Neil Smith has moved in with his sister having previously rented a property with his girlfriend, who has now moved to London for work. Neil hopes to join her in the next year. Ideally, the couple will purchase a property together - but he is worried about his finances.
Neil's salary is £30,000 a year, of which he contributes 5 per cent into his pension. He has not managed to make any other savings as yet due to his debts, which include credit-card balances and loans totalling £10,450. His sister charges him a small rent each month and Neil's other monthly outgoings after his debt repayments are pretty low.
Neil now has two priorities. He knows that he needs to clear his debts so that he can start saving for his share of a deposit on a property, but he isn't sure about the best way to do this. He also wonders whether to take out another loan to purchase a new car as his is becoming more and more expensive to run.
We asked three financial advisers for their help: Malcolm Lyons, of Music Media IFA, Anna Sofat, of AJS Wealth Management, and Justin Modray, of BestInvest.
Case notes: Neil Smith, 27, packaging salesman, Leicester
Salary: £30,000 a year before tax plus a bonus of up to £5,000 before tax, payable in March.
Monthly outgoings: £150 on rent, £125 on petrol, £30 on car tax and £100 on food and upkeep.
Debts: Parental loan of £2,000, bank loan of £1,000, graduate loan of £4,000, credit card debts with HSBC, Egg and American Express totalling £2,650
Property: Currently paying a token rent to his sister, but Neil would like to buy a property with his partner in London next year.
Pension: Contributes 5 per cent of salary (including tax relief) a year to employer's group personal pension - his employer also contributes 5 per cent.
The advisers say that Neil is facing up to his debt problems and knows that the repayments are absorbing too much of his income.
Malcolm Lyons suggests that Neil could use his next bonus to reduce his credit- card balances with Egg, American Express and HSBC, as these are the most expensive debts he has. But this will only help if Neil puts by enough money each month to pay his other debts. He also needs to change to a bank that will offer him a fee-free overdraft and use this instead of loans.
The student loan and the loan from his parents are attracting little or no interest charges, so Anna Sofat says Neil can leave them as they are for the moment.
She says that Neil could consolidate the outstanding credit card balances of these on to a cheaper deal - Sofat gives the M&S "for life" credit card. The rate is 3.9 per cent for as long the original transfer balance remains outstanding.
Modray suggests that Neil checks out www.moneyfacts.co.uk as an independent source of all the credit deals, but also thinks that Neil should set up direct debits so that the majority of his surplus income goes straight to the lenders after his payday.
Another option for Neil to consider is consolidating his credit cards and bank loan into a low-cost personal loan. Sofat suggests Masterloan, which would lend him £5,000 over three years at an annual rate of 5.7 per cent. Neil cannot buy a property until his debt problems are resolved, Sofat says. And she warns that if Neil is struggling now he will likely have more problems in London where living expenses are higher.
Lyons also points out that Neil must avoid any late payments on his debts as this will impact on his mortgage credit worthiness and affect the deals he can get later. He says Neil should cut up the credit cards and close the accounts as soon as the balances are paid.
Neil is dependent on his car, spending around £125 a month on petrol. Although taking out another loan to buy a new car is not ideal, he has little option if he uses it for work.
Sofat says that he should be able to get a cheap loan if he buys a new car and he could get a diesel or a more economical vehicle to cut down his petrol costs. But if he is planning to move to London in the next 12 months the motor may be an expensive luxury. Lyons thinks he would be better off getting the car fixed.
SAVINGS AND PENSION
Neil's pension is quite generous and if his contributions continue he should be able to retire on an inflation-linked pension of half his salary by the time he is 60. Neil mustreview how his pension is invested and the quality of the underlying funds, says Modray.
Lyons says that until Neil is debt free he shouldn't be saving other than into a pension, as he'll earn less interest than he is paying out. Once he's debt-free Modray suggests a cash ISA is a safe place to start saving. The interest is tax free, and as long as Neil shops around he should be able to get an excellent rate.
For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail email@example.com