Wealth Check: 'Debts stop me making ends meet'

We give 'Independent on Sunday' readers a financial makeover
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The problem

The problem

Having accrued a lot of debt both as a student and while travelling and working abroad, Helen Beesley is determined to get on top of her finances.

Since moving to London just under a year ago, she has been earning a reasonable salary, but finds this is soon swallowed up by her rent, bills and day-to- day living costs.

She does have £1,650 in a Cahoot savings account paying 4.98 per cent, though £950 of this is a travel loan she took out from work for her annual season ticket - interest-free repayments are deducted each month.

"I save into this account on a regular basis, and hope to use this money to pay off my debts."

She ends up overdrawn by up to £1,000 each month on her Lloyds current account, and owes £1,400 on an Egg credit card. This is a 0 per cent deal for nine months - at the end of which she plans to move the balance to another interest-free offer.

She also owes just over £5,200 to the Student Loans company and has begun paying this off at a rate of £100 a month.

While Helen has a £40,000 deposit to put towards buying her first home (from the sale of a property owned by her parents), she fears she won't be able to borrow as much she wants on her current income. She is, though, keen to explore avenues such as rent-a-room schemes.

Helen has no pension provision at the moment; her employer does not offer a scheme.

Interview by Esther Shaw

The patient

Helen Beesley, 27, from East Finchley, London.

Job: fundraising officer for a small international children's charity.

Income: £23,200.

Savings: £1,650 in a savings account. Investments: none.

Goal: to get rid of her overdraft and credit card debt and buy a property.

The cure

Helen needs to have a "quiet year - don't go on holiday, be boring," says Ben Yearsley at independent financial adviser (IFA) Hargreaves Lansdown. "Her overdraft and credit card bill need to be paid off as soon as possible," he adds. "But with almost £1,700 in her Cahoot account, she has got the money almost to do that. It just requires some budgeting."

Richard Lishman from IFA Dickson Lishman Prince says she should work to clear her debts before building up her savings, as the interest on balances in the red is far higher than that paid on balances in credit.

That said, Mr Yearsley recommends Helen should have a "rainy day" fund equal to around six months' salary, as well as some long-term savings.

"Pensions are a must," adds Mr Yearsley.

Debts and savings

The overdraft could prove expensive in terms of rates and fees, says Mr Lishman, who recommends Helen transfer £1,000 from her Cahoot account to clear this.

Alternatively, says Alex Pegley at IFA Calculis, she could switch her current account from Lloyds to Smile, as this provides a £500 interest-free overdraft facility.

He also recommends Helen use her annual mini cash individual savings account allowance of up to £3,000 - enabling a proportion of her savings to grow tax-free. Alliance & Leicester, for example, is paying 5.4 per cent.

With more money available, she could pay off her credit card bill, says Mr Lishman, who adds: "There's no need to rush to get rid of the debt on the student loan as the interest rate is only 2.6 per cent per year."

Property

With a £40,000 deposit from her parents, Helen has a real head start compared to many her age, says Mr Yearsley. "Based on her salary of £23,000, she could get a mortgage of about £80,000, which means she could buy a house worth about £120,000."

Buying with the aim of renting out a room is a sensible idea, he adds, as you can receive rent of up to £4,250 a year tax-free.

If she does want to go down this route, a self-certification mortgage might be a good choice, says Mr Pegley, as borrowers do not have to provide proof of their income - relying instead on their own statement of expected earnings.

But Mr Yearsley warns Helen to tread carefully with self-certified loans. "The more she borrows, the more risk she takes on. Would she still be able to pay the mortgage if interest rates suddenly shot up by 1 to 2 per cent?"

Mr Pegley recommends Helen check for the availability of any shared ownership schemes in the area where she is looking to buy a home. Under these initiatives, househunters can buy a property jointly with a local housing association.

Retirement

While property could prove a sound investment in the long run, says Mr Pegley, Helen should start saving for her retirement.

"The advantage of a pension scheme is that tax relief is available on contributions," he says. "Her employer may already offer access to a stakeholder scheme and may be prepared to make additional contributions."

Protection

Helen should check to see if her employer provides any benefits such as income protection or life assurance, says Mr Pegley. When she takes on a mortgage, she should also consider critical illness cover, he adds.

If you would like a financial 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

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