Wealth Check: 'I chose love over cash, but how can I now save?'

A charity worker with a restricted income but low overheads should build up a nest egg rather than rush to pay off her student loan

The patient

Rosa Ellis, 26, from Islington, north London, took a salary cut to work for a charity, and is keen to ensure what spare cash she has is working as hard as possible.

"I chose love over money three years ago to move from the private sector, working in public relations, to the international development organisation Health Poverty Action," she says. "There is so much unnecessary poverty in the world, and working for an organisation that is tackling the global injustices that keep people poor makes me excited to go to work – but it also means I need to be more careful with my own finances."

She earns £25,000 as a communications officer for the charity, and while this meets her outgoings it makes it tricky to set aside any savings for a rainy day. However, she has £3,000 in a Halifax cash individual savings account (ISA), currently paying 1.75 per cent, which was built up during her previous employment.

"I hope that, maybe, one day I'll have enough for a deposit on a flat," she says. "Or should I focus on repaying my student loan before I try to save?"

Rosa has £12,000 in student loans to pay off. She pays £74 a month towards this, and makes sure to steer clear of any further debt.

She benefits from being part of a non-profit housing association and has very cheap rent by London standards: £400 a month, split with her boyfriend, for a one-bed flat.

In the medium term she would like to study for a master's degree in international development or human rights. "But I'm not sure I'd be able to do that and save for a deposit, so should I give up on one of these dreams?" she asks.

Turning to long-term planning, Rosa hasn't yet started paying into a pension. "I've only been working here for five months and I haven't set it up yet," she says. "They offer a defined contribution pension scheme, where I pay up to 5 per cent of my gross salary and my employer matches this." She has no protection policies in place.

The cure

In an ideal world Rosa should wipe out debt while squirreling away spare cash alongside saving long-term into a pension. However, our panel of independent financial advisers (IFAs) realise this is too big a task given her small income.

They say her first priority should be budgeting to set aside a bigger pot of cash savings to be put towards future goals, and joining her company pension scheme would be a wise move, given that her employer also contributes.

Draw up a budget

Rosa should make a list of what she spends her money on, the advisers say. This should be simple and show where money can be saved by, for example, switching energy suppliers or cutting down on nights out.

Anna Sofat at IFA Addidi Wealth says: "I estimate that Rosa gets around £1,550 a month after tax and her student loan. Assuming her fixed overheads amount to around £550 a month including rent, utilities and travel, she has good scope to save between £300 and £500 a month." While building up substantial savings could be a struggle on Rosa's salary, over time budgeting should become second nature and she will reap the rewards.

Build cash savings

Rosa has some "rainy-day" cash in the Halifax ISA. However, she could benefit from a higher rate.

Claire Walsh at IFA Pavilion Financial Services says: "While Rosa benefits from such low rent, she should seek to continue to build her savings in an accessible cash account, and whether this is the foundations of a deposit or towards paying for a master's can be decided at a later stage."

Tony Larkins at IFA Beacon Wealth Management says: "A cash ISA should be maintained for these savings, but a regular review of which provider has the best rates is to be encouraged." Rosa can save up to £5,640 into a cash ISA in the current tax year and all interest earned is tax free. Using a comparison site such as moneyfacts.co.uk or moneysupermarket.com will help find the best rates.

Ms Sofat adds that Rosa could consider saving around £100 a month into a stocks and shares ISA for potentially greater returns over a medium timeframe of five or more years – although this involves greater risk to her capital.

Dealing with student debt

As Rosa started higher education between 1998 and 2011 she will be paying interest of 1.5 per cent a year. Repayments are set at 9 per cent of salary over £15,795. With such a low interest rate, there is no great urgency for Rosa to pay off this loan. She can concentrate on other financial priorities and gradually wipe out this debt.

Pensions and the long term

Rosa is around the age when she should start saving into a pension, and the advisers stress that she should join her company scheme.

"She should contribute the maximum 5 per cent of salary to receive her employer's maximum match-funding," Ms Walsh says.

"Pension savings receive income tax relief, so for every £80 Rosa loses out of her pay, the tax man contributes £20 and then Rosa's employer matches the total contribution.

"So on her salary, with a 5 per cent contribution, she will lose £83 from her take home pay, but she will gain £208 into her pension fund, helping to start her savings for retirement."

Buying a first property

Buying a property won't be a realistic objective unless Rosa is able to save up a deposit.

A solution could be to buy outside the capital, or look to buy with a friend, or take advantage of a shared-equity scheme to give her a leg-up on to the property ladder.

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 will be uncompetitive. This might take some time, so she will need to be patient.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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