Wealth Check: 'London life is so expensive, I can't save enough'

Katharine Cole is an advertising sales co-ordinator who lives in south London. She has worked for Newsweek for 18 months since leaving university, and rents a flat. Unlike many former students, she isn't saddled with debt, but is still struggling to save for the future. She has managed to save £1,000 so far, but living in London is expensive. She spends £100 a month on her credit card, but is setting aside the same amount per month to pay into an Isa.

Katharine's main concern is that she is spending a lot and not making long-term financial gains. She wants to get on to the property ladder before she turns 30, but worries that, as she only just breaks even each month, she will never achieve this.

Katharine wants to live comfortably, with enough money for holidays, but would also like to put money aside for her retirement. She isn't sure how she can maximise the money that she has at the moment.

We asked three independent financial advisers to help: Keith Churchouse, of Churchouse Financial Planning; Danny Cox, of Hargreaves Lansdown; and Phil Stevenson, of Ark Financial Planning.

Case notes

Katherine Cole, 23, South London, advertising sales co-ordinator

Earnings: £20,000 per annum
Pension: none
Property: none
Debt: £250 on credit card
Savings: £500 in a mini cash ISA; £500 in a national savings account
General living expenses: £390 in tax per month; £500 a month on rented accommodation; £400 annually on holidays; £106 a month on travel; £100 a month on paying off a credit card.

SAVINGS

All the advisers are pleased that Katharine is saving on a regular basis, but believe that she can improve her return. Danny Cox says that she could transfer her savings account to Barclays, which pays 6.5 per cent interest on mini cash ISAs. He also thinks that a health-insurance plan would ensure her security in the event of long-term illness.

Keith Churchouse would like to see her increase her monthly saving to £150, to build up enough capital to buy a property in the future. He thinks that her current budget and salary can sustain this investment but she will have to be prudent. He also thinks that she should build an emergency deposit fund of between three and six months' salary.

PROPERTY

Katharine aims to be on the property ladder by the time she is 30, but this looks unlikely at the moment. However, Phil Stevenson believes it is possible if she makes some changes. Her savings at the current rate will be insufficient for a deposit on a property in south London. Currently, based on a 5 per cent return per year, she will have saved £8,400 in six years' time. But if she increased her saving, to £150 or £200 a month, she would have enough for a deposit, And could take out a 100 or 125 per cent loan to buy a property.

RETIREMENT

All of the advisers are keen for Katherine to start as soon as possible with a pension plan. Churchouse points out that, because Katharine is paying the base rate of tax, for every £20 she contributes to a pension plan, she will receive £5.64 from the Government in tax relief.

Cox thinks that Katharine should join a pension scheme run by her employer, if it has one. In the absence of such a scheme, she should aim to start saving into a stakeholder pension as soon as possible, no matter how small the contribution is.

Stevenson is concerned that Katharine wants to retire when she is 65, but now, she wouldn't actually start to receive a state pension until she is 68. So, she needs to start contributing 10 per cent of her salary to a pension fund in order to have a substantial amount of money when retiring, while also being able to save for a future property investment.

Cox has a solution to Katherine's saving problems, but it will involve her taking risks, which she is not very keen to do. To boost her retirement fund and increase her chances of earning more money than expected, she should consider investing in equity-based funds. Although there is risk entailed, Cox advises that Katherine will benefit in the long run if there is a downturn in the market, if she has her money in equity rather than stakeholder savings.

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