Wealth Check: 'I'm in debt and want out. Help!'

Matthew Phillips, 38, from Brighton, has recently returned from living abroad. He is looking to settle down into a more stable lifestyle so he can pay off his debts within the next five years.

Matthew earns an annual salary of £17,000 as part of the property team at a local newspaper in the West Midlands. The job has "brought me some much-needed stability, as it is the first nine-to-five job with a regular wage I've had in ages," he says. He previously worked as a freelance fitness instructor, and the irregular income made it difficult to amass any savings.

After returning to the UK, Matthew took out a £7,000 loan at 6 per cent interest from Natwest in order to consolidate his debts and set up house. He also owes £3,000 in student loans and has £2,000 on his MBNA credit card at 2.5 per cent until April 2008.

Matthew rents a flat in Warwick with his girlfriend. He has no protection policies, but plans to join his firm's pension scheme after working there six months. He used to own a house, purchased jointly with his parents, but sold it "to avoid the temptation of re-mortgaging to get out of debt."

We asked three financial advisers to look at his situation: Keith Churchouse of Churchouse Financial Planning, Dane Halling of Artcturus Investments, and Jason Witcombe of Evolve Financial Planning.

Case notes: Matthew Phillips, 38, advertising salesperson, Leamington Spa

Income: £17,000
Pensions: None
Savings: None
Property: Pays £275 a month in rent
Debts: £7,000 Natwest loan, £3000 student loan, £2000 on a credit card
Monthly outgoings: £900-£1100

Debts

"Matthew needs to pay off his debts, and if he has no excess income then he's got a big problem," says Witcombe. "Get back to basics by sacrificing luxuries like a mobile phone and eating out, in order to generate excess income over expenditure." Halling agrees that "the key for now is discipline in discretionary spending". Churchouse recommends that Matthew keep a record of his spending and try to control it by budgeting.

Savings

"Matthew should consider putting some money away for a rainy day," Churchouse says. He recommends that Matthew aim to accumulate three to six months' salary in case of emergency. To avoid the temptation of spending that money, Churchouse urges that Matthew set up a standing order from his Natwest account to a cash ISA. Halling adds that in the long term, the ISA savings plan could evolve into an equities-based fund, "which can in turn be the funds for an eventual pension plan."

Pension

Because Matthew has lived abroad, Churchouse suggests that he first verify his state pension forecast to check that he will be entitled to a full state pension. He can do this using a BR19 form available on the pension service's website. Witcombe advises Matthew to join his company's pension scheme as soon as he can. "If, however, the employer won't match his contributions, then he should delay pension contributions," he adds. "He would be better off paying down his debt and building up a cash buffer."

Protection

Some employers offer income protection of up to 70 per cent of earnings; Witcombe recommends that Matthew check whether he has access to such benefits at his company. If not, Churchouse suggests that Matthew consider taking out a Permanent Health Insurance (PHI) plan to ensure that he has some sort of income in the event he falls ill and can't work.