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 firstname.lastname@example.org
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