Catherine Gagon is keen to start saving towards getting a toehold on the property ladder, but finds the combination of student debt and the hefty cost of renting makes this difficult.
The 26-year-old rents a room in a three-bed house in Ealing, west London, for £850 a month. "I've been renting for the last five years, and it feels like I'm throwing money down the drain," says the assistant manager of development for a production company, who earns around £35,000 a year.
"At my age I feel like it's time to try and be more financially savvy, although this is hard with the high cost of living and renting," she adds. "Everybody I know seems focused on saving for a deposit, and I have to admit that is my main financial goal now too."
To meet this aim, Catherine intends to move to cheaper accommodation and start budgeting to reduce living costs so that she can slot away cash when possible. "I need to rent somewhere more affordable, and plan to do this by the end of the year, but this could be difficult to find given the cost of renting is on the rise," she says.
Catherine also has debts to service, with a £10,000 student loan that she says is making it tricky to save. "I feel like I've been paying off my student loan forever," she says. She steers clear of credit card and personal loan debt.
"People say I shouldn't worry about a student loan, but I do," she says. "I'm currently paying it off at a rate of around £120 a month, but it feels like I'm making slow progress. I hate being in debt, and have an overdraft facility that I try and stay out of, and a credit card that I pay for any holidays with." She pays off the balance on her credit card each month to avoid interest charges.
For longer-term planning, she has yet to start saving into a pension despite her company money purchase scheme matching any contributions she'd make. "Retirement seems so far away it's hard to prioritise it," she says. "And anyway, I heard that getting an Isa could be an alternative, and they sound more flexible." She has no protection policies.
Catherine's concerns are common among twentysomethings, say our panel of independent financial advisers. "Money worries remain throughout our lives and usually increase as we get older, but our twenties are often the most financially constrained time as people spend more and earn less," says Adrian Lowcock, from the IFA Hargreaves Lansdown. "There is also the pressure to get on the property ladder." However, the advisers add that Catherine is in a sound position to start saving. Yet while her priorities are setting aside cash for the short and medium term, and getting on to the property ladder, she can't afford to ignore retirement planning.
Paying off debt
As Catherine started higher education between 1998 and 2011 she will be paying interest of 1.5 per cent a year. Repayments are set at 9 per cent of salary over £16,365. "The interest on a best buy savings account will be higher than the interest paid on the loan, so Catherine is actually better off saving than she is paying off the student debt," says Lorreine Kennedy, from the IFA Carematters. "Current savings rates are at an all-time low, and general wisdom is that debts should be repaid before saving any more money. However, in view of the low interest rate she is being charged she should continue to make her minimum monthly payments."
Although the debt is worrying Catherine, the loan is reducing and appears manageable, stress the advisers. However, being debt free is undoubtedly a good feeling, adds Mr Lowcock. "So a combination of paying down the loan while creating a savings pot so that she can build a deposit is a sensible plan," he says.
Plan your budget
Catherine can use a budget planner to work out her finances more clearly, and establish how much she can put aside for her house deposit.
A useful budget is available at Moneyadviceservice.org.uk/en/tools/ budget-planner. She should make a list of what she spends her money on.
This should be simple and show where money can be saved by, for example, switching energy suppliers or cutting down on nights out.
Catherine also needs to build up a rainy-day fund for emergencies alongside a deposit, although this might prove a struggle.
Saving for a deposit
The best way to save for a deposit is likely to be through cash savings, as her money will be safe in absolute terms, and available when she needs it. Cash individual savings accounts are the best starting point as all interest earned is tax-free, and up to £5,760 can be saved each tax year.
The best offers are usually because of "bonus rates" that only last for a fixed period, so it is important for Catherine to make a note of when these expire and to hunt around again and potentially transfer to another account, stresses David Smith, from the IFA Bestinvest. For example, Nationwide is offering a cash Isa paying 2.25 per cent, but this includes a 1.75 percentage point bonus until October next year. Catherine should ensure that her money is working as hard as possible by checking the rate on a price comparison site such as Moneyfacts.co.uk.
Get on to the property ladder
To work out the size of the deposit she will need, Catherine has to have a good understanding of the type of property she wants, where and how much it will cost. Then she can get realistic about how much she will need to save, and over what time period. She will also understand how much she will need to borrow, whether this is viable, and how much her monthly mortgage payments might be.
A way for Catherine to get on to the property ladder could be to buy outside the capital, or look to purchase with a friend, or take advantage of a shared-equity scheme.
Mr Smith recommended that Catherine consider the Government's new Help to Buy equity loan. This means that Catherine now need save only a 5 per cent deposit, assuming she buys a newly built home; 75 per cent of the cost could be met by a mortgage, and the rest could be paid for by the Government through an equity loan.
Help to Buy equity loans are open to first-time buyers and home movers on new-build homes worth up to £600,000. Catherine would not be charged any loan fees for the first five years of owning her home. In the sixth year, she would be charged 1.75 per cent of the loan's value. After this, the fee will increase every year. The increase is worked out by using the retail prices index plus 1 per cent.
Catherine could also consider buying a share in a home with a Housing Association. She could buy a proportion of a house, with a lower deposit and more affordable monthly repayments, then buy more of the house as her reserves and surplus allow.
Planning for retirement
Catherine should ideally be saving for the future. Unfortunately, that isn't the reality for many people, who face shorter-term priorities, such as trying to buy their first property.
However, by failing to sign up to her company pension scheme, she is effectively turning down a pay rise, given that it will match her contributions, stress the advisers. Once she has tackled short-term savings she can look longer term. This should be through a combination of pensions, where she will benefit from initial tax relief, and stocks and shares Isas. While Isas are more flexible as the cash can be accessed at any time, the flipside is it makes it tempting to fritter this away before retirement.
Do you need a financial makeover?
Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF firstname.lastname@example.org