Wealth Check: 'How can I not get into huge debt and so avoid the stress my parents felt?'
A recently-graduated charity worker needs to prioritise her goals to ensure she makes the best use of her salary
Sunday 15 May 2011
Kate Waters from Leigh-on-Sea, Essex, has found it difficult to manage her finances since graduating from university with a pile of debts, but is keen to get her finances back on track now she is earning a regular income.
The 25-year-old has been earning a salary of £24,450, working in marketing for a charity for the past five months, but still has student debts of around £16,000.
"I always struggled to get by at university, and it took me more than a year after graduating to clear a £2,000 overdraft," she says. "Then I went back to college to study journalism, and spent a further six months out of work before getting a low-paid first journalism job."
Kate pays £70 a month towards her student loan and £75 per month for the graduate loan; there is £1,100 remaining on the graduate loan.
She also owes around £1,500 on a NatWest credit card with an annual percentage rate of around 17 per cent, and has a £500 interest-free overdraft with her NatWest graduate account.
"Postgraduate training, low-paid work while trying to establish a career, and lots of moving around – including stints abroad – have all made financial stability seem like an impossible goal," says Kate. "But I do now try to pay back between £25 and £100 each month on my credit card, and never go more than £200 overdrawn."
Kate rents a one-bed flat with her boyfriend, and her share of the rent works out at £340 a month. She also spends £300 per month on a season ticket to commute to London.
"Now that I'm settled in my flat and have the job I've always wanted and a decent salary – for my age – I'm keen to sort out my finances properly," she says. "I've also just received the good news that I have inherited £4,000, which I expect to receive in a few months' time, so this will give me the opportunity to clear my graduate loan and credit card debts and start again with a clean slate."
At present, Kate has no savings, no pension, and no protection policies.
"I realised recently that I have never saved for anything and know this has to change," she says. "My first goal is to save enough to go on holiday outside of Europe. But I'm also aware that I need to start paying into a pension and saving for a deposit on a house."
Kate is looking to join her company's pension scheme soon as her employer offers a generous 7.5 per cent of pensionable salary, provided she contributes at least 2.5 per cent.
"I want to get into good habits to ensure I don't end up like my parents' generation, as I've seen how much stress huge debts can cause," she says. "I need to sort my finances now to plan properly for the future."
Our panel of independent financial advisers agrees that while Kate has had a difficult time establishing herself financially since university, she got off to a good start by clearing a large overdraft and is now on the right track towards paying off her remaining debts. With a new job and her income heading in the right direction, they urge her to prioritise her short, medium and long-term goals.
Kate receives around £1,580 a month after income tax and national insurance. "Having paid her rent and monthly commuting costs, this leaves her with £940 to pay for her living expenses, bills and interest on loans," says Jaskarn Pawar from Investor Profile. "Kate says that she wants to develop some good habits. I think the best habit she can get into immediately is spending less than she earns. It's not always easy to do, but living within your means is a great mentality that will pay off in the long run."
Clear the debts and set realistic goals
Kate should use the £4,000 inheritance to pay off both the remaining £1,100 graduate loan, and the £1,500 she owes on the NatWest credit card, according to Mr Pawar. "This should be done straight away as these are costing her money," he says.
Nick Evans, from One Life Wealth Planning, adds that while the expected inheritance will be a great opportunity to clear debts, the good habits will be formed from what Kate chooses to do with the money she is currently spending on debt repayments.
"Start by focusing on the things you want to achieve," he says. "Set yourself some clear goals and attach timescales to them. You won't be able to do everything, so prioritise those goals. Keep a focus on what is important to you and why."
Get into the savings habit
While Kate has identified two goals – to save for a holiday outside Europe and a flat deposit – she also needs to build up some emergency funds to help avoid getting into debt again if she needs money quickly, according to Robin Keyte from Towers of Taunton.
As a rule of thumb, Kate should look to slot away between three and six times her normal monthly expenditure and should use a cash individual savings account (ISA) to benefit from tax-free interest. Current limits allow up to £5,340 to be invested in a cash ISA in this tax year.
Mr Pawar picks out the Santander Flexible ISA issue 3, paying 3.3 per cent, and the Santander Fixed Rate Monthly Saver issue 12, paying 4 per cent.
"Kate could also set up a separate account to save for her holiday," he says. "It doesn't matter if this account and the ISA have only smaller amounts going into them for now. Just the habit of moving a portion of her income into savings each month will be a good one."
Mr Evans adds that Kate needs to be able to maintain the discipline of saving for the short, medium and long term, and must avoid the temptation to dip into longer-term savings for shorter-term needs.
Kate is right in wanting to allocate a certain amount of her savings into a pension each month, says Mr Pawar.
"The employer pension scheme seems very generous, so I would suggest she makes full use of that," he says. "This will force her to regularly put some money towards her retirement. A contribution of 2.5 per cent is just £50 a month, which should be affordable for Kate, and the total benefit in the longer term will be far greater."
Mr Keyte agrees that Kate should definitely join the scheme, but adds that she needs to think carefully about her choice of investment funds.
"Kate's pension funds will probably be invested for up to 40 years, so a fund mostly invested in shares would be preferable," he says. "While the fund price may be volatile and go up and down a lot, the short-term volatility is very small compared to the likely long-term compound returns."
Kate should ask her employer what other benefits are offered as well as the pension, according to Mr Keyte.
"The area of cover of most use to Kate would be income protection, which will provide a replacement income in the event of long-term sickness," he says. "If this cover is not offered by her employer, she could purchase a policy from just £24.60 a month. Money may be too tight at present, but if Kate gets a reasonable pay rise in the future, she should definitely consider this."
Do you need a financial makeover?
Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF or email email@example.com
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Pension mortgages: 'The advice I was given was wrong and now I face losing my home'
Minister's pension promise to firefighters challenged
Gold-plated pensions – the key to retirement freedom?
Mark Dampier: Maybe boom, maybe bust, but we'll probably just muddle along
Your money: Let’s hope for a fairer, more honest 2015
- 1 PlayStation and Xbox hacked by Lizard Squad
- 2 Katie Hopkins speaks out on childhood obesity: 'Parents of fat children should be prosecuted for child cruelty'
- 3 The Grace Dent Christmas Questionnaire
- 4 The 'Black Museum': After 150 years, public set to see exhibits from police’s grisly crime museum
- 5 Vagina canoe artist defends herself over ‘obscenity’ charges
British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Rozanne Duncan: Ukip expels councillor for 'jaw-dropping' comments made in BBC TV interview
Germany anti-Islam protests: 17,000 march on Dresden against 'Islamification of the West'
Ukip member gets into Christmas spirit with Union Flag plea to Santa 'for our country back'
BBC director Danny Cohen: Rising UK antisemitism makes me feel more uncomfortable than ever
Alex Salmond has 'broken his word to the Scottish people' says Scottish Lib Dem leader
iJobs Money & Business
Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...
Not specified: Selby Jennings: SVP Model Validation This top tiered investment...
Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...
£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
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