Wealth Check: 'How can I stop sliding into the red?'

Each week we give 'Independent on Sunday' readers a financial makeover
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The problem

"I'm always overdrawn by a significant amount," says Catherine Osborne. "I live on my own and don't earn very much but always thought that if I could earn £1,000 a month after tax, that would be enough to live on.

"But I'm nearly there and it just isn't the case. I spend more than I earn."

In a bid to manage her finances, Catherine has set up two current accounts. Her salary is paid into the first to pay off the mortgage, bills and other debts.

Funds are then transferred into the second account. "There's usually about £400 left - it's my fun account."

Yet she says budgeting is a struggle. "One week after payday, I can be overdrawn [on the 'fun' account]. The danger is that, if something goes wrong such as the exhaust falling off my car, it really eats into the money I have each month."

She has managed to build up an emergency "rainy day" savings fund, with £2,145 in a Tessa-only individual savings account with her employer, the Nationwide building society. This Toisa pays 4.55 per cent.

She also has £225 in a Nationwide mini cash ISA, paying 4.25 per cent, and £2,000 in a Nationwide tracker ISA. She paid in £50 a month from mid-1999 to early 2003 before becoming disillusioned with the tracker's performance and freezing the payments.

Her biggest investment is her home. After a bruising encounter with an endowment mortgage, she has switched to a repayment deal.

She says she was lucky to buy her house when she did: in 1998, it cost her £40,000; today it is worth £110,000.

The £38,500 mortgage is also with her employer and made up of two repayment parts. The first is for £29,500 and works out at £165 a month; the deal is on a 4 per cent variable rate exclusively for Nationwide staff.

The second part is for £9,000 - a "further advance" taken out last year to buy a car and pay for home improvements. Also a special staff deal, it is set at a higher variable interest rate of 5.14 per cent. "I did look at a fixed rate [for the further advance] but decided against it; there was a £295 fee attached."

Catherine has neither critical illness cover nor income protection if she were to fall seriously ill.

Although only 31, she has saved for retirement through her employers' pension schemes since 1992, first with Habitat and then Nationwide. She contributes 5 per cent of her salary a month into the building society's final salary scheme.

Her overall debt is small: she owes £150 on a Bank of Scotland credit card that charges 14.9 per cent interest.

Interview by Sam Dunn

The patient

Catherine Osborne, 31, lives in Ipswich and works for Nationwide building society as a customer adviser.

Income: £13,474 basic (overtime takes annual salary to £15,500).

Savings and investments: £2,145 in a Nationwide Toisa; £225 in a Nationwide mini cash ISA; £2,000 in a Nationwide tracker ISA, into which she paid £50 a month from mid-1999 until early last year.

Goal: to avoid being constantly overdrawn.

The cure

Drawing up a budget should be Catherine's priority, says Ben Yearsley at independent financial adviser (IFA) Hargreaves Lansdown.

Philippa Gee, at IFA Torquil Clark, suggests setting up a standing order or direct debit to move a set sum of money to her second current account at the start of each month.

But first, advises Ian Smith of IFA Central Financial Planning, she should pay off her credit card debt or switch to a 0 per cent deal, since the 14.9 per cent with Bank of Scotland costs far more than anything earned on investments.

Retirement

Investing early has been a good move, says Mr Smith. Catherine is in a final salary scheme, so will benefit from extra payments. He recommends, though, that she keep an eye on her annual pension statements to check if the projected pension looks reasonable.

Property

The Nationwide 4 per cent deal for the bulk of her mortgage "appears a great rate", says Mr Yearsley. But the further advance at 5.14 per cent is "less attractive", says Mr Smith. Abbey's tracker mortgage offers a rate of 4.34 per cent, he points out, but he recommends staying with her employer because, with penalties for early redemption, switching could prove more expensive.

Protection

Although life cover is irrelevant for Catherine, as she lives on her own, Ms Gee recommends insuring against serious illness. "She should first check what benefits Nationwide offers. If she was off sick, how long would it pay out a salary?"

Failing policies from her employer, Bupa income protection cover costs £13.77 a month for an annual £6,250 payout, while CI cover providing a £50,000 lump sum costs £16.84 a month, adds Mr Yearsley.

Savings/investments

Catherine has "overdone her exposure to Nationwide products", warns Ms Gee, and a wider range of investments would give better balance. As long as she is prepared to accept some degree of risk, monthly payments could be restarted into equity funds such as Invesco Perpetual's Income fund or BWD's UK Blue Chip Growth fund.

As for her mini cash ISA, a better, 4.6 per cent rate is available at Abbey, advises Mr Yearsley. He recommends building a bigger emergency savings fund first before thinking about investing in stocks and shares again.

While Catherine's Toisa pays a decent rate, she must shop around for a good deal when it matures in 2006, adds Mr Smith.

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