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



The Patient


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."

The Cure

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.

Manage cash-flow

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.

Pension saving

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."

Protection

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 j.knight@independent.co.uk

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