Wealth check: Help me break from bank of mum and dad

Ed Gibbs is starting a dream apprenticeship, but can he become self-sufficient when he's earning such a small salary?
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The Independent Online

The patient

Full-time student Ed Gibbs, 19, looks forward to supporting himself once he starts an apprenticeship in the new year. But with little cash now, and a quiet winter on the cards, he is concerned that his hopes of self-sufficiency may be out of reach.

"I'm studying in full-time education at the National College for Motorsport at Silverstone while working most weekends for various race teams, usually unpaid," says Ed. "Jobs in this industry are hard to find during the winter period as most championships finish the season between September and November. But, after February, I'll hopefully be in an apprenticeship that should last between two and five years. By that stage, I should be earning some money myself, although it will be a minimum of £80 a week.

"My first aim is to be self-sufficient," he says. "Right now, I'm relying too much on my parents. They give me money every month for travelling costs and food as well as paying my rent for me. But I find keeping to a budget hard. Travel costs can get quite high as I have to drive to college and to different race teams and circuits most weekends, even with the extra money from my parents.

"I hope I'll be able to pay my own way soon – at least by the time I finish my apprenticeship. But I just don't know what is realistic, or what to do now to give myself the best chance of getting there sooner rather than later."

The cure

"This is an all-too-familiar situation that students and apprentices find themselves in," says Ian Roberts of ARW Wealth Management. "Substantial state support of students has long since disappeared, and many young adults have to rely on their parents to provide income for their basic living requirements. Unfortunately, there is not a lot of improvement on the horizon with the fallout of the recent economic crisis, and grants and other public-sector spending will be on hold for some years to come."

But despite gloomy predictions, Ed and others like him have a number of opportunities to maximise income – and not just by taking on a part-time job. Simply making the most of benefits and tax thresholds could have a marked effect on Ed's everyday financial situation. Elsewhere, our panel of independent financial advisers (IFAs) urge Ed to consider creating spending and savings habits now that will make life easier later on, even if his plans for financial independence are harder to achieve than he had hoped.

Budgeting

So far, Ed has avoided getting into debt and has kept to a strict £100 monthly personal spending budget that his parents provide. But with his living expenses covered, the IFAs suggest he make a note of where this cash goes so that he can build up a workable budget once he begins to earn more. "Without doubt, the apprenticeship years are going to be a time for tight budgeting," says Mr Roberts. "This is a discipline that Ed must follow on a weekly basis. He must continue to avoid building up any significant levels of debt as it would make achieving his aim of self-sufficiency much harder."

Ian Hudson of Hudson Green & Associates, who suggests Ed find a part-time job for a few hours a week to boost his income, says: "Ed may feel frustrated by his current financial situation, but his is certainly not a hopeless case, and it's one he can change. Although he might find looking for a job difficult in the current climate, it's worth persevering. Not only will he gain experience but, while working, he's not spending money, but earning it. As long as he doesn't put himself at risk of being over-tired when driving, Ed will find he can alleviate a lot of his financial concerns with a few hours extra work per week."

The minimum wage for UK workers is £4.83 per hour for those aged between 18 and 21 – known as a development rate – rising to £5.80 an hour for workers aged 22 and over. Even at this legal minimum, Ed needs just four or five hours' work a week to double his monthly budget. This year's personal-income allowance – the amount UK workers aged under 65 can earn before they pay income tax – is £6,475. Even if he found a part-time job immediately, it's highly unlikely that Ed would have to pay income tax this year.

When he does begin his apprenticeship Ed is still unlikely to earn more than £4,160 in his first year. "This level of income is still too low to meet his normal expenditure and therefore, unless he gets a part-time job to run alongside his apprenticeship, he will remain dependent upon his parents," warns Danny Cox of Hargreaves Lansdown.

"This may not be the news Ed wants to hear, but it could mean financial assistance elsewhere. Given the low level of his expected income, he should certainly check to see whether he is entitled to any state benefits, including council-tax exemption, which could save thousands of pounds a year."

Loans and debt

Ed has resisted the temptation to use credit cards or personal loans to fuel extra spending, and in doing so has already given himself a good chance of financial independence later on, the advisers agree. But in the event he needed to invest in further skills or could no longer rely on his parents for any reason, Mr Roberts suggests a Professional and Career Development Loan. This government-backed scheme is designed for people like Ed, he says, and, along with a student loan, offers some of the lowest interest rates available. More information is available at direct.gov.uk/en/educationandlearning, or from Ed's local Jobcentre plus.

He should also inform his bank that he is not currently a tax-payer to ensure that any interest he earns from current or savings account balances is paid gross.

Savings and property

Once Ed's earnings improve as he becomes more experienced, he should start to build up a cash buffer. For most workers, an emergency fund worth between three and six months' salary is considered an ideal target. Mr Cox suggests a cash Individual Savings Account (ISA) "as the interest is paid tax-free. Although Ed wouldn't pay tax on the interest now, at some stage he will, so it makes sense to build up a tax-free pot."

He adds: "The highest interest rates on offer at the moment are through one of the Santander-owned banks – Alliance & Leicester, Bradford & Bingley, or Abbey. They are offering a Super Direct ISA which pays a variable rate of interest of 5.5 per cent, which includes a bonus of 4.5 per cent for the first £8,999 for 12 months." In future, Mr Hudson says, the cash savings could come in handy to pay for a deposit if Ed decides to take a leap of faith and buy rather than rent property.

"This would seem the ideal place for Ed to invest his savings, allowing him to pick up at least a little interest, which, of course, will be free of tax. It can only be opened in-branch, but is a telephone and internet account while you are using it."

Longer term, Ed will have to start looking at a pension. However, at 19, he has time on his side. Says Mr Hudson: "The sooner he starts a pension the longer the money will have to grow. However, the immediate concerns are to get Ed living within his means and building up a cash-savings cushion. When he does start to earn he should look at his retirement provision."

Do you need a financial makeover?

Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF j.knight@independent.co.uk

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