Wealth Check: Getting rid of costly card debt the first step to building a deposit
Jennie is keen to start saving for her first home, but our experts say she will struggle until she sorts out and prioritises her various debts
Saturday 17 August 2013
Jennie Davies, from Bootle in Liverpool, is keen to clear the debts she's built up so she can start saving for a house deposit. The 28-year-old works as a test analyst and earns about £27,000 a year. She has been in this job for three years.
Jennie lives at home with her grandparents, but she hopes to take the first step on to the property ladder in the not-too-distant future.
"I'm hoping to buy a three-bed home in Liverpool for around £125,000-£150,000," she says. "But I know I'll have to save hard to make this happen as I've only got around £1,500 in my current account with NatWest, so I'm essentially starting from scratch."
The biggest obstacle at the moment is her debts. "I owe £3,500 on two credit cards: one with Barclaycard and one with Capital One," she says. "I also owe £10,000 on a loan with NatWest, and £15,000 on a student loan. In addition, I've run up an overdraft of £1,500 on my current account. These are debts which I mostly amassed while travelling – and I really want to get these paid off quickly so I can concentrate on building up my savings."
Jennie is in the fortunate position of not having to pay rent or a mortgage as she lives with her family; she contributes £250 a month towards the household bills.
As yet, Jennie has not begun paying into a pension. She also has no protection policies in place.
Our panel of independent financial advisers agree that getting on to the property ladder can be extremely difficult for young people in Jennie's position, with house prices having risen and lenders more reluctant to lend.
They urge Jennie to focus on paying off her debts so she can start saving seriously for a deposit. They add that while it may not feel like a priority at the moment, the sooner she starts paying into a pension, the better.
Focus on reducing debt
Adrian Lowcock at Hargreaves Lansdown says Jennie needs to settle the debts on her cards, bank loan and overdraft as a priority.
"The higher the interest rate, the greater the urgency with which Jennie needs to pay off that debt," he says. "Credit cards are usually the most expensive, but they require the smallest monthly payments. Loan rates are likely to be lower, but the minimum repayment will be higher."
Consider consolidating debts
Mr Lowcock suggests Jennie may want to look at consolidating the credit card debt into the bank loan.
"This would save her money in interest payments," he says.
"She could also ask her bank about making overpayments on the loan. Equally, if the rate on the overdraft is also high, it may be worth consolidating the overdraft into the bank loan as well. The reduction in interest payments will free up some cash which she can use to repay her debts more quickly."
As an alternative, Patrick Connolly at AWD Chase de Vere suggests that Jennie could get better terms by moving her credit card and loan debts elsewhere. Useful sites for comparing rates include MoneyFacts.co.uk and MoneySupermarket.com.
"She should then look to pay off her overdraft," Mr Connolly says. "However, paying off the student loan is far less urgent as Jennie will be paying a lower rate of interest on this loan. She can leave this on the back-burner for now and let this clear naturally through her payroll as her income increases."
Build up savings
Mr Lowcock says that while it's admirable that Jennie has saved £1,500, she would actually be in a better position financially if she used this money to pay her debts off first.
"She may be earning little over 0 per cent on money in her current account, yet paying a hefty rate of interest on her credit cards," he says. "In this situation, there's no point have both savings and debt."
Once Jennie's got her debt under control, her next priority must be building up some cash savings.
"She'll need cash for two reasons," says Mr Connolly. "Firstly as an emergency fund so she has money available for any short-term requirements; this will help her avoid having to go any further into debt. Secondly, she will need savings to build a deposit."
When Jennie is in a position to save, Mr Connolly urges her to build cash savings in an individual savings account (Isa).
"This would separate her savings from her day-to-day current account money, and all interest would be earned tax-free," he says.
"Jennie could also look to set up a regular direct debit from her current account into a cash Isa to help her get into the savings habit. In addition, she should look to boost her income by making use of a cashback site such as Quidco, as this will give her money back each time she makes purchases online."
