Wealth Check: 'Help me get rid of bad habits and find some stability'

Our experts praise freelance producer Holly Adams' efforts to prioritise paying off her overdraft and student loan, as well as what she owes on credit cards

The patient

Holly Adams, 32, from Ealing Broadway, west London, is seeking advice on how to manage debt and get a grip on her finances. She works as a freelance celebrity producer for ITV, earning around £65,000 a year. However, while she was climbing the career ladder she found the cost of London life saw her sink into debt.

"I'm sure I'm similar to others when I say that I didn't have any guidance on managing money when I was younger and fell into bad habits, and didn't monitor my spending when I started working in London," she says. "I wasn't managing my debt effectively until recently, and I'm seeking advice on this."

This has resulted in Holly amassing around £45,600 worth of debt. She is saddled with an overdraft of £1,500 on her HSBC current account at a rate of 19.9 per cent. She also pays £302 a month for a £5,800 graduate loan, also with HSBC, at 7.9 per cent.

She has built up credit-card debt, with £6,500 on an MBNA card at 15.9 per cent, and £12,300 on another with the same provider, also at 15.9 per cent. In addition, she owes £7,000 on a Halifax credit card on an interest-free balance transfer deal until September this year.

After buying a new Mini she pays £394 a month for a car loan, with around £12,500 left to repay over 38 months at 10.1 per cent with Mini Financial Services.

"I've been trying to blitz my debt by paying it off in substantial amounts each month – around £1,200 per month sometimes," says Holly. "But I'm not sure how I should best be wiping it out."

She hasn't yet stepped onto the property ladder, and rents a room in a three-bed house for £630 a month, paying an extra £130 for bills.

"I'd love to eventually own my own place in London, but I'm not lucky enough to have parents who are in a position to help me with a deposit like other friends," she says.

"I'm aware that there are schemes to help first-time buyers, and it would be good to know what my options are and how much I need to save."

While Holly has yet to build up short-term savings for emergencies, she has set aside £6,000 for a tax bill due at the end of this month.

"It makes me feel good that I'm paying off my debt, but I suppose it's a tricky situation because by trying to wipe this out I struggle to meet my tax bill, and also I haven't been able to save in general," she says.

She doesn't have a pension or any protection policies in place.

"My mother is in her sixties, and she worries constantly about how she will afford retirement as she doesn't have a pension – I'd like to be able to help, but really don't know what the best course of action is for her or for me."

The cure

Our panel of independent financial advisers (IFAs) agree that Holly is wise in prioritising her debts, as tackling these is essential before she considers other goals.

While considering pension provision and a property purchase is important, Robert Forbes, from Plutus Wealth Management, says: "It is good that she is thinking about the future, but she needs to gain control of the present before making any longer-term commitments."

Clear the debts

Holly should focus on paying off the debt with the highest interest rate first, which includes her credit-card debt and overdraft.

She also needs to work out a budget and ensure she is not adding to the problem by living beyond her means each month.

"She should make a list of what she spends her money on, and work out her rough monthly expenditure," says Mr Forbes.

Over time Holly should see a significant boost to her bank balance by making small changes to her lifestyle.

Build up cash savings

There is little point in having savings if the interest earned is less than the amount paid on debt.

However, saving towards her tax bill rather than taking on more debt to cover this is a sensible first step.

Yet everyone needs spare cash to meet short-term emergencies or requirements. Holly should build up an additional pot after tackling her debts of around three months' salary, stresses Mr Forbes.

When she does have cash to set aside she can put up to £5,640 in a cash individual savings account (ISA) in the current tax year, as all interest earned is tax free. Using a comparison site, such as moneyfacts.co.uk, will help her find the best rates.

Dealing with tax liability

Simon Webster from IFA Facts and Figures stresses that Holly should make sure she has claimed for all business expenses as a freelancer, such as car-loan interest payments if she uses her vehicle for work, and an allowance for working from home if this applies.

"It also might be worth Holly setting up a limited company – depending on how many sources of income she has," he adds. "She should speak to an accountant with clients in her field to make sure she is paying the right amount of tax, as if she is paying too much this would free up some cash to pay down debt, or make savings."

Consider protection policies

Scott Gallacher from Rowley Turton adds: "Holly needs to protect what she already has – her income – as the financial consequences of her being unable to work due to ill health would be disastrous as she has significant debt and no savings."

He recommends that she consider an income-protection policy to provide her with a benefit of £2,000 per month to cover her bills, loan repayments and living expenses should she be unable to work due to long-term illness or disability.

Buying a first property

Wiping out debt will make her a more appealing proposition to lenders, and then she can start saving towards a deposit.

Mr Webster believes buying a property should be on the list before ploughing money into a pension.

To make getting onto the first rung of the ladder more affordable she could consider buying outside London and renting out the property, or look to purchase with a friend.

There are also schemes available to give her a leg-up onto the property ladder, such as the FirstBuy scheme. This offers the chance to buy a home with the assistance of a 20 per cent equity loan alongside a mortgage and deposit. The buyer does not have to make payments on the equity loan portion for five years.

However, Mr Webster adds: "This scheme is only available to those whose household income is less than £60,000. At present Holly doesn't qualify, but forming a limited company may help reduce the income she takes and give her this option."

She should aim to save at least 10 per cent of the property value. As a first-time buyer she could get a 95 per cent mortgage, but the rates would be uncompetitive at present.

Saving for retirement

How Holly plans to save towards retirement should be an important consideration.

She could start contributing even a small sum to a personal pension plan, alongside stocks and shares ISAs, but the advisers agree this isn't currently top of her to-do list.