Wealth Check: 'I want to buy a house, but first I need to cut my debts'
Saturday 14 August 2004
Laura Kane has been a personnel administrator at a building society for a year and is about to start studying for a personnel qualification, sponsored by her employer. Before that, she worked at Tesco and Vodafone and studied for a year.
She recently moved back with her parents after her boyfriend was made redundant but wants to save to buy a house with her partner. First, though, Ms Kane wants to cut her debts. She has a large credit-card balance as she transferred a more expensive car loan to the card. She wants to cut the balance, but she also needs to make sure she has a good deal now and frequently changes credit cards to take advantage of special-rate offers. She is worried that this could affect her credit rating.
Ms Kane, who loves cars and motor sport, sets aside money to cover the car tax and insurance premiums.
We put her case to Justin Modray at BestInvest, Patrick Connolly at John Scott and Partners and Jennifer Storrow at Gee & Company.
LAURA KANE, 24, PERSONNEL ADMINISTRATOR
Education: Completed one year at university but did not obtain a degree.
Debt: Student loan, 3.9 per cent, £2,500. One credit card, 3.9 per cent fixed until balance cleared. About £8,000 owing, repaying £300 per month. Overdraft £850.
Savings: One savings account, paying in £100 per month, 4.67 per cent.
Investments: Holds around 1,000 shares in Vodafone and Tesco.
Mr Modray says that although Ms Kane has been able to find a deal with a low interest rate for her main debt, it will still take around two-and-a-half years to clear her credit card balance at her current repayments of £300 a month. She also has an overdraft.
The first priority should be for her to clear her overdraft, Mr Modray says, if her bank charges interest. She could consider selling her shares in Vodafone and Tesco to cut down her borrowing.
Mr Connolly agrees, saying that for Ms Kane to have such a large proportion of her savings in just two shares is highly risky. At current market prices, selling the shares should raise around £3,700. Ms Kane could then look to redirect her monthly savings of £100 a month to debt repayments. It might also be possible to pay off more, if she reviews outgoings such as gym membership.
Ms Storrow points out that although Ms Kane is making progress paying off her student loan, her other debts will continue to dog her wherever she goes. In particular, high debts will make it much harder for Ms Kane to find a competitive mortgage. But she says that it is missing monthly repayments, rather than the number of cards Ms Kane holds, that affects her credit rating
SAVINGS AND PENSION
Ms Kane's savings earn slightly less than her debt costs her, once income tax is taken into account. Mr Connolly says that any money Ms Kane has left after debt repayments could work harder. An Isa pays interest tax-free, and Abbey's postal Isa pays 5.1 per cent.
Mr Modray says that Ms Kane could use her savings to pay off some credit card debt, though if she relies on some of that money to run her car, her options are reduced.
Ms Storrow points out that the early pension contributions Ms Kane is making now will be the ones that work the hardest for her in the long run. However, an occupational pension scheme - if her employer offers one - might be a better bet than one dependent on the financial markets.
Mr Modray argues that as Ms Kane's employer does not currently put any funds into her pension, it puts more pressure on her investments. She should look for a good long-term fund, possibly investing in the global stock markets, and try to increase her pension contributions over time.
SPENDING AND BUYING A HOUSE
If Ms Kane does want to buy a house, with or without her partner, she needs to do two things: cut debt and save a deposit. This, our panel warns, will mean tough choices.
Ms Kane should not give up her pension payments, and she needs to divert her current savings to debt repayments, so she needs to look elsewhere for extra money.
Mr Connolly says that the gym membership is only good value if Ms Kane is a regular visitor, and Ms Storrow says it is one expense she really should consider doing without. She goes further: if Ms Kane sold her car, she would cut a large chunk off her debt. If she bought a bike instead, she could combine cost savings with fitness.
And, although Ms Kane might be anxious to buy a house now, Ms Storrow says paying off debts is more important: waiting a couple of years longer to start on the property will not make much difference over the long term.
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