Aspiring film-maker Andrew David wants to set up an independent film company, but debts of more than £25,000 are delaying the dream.
The 28-year-old from east London is well qualified to enter the creative industry, with a BA in video production as well as an MA in real-time media communications. He has collaborated on a number of music videos, most recently Kele Le Roc's "Retro" and David Jordan's "Don't Wanna (Hear You Say)", and his film on Excalibah, the former BBC 1Xtra DJ, was screened at the Sheffield International Documentary Festival.
However, with £17,000 of combined student and career development loan, £2,500 of credit card debt (spread across a HSBC Visa card charging 15.9 per cent and a Virgin card charging 17.9 per cent) and a £6,200 interest-free loan from a family member, Andrew carries debt totalling £25,700.
His income is limited as he left full-time work last year to focus on setting up the business. He works as a part-time broadcast monitor for two days a week, giving him a monthly income of between £550 and £600, and has outgoing expenditure of £519 after moving back in with his parents.
Clearing the debts
Joss Harwood, chartered financial planner at Durham-based Eldon Financial Planning, says compromising will be key if Mr David wants to achieve his goal of setting up a film business. "Andrew will need all of the determination he is showing in the pursuit of his dream to fight his way to a better financial position. He is caught in a tricky position – unable to give up work completely, yet ideally needing to channel all his energies into the new venture to make it work. He may need to be patient and extend his timeframes," she advises.
When it comes to clearing his debt, Ms Harwood recommends tackling the credit card debt first, as the high interest rate applied to it means left unaddressed it may balloon in size.
"If funds are made available, it would make sense to at least repay the credit cards to save on interest. Andrew could then afford to pay his family member some interest which would reward them for their help. He could offer to pay, say, 5 per cent a year for a further £5,500 loan to repay the cards and give him the £3,000 business capital required in the short term."
To help to free up funds to do this, she recommends that he revises his outgoing monthly expenditure. Mr David's monthly costs are £60 for an Oyster card, £20 for petrol, £200 for food, £42 for gym membership, £5 for website hosting and £162 on career development loan repayments. "Perhaps the gym membership has to be given up to save £42 per month. At 7 per cent of his income this is a comparatively large outgoing," she says.
If further funds are not available, Ms Harwood recommends Mr David investigate a balance transfer for the £2,500 to gain a 15-month period of 0 per cent interest. "Most providers have income limits of £10,000 to £25,000, but if his credit rating is good, Santander will consider him. There is a fee of 3 per cent. The £35 per month interest saved plus the gym membership would mean finding a further £98 per month to repay the debt within 15 months. Successful completion of this strategy will also improve his credit rating.
"Student loans do not have to be repaid quickly, and the current terms are such that Andrew won't have to make any repayments until his earnings increase to over £1,250 a month."
Ms Harwood calculates that a loan of £10,000 at 9.9 per cent – a typical career development loan rate – with a payment of £162 per month would take about seven years to repay. A student loan of £10,000 at 4.4 per cent – one of the rates now applying depending on when the loan was taken out – would take six years to repay with the same level of contribution.
Building up capital
Mr David believes he will need about £12,000 to kick-start his business, covering the cost of equipment and marketing. He already has borrowed £7,500 from a family member and will need another £4,500 to reach his target, although the financial advisers believe he should seek professional business advice before channelling the money into the business. Paul Duckworth, chartered financial planner and managing director of Paul Duckworth IFA, also recommends that Mr David pay off his debt first and extend his timeframe so as to be in a solid financial position.
"This would be much easier if he could increase his income," he says. "I am sure he is putting all his effort into building up his business and trying to make it profitable. However, if there is no immediate prospect of the business generating profit it may be necessary to extend his part-time hours, or even return to full-time work until his debts are reduced and his has built up the necessary capital."
When Mr David has a larger regular income, Mr Duckworth recommends transferring his savings to a cash ISA to take advantage of a higher rate of interest over the long term. "Although interest rates are low at present, they must start to rise at some point, and the interest on cash ISAs is tax free. Make sure you can access the money at reasonable notice."
Another way of building up capital, he says, would be to seek outside funding or consider finding a business partner with larger financial resources or the requisite equipment already. "A visit to Business Link might pay dividends for Andrew. I understand there can be funds available specifically for creative content. However, he will need a solid business plan and a thorough understanding of the market in which he wants to work," adds Mr Duckworth.
Building up a nest egg
While Andrew has many years ahead of him before he retires, he should consider his pension options. He has £1,000 in a pension scheme, but says he is reluctant to make further contributions because he believes hard work over the next decade will give him financial stability. However, Graham Laverick, managing director of WR Financial Management, says there are big advantages to be had from saving from a young age.
"By making contributions from a relatively young age, Andrew will have the opportunity of building a sizeable fund for when he wants to retire. He will need to make an awful amount of money in the next 10 years to live off for the rest of his life. A million pounds would provide an income of between £50,000 and £100,000 per annum with the prospect of keeping the capital intact – but to accrue this amount of money over the next 10 years may be totally unrealistic especially as it will have come out of net income."
Mr Laverick calculates that if Andrew were to start a stakeholder pension, contributing £50 net per month, he could expect to accumulate a pension fund of about £50,100 at age 60. This assumes an investment growth rate of 7 per cent per year.
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Write to Julian Knight at the 'Independent on Sunday', 2 Derry Street, London W8 5H or email@example.com