Jonathan Harding, 22, has just started his first full-time job as an analyst for an insurance company, and is facing a number of debts having just finished his studies. After completing a Masters degree in computer science at the University of East Anglia, he has a student loan, graduate loan, career development loan and an overdraft of around £17,000.
Jonathan is keen to clear his overdraft and career development loan within the next year, and also wants to pay off his graduate loan as soon as possible.
Although he is keen to save for a deposit to buy a house, Jonathan is having trouble putting any money aside while he is paying off his debts. However, he does contribute to his company pension scheme. "I worry that, should the need arise, I would find it difficult to take on any more financial commitments," he says.
We asked three financial advisers for their recommendations: Nick Wilson of Wilson Dean Financial Services Ltd, Tom McPhail, of Hargreaves Lansdowne, and AJ Somal of the Montpelier Group.
Case notes: Jonathan Harding, analyst, Norwich
Income: £16,500 annually
Property: £280 per month, rents a flat with a friend
Pensions: £660 annually
Debts: Current account overdraft – £1,933; career development loan, graduate loan and student Loans totalling around £15,000. Monthly Outgoings: £434 per month
Both Wilson and McPhail agree with Jonathan that clearing his career development and graduate loans should be his first priority. As Wilson says: "I suggest he diverts as much as he can toward this goal, checking first that there are no penalties for overpayments with either loan."
The most expensive debt he is currently paying off is his graduate loan with HSBC, and once that is clear he can continue to the next. As for his student loan, Wilson says: "Student loans normally offer an artificially low rate of interest and so he should not be in a hurry to repay this."
Only after Jonathan has cleared his debts can he start thinking about saving. With so much to pay back, he will have little or no money to put aside each month. Somal suggests that once he has cleared his debts he should "consider saving on a regular basis by opening a Mini Cash ISA, which would eventually be used towards a deposit for a purchase of a property." Somal recommends the National Savings & Investments' Direct ISA, which offers a current rate of 6.3 per cent.
Although Jonathan probably has insurance through his employer, McPhail points out that he should check what the terms of this are. "Often such schemes are less generous than people expect." Wilson agrees, adding that as Jonathan is almost entirely dependent on his income he should look to insure against losing it with an income protection policy, which would pay out a pre-defined tax-free monthly income should he be unable to work because of an accident, sickness or disability. This is, however, only feasible when some extra money is at hand, because this type of scheme costs money, and might not be something he is willing to invest in at the moment.
At the moment, Jonathan's pension will have to be one of his lowest priorities, because of the more pressing issues of his debt. However, the advisers all agree that it is good that Jonathan is already a member of his employer's pension scheme. Somal says: "As he has joined the scheme at an early age, he has an ample amount of years to accumulate a large pension fund at retirement."
McPhail agrees and suggests that Jonathan thinks about investing 100 per cent of his pension in equities: "He shouldn't be frightened of investing in higher-risk funds – there's plenty of time to be cautious later," he says.
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