Wealth Check: 'I want to travel the world before I have too many responsibilities'
Bad luck mate, you owe too much already. Earn more and spend less is the unglamorous advice.
Sunday 09 November 2008
Ben Allen, 27, wants to take time out to go travelling, but with £20,500 of debt, he risks sinking further into the red. "More than anything, I'd like to go around the world for about six months before I have too many responsibilities," he says. "But I feel anchored to this country by my debt."
Beside £12,500 in student loans, he owes £8,000 on credit cards. This includes £2,000 on a Royal Bank of Scotland card with interest charged at 16.9 per cent and £500 on an MBNA card at 15.9 per cent.
He also takes advantage of cards offering interest-free, balance-transfer deals when possible, with various sums accumulated across these. "I tend to pay the minimum off on all my cards, and switch between the best deals when I can, although I worry that with the credit squeeze this will become difficult to do," he says.
He has £4,500 on a Virgin credit card on a 16-month interest-free balance transfer deal; £500 on a Citibank card on a 13-month deal and £500 on an Egg card at 0 per cent until January 2010.
"These cards helped cover expenses before I started my current job about three years ago, so I could meet rent and basic bills when I was earning very little," he says. "I budget around £100 a month to meet the minimum payments across these."
As a digital marketing consultant for a music and entertainment public relations company, Ben earns around £25,000 a year. He would like to save towards buying as home, but has yet to start.
However, he hopes that the additional £2,500 a year he makes as a freelance DJ and artist liaison worker for festivals and events around London will help enable him to start setting money aside.
"I don't know which account to pick though," he says. "All my spare cash simply sits in my NatWest current account, and I tend to have around £600 for personal spending left after all bills." He rents a room for £510 a month in a five-bedroom house in Bethnal Green, east London, but hopes to buy his first home in a few years.
Ben is not contributing to a pension plan and has no protection policies. "I'd like an investment or initiative that will afford me some future financial security, but I'm not sure what this is," he says.
As a priority, Ben needs to slash his spending and take control of his finances, agree our panel of independent financial advisers (IFAs).
"Ben is displaying the classic traits and symptoms of the financially crippled patient of our age," says Matthew Woodbridge from Chelsea Financial Services. "He's young, free-spending, heavily leveraged and reliant on credit cards." However, with a little budgeting he should be able to get out of the red in due course, although any travel plans should be "put on ice" until this is achieved – particularly in the face of a gloomy economic outlook.
Ben should use as much of his disposable income as possible to cut his debts, starting with the Royal Bank of Scotland card, which charges the most interest.
"It is clear that at £100 a month, the £8,000 credit card debt is going to take years to pay off, as much of this payment will be absorbed by interest," warns Danny Cox from Hargreaves Lansdown. "Tough step number one is to cut up these cards and clear this debt."
He is wise to worry about an end to 0 per cent deals on cards because these are drying up, add the advisers. "It should be his priority to rid himself of this debt before being landed with hefty interest payments once these deals expire," says Mr Woodbridge.
The interest he pays on debt will typically be higher than the interest earned on his savings, so he should redirect as much of his personal spending money towards wiping this out. Once he has tackled the most expensive debt, he can turn to the card with the 0 per cent deal that is due to expire first.
"These deals do charge interest of a sort because they levy a balance transfer fee of around 2.5 to 3 per cent of the debt," says Caroline Hawkesley from Evolve Financial Planning. "They also generally charge their standard rates of interest on any further credit built up on them."
The rate of interest on student loans is 3.8 per cent, and is set in line with the Retail Price Index each September. Ben can continue paying this low-cost debt off gradually.
Ms Hawkesley says that while Ben needs to put aside some "rainy day" money, there is no point saving until he has cleared his debts. He can then start with a tax-free cash individual savings account (ISA) offering a competitive rate of interest. Under HM Revenue & Customs rules, Ben is allowed to save up to £3,600 a year in a cash ISA. A search on moneysupermarket.com or Moneyfacts.co.uk will help him to find the best ISA on offer.
Once Ben feels his credit-card debt is under control, he needs to start building up funds. "He should save a cash buffer of around three months' salary," says Mr Woodbridge. "And then, only then, should he begin to consider an investment portfolio."
In addition, if he can increase his freelance earnings beside his salary, this will help produce spare funds to set aside for long-term financial security, add the advisers.
When he is in a better financial position, he can consider saving for his own home. Fortunately, with prices set to slide for some time yet, there is no rush to do so. When he does take the plunge, he could consider buying a home with his parents as guarantors, says Mr Cox. Taking this route should help Ben secure a mortgage deal. At present, some lenders are asking for big deposits. In order for Ben to gain access to the best mortgage rates he will need a substantial deposit of more than 10 per cent of the property value.
Ben should find out if his employer runs an occupational pension plan and if it will make contributions on his behalf, stress the advisers. If not, he can set up his own personal pension with a good provider such as Scottish Widows, which has low charges and access to a decent range of funds.
"It is important to start saving into a pension as early as possible, but this is not a priority until he has cleared his debts," says Ms Hawkesley.
As Ben has no dependants, there is no need for life cover. But he should still check what benefits are offered by his employer. Some employers, after all, offer death in service payments equivalent to a year or more's salary.
Do you need a financial makeover? Write to Julian Knight at The Independent on Sunday, 191 Marsh Wall, London E14 9RS; firstname.lastname@example.org
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