Wealth Check: 'I want to get on the property ladder – but I've got debts to clear'

Student Neelam Eman Ali hopes to swap her part-time work for a career in childcare. She needs to save to pay off her overdraft, and get a pension

The patient

Neelam Eman Ali from Watford in Hertfordshire wants to clear her debts and get her finances into better shape so she can start thinking about the future, and one day look at taking the first step on to the property ladder.

The 20-year-old is studying for a childcare diploma at West Herts College, which is due to finish next month, and lives with her mother in a rented council house.

While she doesn't pay rent, Neelam helps out with the household costs, including the phone bills, grocery shopping and petrol, thanks to a job as a crew member at a fast food outlet. "I've had the job for two years alongside my studies, but the pay isn't particularly good, and the working environment is quite hard, so I'd be keen to find an alternative place to work," she says.

When Neelam finishes her course, she plans on looking for a job in childcare. "But I'm also widening the net, and will look at other potential roles too, such as working as a receptionist or a PA," she says. "The problem is, I don't have much experience of this kind of work, so may struggle."

As Neelam has been studying and using money from her part-time job to help with the household bills, she has yet to squirrel any money away into savings. She also has debts to contend with. "I've run up £1,500 on my overdraft with Santander," she says. "I didn't even realise I had an overdraft facility until I'd gone a long way into the red. I am slowly paying this back, but it's going to take some time. On the plus side, I don't have any debts on cards or loans to worry about."

As yet, Neelam hasn't given much thought to pension planning; she also has no protection policies in place.

"My main priority is clearing my debts so I can start saving money," she says. "One day, I'd like to buy a flat, and also have enough money to go travelling.

"I'd like to take steps to sort my life and no longer live in a council area," she adds. "I'd also like to help my mum by taking steps to ease the financial pressures at home."

The cure

Our panel of independent financial advisers agree that while Neelam has a number of perfectly reasonable financial goals, some are simply unachievable at this stage.

They suggest the best starting point to achieve her objectives is by improving her employment position. They also urge her to begin budgeting carefully, deal with her overdraft, and look to build up her savings for the short-term, and eventually for the longer-term.

Review employment plans

While Neelam needs to improve her employment position, this is easier said than done in the economic climate, when many young people are struggling to find jobs, says Patrick Connolly from Chase de Vere.

"Nonetheless, Neelam needs to have some direction," he says. "She needs to ask herself whether she wants employment in the childcare field – or whether she is indifferent."

Given that Neelam isn't happy with her job at the fast food outlet, she needs to start proactively looking at the job market now, he adds. "If she can secure a new job which she enjoys – and which pays her more money – her overall financial position should improve markedly," he says.

Draw up a budget

At this stage in life, the best thing Neelam can do is get into some good habits with her personal finances, according to Christopher Wicks from Bridgewater Financial Services.

"She should begin by making sure she knows exactly how she spends her money," he says. "She should also keep a record of outgoings, and check the rates on phone tariffs and other household bills are competitive."

Useful comparison sites for comparing rates include uSwitch.com and moneysupermarket.com.

Deal with debts

Neelam's main priority should be to pay off her overdraft, as charges can be hefty, according to Mr Wicks.

Nick Evans, from One Life Wealth Planning, suggests Neelam may want to consider converting the overdraft into a personal loan over a period of say, three or four years.

"On the downside, it may cost her more in total to repay this debt – even allowing for a lower interest rate – as it will take her longer to pay it off," he says. "But the clear advantage is she can reduce her monthly outgoings. Overdrafts are one of the worst forms of debt, as it's so easy to build up debt unless they're used with great discipline."

Start to build up savings

Once Neelam has paid off her debts, her next financial priority should be to build up her cash savings.

"It's very important to have emergency cash savings," says Mr Connolly. "This will help to avoid the need to go into debt if money is required at short notice."

As a starting point, Neelam should start saving into a cash individual savings account (Isa).

"In the current year the limit is £5,760," says Mr Connolly. "All interest is earned tax-free."

If Neelam is able to build her pot of savings, this will also put her in a better position to achieve her longer-term financial goals, such as buying her own home.

"The key now is for Neelam to get into the habit of putting money into savings each month," adds Mr Evans. "Even if she occasionally has to take it out again, the habit will be rewarded. And, once she starts her new career, her earnings will hopefully increase – giving her the perfect opportunity to increase the amount she saves."

Don't ignore planning for the longer term

Right now, Neelam's huge advantage is her age, according to Mr Evans.

"As she's still young, she can be forgiven for not having thought much about savings, investing, pensions or protection," he says.

That said, Mr Connolly adds that she will need to think about putting money into pensions and other investments at some point.

"First and foremost, she needs to focus on paying off her debts and building cash savings," he says. "But once she's been able to secure a job which she thinks she will stay in for some time, she should look into joining any pension arrangements offered by her employer, and particularly if the employer makes contributions."

He also points out that while there's no desperate hurry for Neelam to start pension saving, the sooner she starts saving for retirement, the more time her money will have to grow into a decent pension fund.

Review protection further down the line

As Neelam has no obvious protection needs, she doesn't need to worry about protection products for the time being, says Mr Connolly.

"But when she manages to secure a full-time job she should review any protection benefits offered by her employer," he says.

Mr Wicks agrees that while life cover is not necessary in her current position, she will need to think about this insurance once she starts working and if she has a family.

Don't rely on getting married

While Neelam talks about wanting to get married in a couple of years' time, Mr Connolly warns her not to hold back on her financial planning because of this.

"Her planning should take account of her position today," he says. "It can then be tweaked if her circumstances change in the future."

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