he puts himself on an even keel, he risks a life in debt where is working hard just to stand still."


Reconsider the student loan

While it is positive that Mark wishes to pay off his student loan, Patrick Connolly from AWD Chase de Vere points out that with the UK interest base rate at a historically low level of 0.5 per cent, the rate on Mark's loan may be around only 1.5 per cent.

"There is an argument that Mark could earn more interest in a savings account, even after tax, than he is paying on his loan," he says.

"That said, even though the rate on a student loan is likely to be competitive when compared to the wider market, he should look to repay this when his other debts are repaid, as at some point in the future interest rates will rise again."


Build up cash savings

Mark has been sensible about building cash savings, as everyone should have at least some money in cash to cater for any short-term emergencies, says Mr Connolly. "However, there is little point having both cash savings and debts if the interest Mark is earning on his savings is less than the amount he is paying on his debt," he says.

Mr Bamford agrees that Mark should focus initially on prioritising paying off his high-interest debt.

"Once he's done this, it will improve his overall wealth and free up more income each month which can go towards savings," he says.

Review savings rates

Mark has done well to find savings accounts paying around 3 per cent, as this is competitive in the current low-interest environment, according to Mr Connolly.

"However, if the money is held in a normal savings account, Mark will have to pay tax on it," he says. "Mark should look to hold his cash savings within a cash individual savings account (ISA), into which he can invest up to £5,640 in the current tax year, as all interest earned is tax free."


Boost pension saving

If Mark's debt repayment goals are affordable in the timescales he has set, he should continue making pension contributions at the current level for now, says Mr Bamford.

"He should then increase his contribution as gets older and his career progresses," he adds.

Mr Cox warns Mark that 5 per cent of earnings is not sufficient to provide a decent income at retirement, and recommends Mark at least double his savings when his short-term debts are cleared.

Mr Connolly suggests Mark could get a projection now to understand the benefits his pension is likely to provide. "This will determine what additional contributions he should look to make," he says.

"He should also review the funds into which he is investing to ensure they are performing as expected, and to check they match his attitude to risk – and that the charges aren't too high."

Review protection

As the payment protection insurance mis-selling scandal has been well-documented, Mark should also review his existing policies and understand the benefits of his PPI.

"PPI is generally not good value, and that an income protection policy may be more cost-effective," says Mr Cox. "Mark should also check exactly what his life policy covers him for."


Draw up a cohabitation agreement and will

Mr Bamford suggests Mark and his partner should discuss a longer-term financial plan, and potentially take legal advice to draw up a cohabitation agreement

"This will ensure they both understand their current financial arrangement, particularly should the relationship break down in the future," he says.

Mr Cox also urges Mark to draw up a will stating what he would like to happen to his house should he die. "This is important given that so-called 'common law' spouses have no legal entitlement to any property," he says.

Do you need a financial makeover?

Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF, j.knight@independent.co.uk