Wealth Check: 'Each month I'm £1,250 in the red'

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The problem

In her early 20s, Louisa Hancox is desperate to chip away at a £22,000 debt mountain.

As well as £15,000 in student loans - a legacy of a four-year degree course at Leeds University - she is repaying a £6,670 graduate loan at £146 a month. That last figure includes £30 for payment protection insurance (PPI).

There is also £1,600 on an HSBC credit card with an annual percentage rate (APR) of 13.9. Louisa usually makes just the minimum repayment each month but tries to pay off between £50 and £100 extra if she can.

At the end of each month, she is usually £1,250 overdrawn too.

"By the time I have paid my utility and mobile bills and made loan repayments, I'm left with £250 a month for a social life."

She rents a two-bed flat in south London with her boyfriend, Richard; each pays £500 a month.

Keen to buy a home together, they have the offer of "substantial" help from her boyfriend's parents.

"I'd like to sort out my finances so I can think about getting a mortgage," says Louisa. "But I'm not sure how much we could borrow."

To make matters more difficult, she has nothing in the way of either savings or investments.

Although Louisa wants to start a pension, her employer doesn't provide one. She has no life or income protection policies, either.

Interview by Esther Shaw

The patient

Louisa Hancox, 24, from Clapham, south-west London.

Job: charity finance manager.

Income: £23,000.

Savings/investments: none.

Goals: to control her debts and improve the management of her monthly income. She is also considering buying a property.

The cure

It's time for Louisa to get tough with herself, warns Ben Yearsley of independent financial adviser (IFA) Hargreaves Lansdown.

She should cut down on her social life for the next six to 12 months - "until she gets her finances on the right track", he says. "She has to tighten her belt and start being realistic about her long-term goals."

His stern advice is echoed by Kevin Anderson from IFA Budge and Co: "Louisa should draw up a budget, eliminate unnecessary expenses and avoid using her credit card for a few months, until she brings the balance down."

But there may be room for manoeuvre in considering a mortgage with her boyfriend, thanks to lending rules based on affordability rather than on earnings.

Debts

These need the most immediate attention.

Straight away, Louisa should look to move her credit card balance from HSBC to a provider offering a 0 per cent introductory deal, says Mr Anderson. "Her repayments will better reduce the [outstanding] balance." For example, the Halifax offers 0 per cent for 12 months.

But this will only be worthwhile, Mr Yearsley warns, if Louisa makes a concerted effort to pay off the full amount before the deal ends. If she can't do that, she should switch again to another 0 per cent offer.

Louisa should check her graduate loan rate, says Chris Wicks of IFA Alexander Beard.

If it's at an uncompetitive rate - higher than 7.25 per cent, say - consider going for either a new, cheaper loan over the same length of time, or extending the life of the existing loan and making the monthly repayments smaller.

However, she must check to see whether there will be a hefty penalty for paying off the loan early if she switches it to another provider, warns Mr Wicks. If so, this could wipe out any benefits.

Louisa should ask if she really needs the PPI cover, says Mr Anderson, pointing out that a big slice of her graduate loan is comprised of this. "For many people, [PPI] is unnecessary and expensive," he warns.

While her £15,000 in student loans represents the biggest debt (and must be repaid monthly, being taken from her salary before she receives it), it is also the cheapest, with an interest rate linked to inflation.

Property

Given that Louisa and her boyfriend already pay £1,000 in monthly rent together, they could take out a 25-year interest-only mortgage of almost £200,000 and pay an equivalent monthly sum, says Mr Anderson.

"Most lenders now look at affordability rather than a strict criteria based on earnings," he says. "It makes sense to use the rent money to fund a mortgage - especially with the offer of help with the deposit."

However, Louisa's maximum mortgage will be reduced by the level of her existing borrowings, warns Mr Wicks.

Buying together carries risks too; early legal advice will help limit any financial problems in the event of a split.

Savings/investments

Once Louisa has her debts under control, she can start thinking about long-term financial planning, says Mr Yearsley.

"This should include an emergency fund - equivalent to six months' salary - in a mini cash individual savings account to pay no tax."

There is little point in shares until she has more cash to play with.

Retirement

Louisa should also turn her attention to a pension once her debts are sorted out, says Mr Yearsley.

Unfortunately, the size of her employer - a charity with a handful of staff - means it's under no obligation to offer an occupational scheme.

However, rather than waiting for her employer to sort out retirement funding, she can take out a personal stakeholder pension. These plans carry low charges - no more than 1.5 per cent - and the Government makes contributions in the form of tax relief.

As a guide, Mr Yearsley recommends investing half your age as a percentage of salary - 12 per cent in Louisa's case.

Protection

She needs no life cover as she has no dependants, advises Mr Anderson. "But she should check how long her salary will be paid if she is unable to work through sickness or accident."

While she could think about critical illness cover or permanent health insurance, these products are expensive and not priorities, adds Mr Yearsley.

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