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
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
- 2 Christians: The world's most persecuted people
- 3 The secret report that helps Israel hide facts
- 4 Danish TV reporter is all business up top, all party down below
- 5 Denmark bans kosher and halal slaughter as minister says ‘animal rights come before religion’
The secret report that helps Israel hide facts
A day in the life of Vladimir Putin: The dictator in his labyrinth
A new Russian revolution: The cracks are starting to appear in Putin’s Kremlin power bloc
Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
Were 'Poor Doors' added to mixed developments so wealthy residents don't have to go in alongside social housing tenants?
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
iJobs Money & Business
£500 - £600 per day + competitive: Orgtel: My client, a leading bank, is curre...
£20 - £22 per hour + competitive: Orgtel: Senior Fund Administrator, Top Four ...
£17 - £20 per hour: Cameron Kennedy Recruitment: My client, one of the worlds ...
£600 per day: Harrington Starr: SQL DBA/Developer SQL, C#, VBA, SQL Server, ...
Day In a Page
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000