Wealth Check: 'I've had enough of hand to mouth'

We give 'Independent on Sunday' readers a financial makeover

The problem

By his own admission, Kevin O'Sullivan's finances are "in a state": he tends to "spend, spend, spend" until it has all gone towards the end of the month.

"It all feels a little hand to mouth," he admits. "My spending is solely dictated by my pay cheque."

After rent, travel and daily living costs, he has little money left over. But he would like to save regularly into a fund that he can't dip into too easily.

"I don't require large sums saved up. I'd just like to have enough for a rainy day."

The 23-year-old also has half an eye on the longer term. "I have been considering a pension but keep kidding myself that I'm too young to start," he says. "At the moment, I'm more worried that my outgoings are far too high."

Kevin is in the enviable position of having neither loans nor credit card debt. "My first priority on leaving university was to rid myself of debt."

And while he pays £580 a month, not including bills, on a rented flat share in south London, he also has a buy-to-let mortgage on a £320,000 property in east London. He borrowed £150,000 from the Royal Bank of Scotland, and had help from his father to finance the purchase.

"The house currently has tenants whose rent covers the mortgage repayments. It is very self-sufficient."

Kevin has no protection policies.

Interview by Esther Shaw

The patient

Kevin O'Sullivan, 23, from Brixton, south London.

Job: account manager for a media agency.

Income: £25,000 a year.

Savings: none.

Investments: a buy-to-let property in east London.

Goal: to curb his spending, get into a savings habit and start putting money by for his retirement.

The cure

To see where he could find room for some savings, Kevin needs to write down all his income and spending, says Mark Loydall from independent financial adviser (IFA) Cambourne Financial Planning. "He has managed to pay off his student loans from his salary, [so] he should be able to save."

Once he has examined his spending record and hopefully identified a sum he's able to set aside, Kevin can start to think about his savings and pension. "Being debt-free gives an opportunity to build for the future," adds Mr Loydall.

But if he can't reduce his spending, he could instead increase his income by putting up the rent on his buy-to-let property, suggests Colin Rothery at IFA Throgmorton Financial Services. This, though, is a risky strategy: if the worst came to the worst, he could end up with a vacant property "and no rental income at all".

Savings

He's repaid his student debts, so Kevin's priority is to build an emergency savings fund, advises Martin Bamford at IFA Informed Choice.

Since he may need instant access to his money, Mr Bamford recommends he use a mini cash individual savings account (ISA), where he can save up to £3,000 a year tax-free. Alliance & Leicester, for example, is paying 5.4 per cent on its Direct ISA.

When he can afford it, Kevin could also look at setting up a regular monthly savings account.

A fixed sum must be invested each month and, as a deterrent to stop Kevin dipping in, he should choose an account with penalties for access. He could earn 7 per cent with the Halifax or 8 per cent with HSBC, though in the latter case, he must also open a current account with the bank.

Property

The buy-to-let may be self-financing - and provide growth in capital value for the future - but there could still be room for the property to work harder financially.

Mr Rothery says that, while hiking the rent too high may backfire, Kevin could remortgage. Birmingham Midshires is offering 5.99 per cent on a tracker buy-to-let mortgage that comes with no valuation, legal or arrangement fees. If Kevin's present rate is higher than this, and there are no penalties for transferring his mortgage, the above deal could be worth considering.

Retirement

It's a long time until then, Mr Bamford concedes, but pension planning mustn't slip too far down Kevin's list of priorities. "The earlier he starts to contribute, the longer the money is invested to grow for the future."

The buy-to-let property is a long-term investment, too, he adds, but it is a good idea to have more than one source of money to rely on in retirement.

Protection

Kevin should check to see if his employer offers any critical illness cover or income protection, says Mr Loydall. But even if he stands to get little more than statutory sick pay, extra protection will probably be too expensive, given his budget and priorities.

If you would like a financial makeover, write to Sam Dunn at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email s.dunn@independent.co.uk