Plan for a deposit and other house-buying expenses
Dave Penny from Invest Southwest suggests that when it comes to taking the first step on to the property ladder, the Government's recently announced Help to Buy mortgage support scheme could be worth considering.
"This would enable Jennie to buy with a deposit of just 5 per cent – meaning any deposit in excess of £7,500 should give her the opportunity of buying a house in her desired price bracket," he says. "With the right discipline, she could reach this goal in around three years' time."
Nonetheless, Mr Connolly reminds Jennie that she can't start saving for a deposit until she's sorted out her debts. "And if she ends up needing a deposit of 10 per cent – or more – this could mean further years of saving," he says. "At the same time, Jennie needs to give some forward thought to her day-to-day expenses as having her own place will be considerably more expensive than paying £250 to live with her family."
Don't ignore pension planning
While saving for the future may not be Jennie's most pressing financial objective at present, given that she is now 28, this is something she simply can't ignore.
"The sooner she starts saving, the easier it will be for her to achieve a reasonable standard of living in retirement – or to be able to retire when she wants," says Mr Connolly.
Mr Penny urges Jennie to check whether her employer offer a workplace pension.
"If the firm doesn't do so already, it will have to do so in the very near future under a scheme known as auto-enrolment," he says. "With this scheme, not only will Jennie have to contribute, but her employer and the Government will have to make contributions too. Jennie should take up this offer when it becomes available."
Once she's completed her house purchase, Mr Penny advises her to think about increasing the amount she pays into a pension.
Delay investing for the time being
Jennie can afford not to put money into investments for now, according to Mr Connolly.
"Her focus must be on paying off her debt and building cash savings before looking at making longer-term investments," he says. "When she is in a position to invest, it might be sensible to consider tax-efficient stocks-and-shares Isas and to invest in these for the long-term. This will work well alongside her auto-enrolled pension scheme."
Take out decent protection policies
Mr Penny says there is no point in Jennie making big plans if it all goes wrong beforehand, and urges her to check what protection benefits are available from her employer.
"She should then consider an income protection policy which pays a tax-free monthly benefit if the policyholder is off work, until retirement, recovery or death," he says. "But as Jennie does not have any financial dependants at present, she does not need life cover at this time."
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
As Voltaire once said, “Ice cream is exquisite. What a pity it isn’t illegal”
How to protect your assets if the stock markets begin to head south again
Child Maintenance Service to replace Child Support Agency - but is it better?
A student's guide to financial survival: You don't have to drown in debt at university
Bargain Hunter: Kit yourself out in sports gear - at a healthy discount of up to 75%
The HiFX guide to managing corporate foreign exchange and international payments
- 1 'Alien thigh bone' on Mars: Excitement from alien hunters at 'evidence' of extraterrestrial life
- 2 Mother fed her daughter tapeworms to make her skinny for pageant
- 3 Crystal Palace next manager latest: Palace consider Ally McCoist - EXCLUSIVE
- 4 Richard Dawkins on babies with Down Syndrome: 'Abort it and try again – it would be immoral to bring it into the world'
- 5 ALS ice bucket challenge co-founder Corey Griffin drowns, aged 27
Richard Dawkins on babies with Down Syndrome: 'Abort it and try again – it would be immoral to bring it into the world'
Scottish independence: English people overwhelmingly want Scotland to stay in the UK
Isis threat: Cameron wants an alliance with Iran
Michael Brown shooting: Chaos erupts on the streets of Ferguson after autopsy shows teenager was shot six times – twice in the head
Disgusting, frustrating, but intriguing: how the country really feels about its politicians
Bin bag full of cats' heads discovered near Manchester's Curry Mile
iJobs Money & Business
Negotiable: Harrington Starr: Market Administrator (1st line Support, Trade Fl...
£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...
Negotiable: Harrington Starr: Data Support Analyst (Linux, Solaris, Windows Se...
Negotiable: Harrington Starr: Helpdesk Support Engineer (Windows, MS Office, E...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony