Wealth Check: 'I'm desperate to get out of my overdraft'

Like many graduates, Claire Dodd is still struggling with student debts. The 25-year-old magazine journalist from Manchester arrived in London three years ago to study for a postgraduate degree, which sank her into a cycle of eye-watering borrowing. She now has a good writing job and a vibrant social life, but her debts have become a daily worry.

"It really was my second degree that sank my finances and drank my money," she says. "The course was full-time so I was unable to work alongside it and relied on the little money I had saved. Since being a student I have never not been in debt and I'm desperate to clear it."

Claire recently finished paying off a £1,000 credit card debt and several parental loans, but regularly hits her overdraft limit of £1,750. She loves going out and wants to buy driving lessons next year. Can Claire live life to the full while still clearing her debt?

Case notes

Salary: £24,000.
Monthly outgoings: £1,683.
Savings: None.
Debts: Approx £1,750 overdraft.

Giving advice this week are Gordon Bowden from Quainton Hills Financial Planning, Danny Cox from Hargreaves Lansdown and Philip Pearson from P&P Invest...

Debts

Claire showed strong will in paying off her other debts, but she is still saddled with an overdraft which is costing £14.50 per month in interest. The experts agree clearing this should be her priority, but it will be tough with London prices eating into her salary.

"If she were to go over her overdraft limit the interest and charges would be punitive," says Bowden. "The solution for Claire is simple – if a little unpalatable. She either has to earn more or spend less."

Claire is not prepared to trade in her job, so it will have to be the latter. A great way to budget is to list expenditure by item, according to Cox. He recommends marking each with the labels "essential", "important but not essential" and "luxury".

He says: "Important but not essential might include items such as her mobile phone or gym membership. Here, Claire should look very carefully at whether expenditure could be eliminated completely or alternatively, savings made by shopping around."

But cutting out luxuries like eating out is where the biggest savings can be made. He adds: "It is amazing how less important a shop bought latte becomes if you have to record every one you buy."

By Cox's estimation, Claire could be free of the debt in 10 months if she repaid her overdraft at £200 per month. He also recommends replacing the debt with a personal loan, which can reduce the interest rate.

Savings

Not many people can boast of job security in this climate, so it's worth putting a bit away just in case. Once Claire is free of her debts, she should stick to a modest budget and save £200 per month to provide a financial cushion.

Pearson says: "Claire needs to establish a contingency fund to cover the uncertainties in life. Without this there is a high risk that she will fall back into debt."

He recommends aiming for a minimum of three months net income to put aside and suggests taking out an account with the Principality Building Society, which provides a fixed interest rate of 4.5 per cent for 12 months and requires minimum monthly deposits of £20.

Cox also recommends cash ISAs, which are tax free and give much better rates of return than savings accounts. He stresses the importance of transferring savings on pay day to avoid them being spent.

But savers have to be proactive with their money even when it is safely put away, or it could be in danger of going stale. Bowden warns: "Claire would need to monitor her account because they usually have a maximum total amount that obtains the high interest rate and the high interest rate only lasts for a fixed period."

Future

Retirement is a long time off for Claire, and she currently has no pension. But Pearson warns a sobering 10 per cent of her lifetime salary must be invested to get a decent retirement income, so the sooner she starts, the better.

She could go privately, but company schemes are usually best, as the employer makes contributions and the employee's own savings get income tax relief. Cox explains: "Her pension contributions will reduce her take home pay.

"However, if, for example, her employer were to match her contribution to a maximum of 5 per cent of her salary, at a cost of just £80 a month to Claire, a total of £200 would be going into her pension, nothing short of a good deal."

Pearson also recommends taking permanent health insurance, which would provide an income if she were to suffer from long-term sickness. He says: "The longer the deferred period before payment is made, the lower the premium."

Conclusion

Claire lives for the moment and is 100 per cent focused on her career, but if she knuckles down and takes her finances by the horns now she can expect an easier and wealthier future.

For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email wealthcheck@ independent.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
Night job: Pacha nightclub DJ, Joan Ribas, is the new kingmaker on the island
news
Arts and Entertainment
Nicole Kidman plays Grace Kelly in the film, which was criticised by Monaco’s royal family
film'I survived it, but I’ll never be the same,' says Arash Amel
Life and Style
Retailers should make good any consumer goods problems that occur within two years
tech(and what to do if you receive it)
Life and Style
healthIf one was missed, vomiting blood was seen as a viable alternative
Life and Style
tech
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Guru Careers: Graduate Editor / Editorial Assistant

    £16 - 20k: Guru Careers: A Graduate Editor / Editorial Assistant is needed to ...

    Day In a Page

    Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

    Blundering Blair quits as Middle East peace envoy – only Israel will miss him

    For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
    Fifa corruption arrests: All hail the Feds for riding to football's rescue

    Fifa corruption arrests

    All hail the Feds for riding to football's rescue, says Ian Herbert
    Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

    The Kurdish enclave still resisting the tyranny of Assad and Isis

    In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
    How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

    How I survived Cambodia's Killing Fields

    Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
    Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

    How Stephen Mangan got his range

    Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor
    The ZX Spectrum has been crowd-funded back into play - with some 21st-century tweaks

    The ZX Spectrum is back

    The ZX Spectrum was the original - and for some players, still the best. David Crookes meets the fans who've kept the games' flames lit
    Grace of Monaco film panned: even the screenwriter pours scorn on biopic starring Nicole Kidman

    Even the screenwriter pours scorn on Grace of Monaco biopic

    The critics had a field day after last year's premiere, but the savaging goes on
    Menstrual Hygiene Day: The strange ideas people used to believe about periods

    Menstrual Hygiene Day: The strange ideas people once had about periods

    If one was missed, vomiting blood was seen as a viable alternative
    The best work perks: From free travel cards to making dreams come true (really)

    The quirks of work perks

    From free travel cards to making dreams come true (really)
    Is bridge the latest twee pastime to get hip?

    Is bridge becoming hip?

    The number of young players has trebled in the past year. Gillian Orr discovers if this old game has new tricks
    Long author-lists on research papers are threatening the academic work system

    The rise of 'hyperauthorship'

    Now that academic papers are written by thousands (yes, thousands) of contributors, it's getting hard to tell workers from shirkers
    The rise of Lego Clubs: How toys are helping children struggling with social interaction to build better relationships

    The rise of Lego Clubs

    How toys are helping children struggling with social interaction to build better relationships
    5 best running glasses

    On your marks: 5 best running glasses

    Whether you’re pounding pavements, parks or hill passes, keep your eyes protected in all weathers
    Joe Root: 'Ben Stokes gives everything – he’s rubbing off on us all'

    'Ben Stokes gives everything – he’s rubbing off on us all'

    Joe Root says the England dressing room is a happy place again – and Stokes is the catalyst
    Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

    Please save my husband

    As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada