Declan McKay, 22, is a student who supplements his income by working as a barman. He lives in a rented property in Woodlands, Glasgow.
As he is entering the final year of his English literature degree, he is eager to begin planning for his financial future and learn the best way to clear his overdraft and student debt. "I want to know the most effective way to clear my student debts and begin saving money for the future," says Declan.
As well as completing his degree and clearing his debts, Declan is also keen to get a foothold on the property ladder and enter full-time employment. "I would like to have a steady income within three few years of leaving university, with a view to buying my own house by the age of 30. I am unsure of the exact job I would like to have but my degree will definitely benefit me if I work in something creative," he says.
Income: £500 per month
Monthly outgoings: £300 rent, £200 living expenses
Debt: Student loan and overdraft
Advice this week is given by Anna Sofat of Addidi and Danny Cox of Hargreaves Lansdown...
Savings and overdrafts
The experts agree that Declan needs to work out a list of realistic financial expectations and stick to a stringent monthly budget if he is to pay off his student debts. His top priority should be to clear his overdraft because as soon as he leaves university his bank is likely to roll this into another product. The new overdraft is likely to cost more and so he should make it a priority to repay this back as soon as it's feasible.
"In order to start saving, Declan should set himself a budget," says Cox. "Even on his current modest income, setting and sticking to a budget is a good habit to get into. Perhaps the easiest way to do this is first to list all of his expenditures item by item. Then he should categorise each item as either essential, important but not essential, or luxury."
Cox says Declan should clear his overdraft before he starts to save. "He should set himself a target of how much he is going to repay each month toward the overdraft and stick to it. Overdrafts, alongside credit cards, are often the most expensive forms of debt. Converting an overdraft to a loan is generally not a good idea because over time the cost of repayment will end up being much higher."
Once the overdraft has been paid off, Declan should divert the debt repayments to savings, says Cox. "Declan should set a target that is realistic but not so high that he has no chance of meeting it and loses motivation. However, it needs to be high enough for it to be meaningful."
For new savings, Declan needs to build a cash cushion. "A cash ISA is perfect for this portion and, once working, Declan can save up to £300 a month or £3,600 a year in this way (£5,100 a year from 2010/11). Cash ISAs are tax-free, meaning a much better rate of return than a savings account. And by shopping around, Declan can maximise his interest returns," says Cox.
"Declan will need a decent deposit if he is to have a chance of owning his own home. He will need a deposit of at least 10 per cent of the purchase price. As soon as he is in work it would make sense to set aside some savings for his future goals," says Sofat.
Cox advises Declan to start saving for retirement as soon as he gets a full-time job. If the company he works for offers a pension scheme, Declan should join, particularly if the employer also pays into the scheme.
Cox says: "Retirement may be a 'lifetime' away, but a £100,000 pension fund today will pay an income to a 65-year-old of around £6,000 a year.
"Add in increasing options and bring that forward to the age of 60 and a £100,000 pension fund will provide a starting income of nearer £4,000 a year.
"Those who have ambitions of retiring before 65 – and for Declan, the state pension will not be paid until age 68 – will have to start saving early to have any chance of doing so," adds Cox.
Declan is graduating into a highly competitive job market, so needs to think hard about the type of job he wants. Sofat says: "Declan's key priority on graduating will be to find a job – the economic climate is not very good and many prospective employers are cutting back so it's imperative that Declan spends some quality time assessing what career he might want to pursue.
"He could compile a long and then a short list of job ideas and use that as a basis to get work experience in several different areas before deciding on a final career. He might have to do unpaid work experience so will probably need to continue working as a barman to fund his living costs during this period," says Sofat.
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