Wealth Check: 'Bite the bullet, pay your debts and destroy the credit cards'


The problem: He wants to save but he likes to spend

Two years since graduation, Daniel Eddy earns a decent salary but is concerned about sliding deep into the red.

The 24-year-old from Bracknell, Berkshire, earns £28,000 a year as a public relations consultant but has debts of more than £10,000.

Alongside £3,500 in student loans, he owes £600 on an Egg credit card, with interest charged at a rate of 16.9 per cent; £800 on an Egg card at 7.9 per cent, and £800 on a Halifax credit card at 15.9 per cent.

He also owes £4,500 to his parents - money that he used to buy a new car and go travelling.

"Rather than saving it, I seem to spend money on unnecessary things," he says. "I also use credit cards to avoid eating into my current account balance. I know this isn't financially sound, yet it makes me feel better than having an empty account."

Until recently, Daniel had been paying £425 a month in rent but found this was too much. Now he has moved back in with his parents and contributes £200 a month for food and board.

"I want to save for a deposit on a house so that I don't have to go back to renting when I move out."

So far, he has amassed £1,850 in a Standard Life mini cash individual savings account (ISA), earning 4.85 per cent interest. He pays in £50 a month.

In the short term, Daniel also wants to save up £2,000 for Lasik corrective eye surgery.

He has neither a pension fund nor protection policies in place.

The cure: Switch your balances to a 0 per cent deal

On his current salary - and with a little discipline - Daniel should have ample money to pay off his debts and start planning for the future, says Ben Yearsley of independent financial adviser (IFA) Hargreaves Lansdown.

"Putting £50 a month into an ISA while his credit card debts are building up is utterly illogical," he comments. "Daniel should just bite the bullet, pay them off and destroy the cards."

Living at home is a valuable bonus as he tries to save money, adds Alex Pegley of IFA Calculis.

But Mr Pegley questions whether Daniel needs to have the laser eye surgery right now. "In the long term, it will probably prove good value, given the cost of contact lenses. But buying a property might be a better investment now."

Debt

Daniel should start by clearing the most expensive debts, stresses Vivienne Starkey from IFA Equal Partners.

She recommends he transfer the outstanding balances on his three credit cards to a 0 per cent deal - such as that offered for six months by Norwich & Peterborough building society, one of the few remaining lenders not to charge a balance-transfer fee. That will allow him to chip away at his borrowings.

As the interest rate on student loans is low - currently 3.2 per cent - and linked to inflation, Daniel can continue to pay this off gradually, says Mr Pegley.

He might also try asking his parents if he can defer paying back their loan while he saves for a house.

Savings

His goals are short term, so Daniel should concentrate on cash savings and avoid equity investments.

"Once he has paid off his debts using the money in his ISA, he should then look into building up his savings, again in an ISA, as this offers instant access and tax-free returns and is the best way to achieve his goals," explains Mr Yearsley.

Ms Starkey comments that Daniel could get a higher rate on his mini cash ISA by switching provider, and picks out Bradford & Bingley, paying 5.03 per cent.

But, she adds, if he wants to take out some of the capital in the short term to reduce his debts, it is probably not worth moving his money for the time being.

Property

If he can discipline himself by taking the time to clear his borrowings and amass a deposit, Daniel will be able to secure a better mortgage deal, says Ms Starkey.

"All debts are taken into account when applying for a mortgage, and the greater the debts, the less Daniel will be able to borrow."

In Bracknell, the average one-bedroom flat costs £145,000. So assuming that he will need to apply for a 90 per cent mortgage, and bearing in mind the cost of legal fees and stamp duty, he will be looking to put down a deposit of around £16,000.

"If Daniel reins in his expenditure and dedicates himself to saving, he could build up this sum in just a few years," says Mr Pegley.

Retirement

Pension planning is important - and the earlier Daniel starts, the better off he'll be, says Mr Pegley.

Mr Yearsley recommends that Daniel find out if his employer will make contributions to a pension plan on his behalf.

"If there are more than five employees in the company he works for, the employer is obliged, by law, to make a stakeholder pension available to all its workers," he explains.

If his company has no pension scheme in place, Mr Yearsley says he should start a personal pension whenever possible.

Protection

As Daniel has no dependants, there is no need for life cover, says Mr Yearsley.

"But he should check if benefits such as income protection, or critical illness cover, are available through his work."

If you would like a makeover, write to Sam Dunn at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email s.dunn@independent.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
people'It can last and it's terrifying'
Sport
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
Sport
footballStriker has moved on loan for the remainder of the season
Sport
footballFeaturing Bart Simpson
PROMOTED VIDEO
News
Katie Hopkins appearing on 'This Morning' after she purposefully put on 4 stone.
peopleKatie Hopkins breaks down in tears over weight gain challenge
News
Ricky Gervais performs stand-up
people
Arts and Entertainment
Olivia Colman topped the list of the 30 most influential females in broadcasting
tv
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Sport
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
News
i100
Life and Style
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside
lifeDavid Sedaris: What I learnt from my fitness tracker about the world
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    SQL Implementation Consultant (VB,C#, SQL, Java, Eclipse, integ

    £40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...

    Head of IT (Windows, Server, VMware, SAN, Fidessa, Equities)

    £85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...

    Technical Software Consultant (Excel, VBA, SQL, JAVA, Oracle)

    £40000 - £50000 per annum: Harrington Starr: You will not be expected to hav...

    Day In a Page

    'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

    'I’ll tell you what I would not serve - lamb and potatoes'

    US ambassador hits out at stodgy British food
    Radio Times female powerlist: A 'revolution' in TV gender roles

    A 'revolution' in TV gender roles

    Inside the Radio Times female powerlist
    Endgame: James Frey's literary treasure hunt

    James Frey's literary treasure hunt

    Riddling trilogy could net you $3m
    Fitbit: Because the tingle feels so good

    Fitbit: Because the tingle feels so good

    What David Sedaris learnt about the world from his fitness tracker
    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Second-holiest site in Islam attracts millions of pilgrims each year
    Alexander Fury: The designer names to look for at fashion week this season

    The big names to look for this fashion week

    This week, designers begin to show their spring 2015 collections in New York
    Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

    'I like Orwell's writing as much as the next talented mediocrity'

    Will Self takes aim at Orwell's rules for writing plain English
    Meet Afghanistan's middle-class paint-ballers

    Meet Afghanistan's middle-class paint-ballers

    Toy guns proving a popular diversion in a country flooded with the real thing
    Al Pacino wows Venice

    Al Pacino wows Venice

    Ham among the brilliance as actor premieres two films at festival
    Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

    Neil Lawson Baker interview

    ‘I’ve gained so much from art. It’s only right to give something back’.
    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering