Wealth Check: 'I'm just starting out and want to get into the habit of saving so I can buy a home'
Shona is desperate to get a hold of her finances so she can build for the future.
Saturday 06 June 2009
Shona, 21, has two paid part-time jobs, both in the charitable sector. She lives at home with her mother in Crouch End, north London.
Having graduated from Leeds University last summer, and only recently started paid employment, she is struggling to keep on top of her finances.
"I have no sense of financial control or budgeting at all. I spend without any idea of whether I can afford to spend, and so end up in a constant state of debt and borrowing from family members," she admits.
As well as help with getting her money situation under control, Shona is also ambitious to move home and get a car, so would like advice on saving so that she can work towards her goals. "I would like to be able to move into my own place within the next year. I would also like to pay off my existing debts and work towards buying a car," she says.
Income: Earns approximately £1,400 a month.
Monthly outgoings: £170 tax and National Insurance contributions, £750 living expenses including phone bill, food, going out and shopping.
Debt:Owes £1,445 in bank overdrafts and £13,000 to Student Loan Company.
Savings: ISAs worth £6,000.
Advice this week is given by Dennis Hall of Yellowtail Financial Planning, Danny Cox of Hargreaves Lansdown and Mark Osland of Formula.
All three experts agree that the top priority for Shona is to work out a budget. "Shona has identified what is probably the single most important factor that will determine financial success in her lifetime – budgeting. Regardless of the size of income, in my experience people that have grasped the concept of budgeting have the greatest financial stability," Dennis Hall says.
He recommends Shona calculates how much she spends each day by writing down all of her daily expenses in a notebook. "From this she can see where she can cut back and save more money." By writing down every time she spends money Shona can focus her mind and avoid over-spending, Hall points out.
"Once Shona has identified her spending, she should categorise it into three different types: essential (such as rent); important (such as clothing and mobile phone); and luxury (such as holidays, take-away coffees and eating out)," says Danny Cox. With all her spending listed, Shona can see where savings can be made, primarily by stopping or cutting down on luxuries and important items. "Armed with this information Shona can then set a strict budget which should create the space for repaying her debts and building better savings," says Cox.
Once Shona has worked out her budget, the experts recommend setting up a monthly direct debit from her current account to an ISA. This way each month a proportion of her income is being saved. Cox says: "If some of this surplus money is being set aside, perhaps with the aim of buying a car or, in the long-term, a deposit for a house, Shona is more likely to stick with it." Hall calculates that Shona has a surplus of around £480 a month. "If she has no savings structure in place this will likely be frittered away."
Shona should use some of her savings each month to pay off her overdraft, as the interest earned on the ISA is likely to be less than she is paying on her overdraft. "Her overdraft will be very expensive, yet she has money in her cash ISA," points out Mark Osland. "At the very least she should be working towards eliminating her overdraft by reducing it monthly or using some of her savings to pay it off."
Interest rates on student loans were reduced to 1.5 per cent from March 5 this year. Osland says that because Shona's gross earnings are higher than £15,000 a year, she will need to start paying off some of her student loan. "Based on her gross income, I would expect her to have to pay £162 per annum. She should speak to the Student Loans Company. Her desire to pay off her debts is admirable, but the interest rate on student loans is very low, so there is not such a pressing need to pay it off, unlike the overdraft."
All three advisers think Shona should ask her employers about a pension scheme. Cox says even though Shona is a long way off retirement, she should start thinking about the future. "If Shona is able to join a pension scheme run by either or both her employers she should consider doing so, especially if they will pay into the scheme."
Buying a car
Hall recommends that Shona thinks again about buying a car. "I can see the attraction of having a car, but is it really such a good idea? With all the costs of depreciation, maintenance, insurance, tax, etc, it is cheaper to take taxis everywhere, and someone else does the driving. For a younger driver, car ownership in London is a money pit."
For a free financial check-up, write to Wealth Check, The Independent, The Independent, 2 Derry Street, London, W8 5HF; or email firstname.lastname@example.org
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