Wealth Check: 'Bite the bullet, pay your debts and destroy the credit cards'
Sunday 22 October 2006
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."
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.
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.
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.
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.
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 email@example.com
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Al Pacino on suffering from depression: 'It can last and it's terrifying'
- 2 Half of young women unable to ‘locate vagina’ and 65% find it difficult to say the word
- 3 Saudis risk new Muslim division with proposal to move Mohamed’s tomb
- 4 A teacher speaks out: 'I'm effectively being forced out of a career that I wanted to love'
- 5 Mexican woman becomes world’s 'oldest person' at 127
Rotherham child sex abuse scandal: Labour Home Office to be probed over what Tony Blair's government knew - and when
What do immigrants really think of Britain? Polish immigrant's Reddit post goes viral
Ashya King: Parents of five-year-old boy refused permission to visit him in hospital and denied bail at Spanish court
With Douglas Carswell joining Ukip, my party has taken another giant step forward
When elitism grips the top of British society to this extent, there is only one answer: abolish private schools
Ukip Douglas Carswell defection: Tory MP jumps ship to join Nigel Farage
iJobs Money & Business
£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...
£40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...
£85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...
£40000 - £50000 per annum: Harrington Starr: You will not be expected to hav...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony