Wealth Check: 'I'm desperate to get out of my overdraft'
Saturday 05 December 2009
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?
Monthly outgoings: £1,683.
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...
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.
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."
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."
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; request a free guide on NISAs from Hargreaves Lansdown
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