Wealth Check: 'London's so expensive, but I must cut my debt'
Jenny earns a good salary but regularly dips into the red. How can she sort out her finances?
Sunday 23 August 2009
Since moving to London, Jenny Bowler, 28, has been adjusting to the high cost of living – while also trying to pay off her debts. "I moved here 18 months ago, and it still shocks me how much everything costs," she says. She currently owes £4,500 on a Virgin credit card on a 0 per cent balance transfer deal for the next six months, and has £4,000 left to repay on a Barclays personal loan taken out three years ago. "This was taken out to buy my pride and joy – my Volkswagen Beetle."
Jenny switched her credit card debt to take advantage of interest-free periods but would like to get rid of her debts altogether. At the moment, she makes only the minimum monthly repayments on the card, while paying £194 on the personal loan.
The problem is that she is unsure how to tackle her debts effectively. "I don't want to pay balance transfer fees. I want to be able to budget well and pay off my card debt in the next 18 months."
Jenny earns £31,500 as an advertising account manager but, with no savings to fall back on, she finds it tricky to make ends meet in London. To this end, she sometimes slips into her overdraft facility on her current account. This is interest free up to £750 and 14.8 per cent above that. "I earn a decent wage and can't understand why I end up in my overdraft each month."
In the short term, she wants to pay off her debts and start saving towards buying a property. "I haven't been in a position to start making savings so far, though if I have something to save for I know I can do it," she says. "I previously managed to put aside £5,000 in a year to go travelling, but that was before I had debts and moved to London."
Jenny pays £568 a month to rent a room in a three-bed flat in Battersea, south-west London. While she has considered buying her own property, she's aware this is not possible at the moment.
Jenny is not contributing to a pension scheme and has no protection policies in place. "I can't afford to consider making contributions to a pension, and my employer doesn't have a scheme."
Getting rid of her debt will be tough but it is manageable, our panel of independent financial advisers (IFAs) agrees. The advisers recommend she look at her last three months of bank statements to see where money can be saved.
Once she has done this, she can increase her monthly repayments and start planning for the future. Jenny has a number of things in her favour, says Matthew Woodbridge from IFA Chelsea Financial Services. "These include employment, a decent salary, and room for career progression."
The first thing Jenny needs to do is to sit down and create a budget. "This may not be the most exciting thing to do but absolutely essential if she is going to improve her general financial position," says Alan Smith from IFA Capital Asset Management.
She needs to list every one of her monthly expenses including rent, food, travel, eating out and entertainment – as well as the monthly payment on her credit card and loan. Then she can consider what costs may be reduced. "This might include not renewing a gym membership, or changing her social habits," says Danny Cox from IFA Hargreaves Lansdown.
If her debt situation does not improve, Jenny might have to resort to selling her pride and joy: her car. "As painful as this might be, this would provide substantial savings including the cost of maintenance, insurance, tax, petrol, etc, and, of course, the value of the car could be used to repay some of her debts," says Mr Cox.
Given her salary and outgoings, Jenny should be able to find some extra cash to pay off her card debt. "And many retailers and restaurants are offering deals and discounts which can be taken advantage of to help her with this," adds Mr Smith. She must move beyond just paying off the interest each month and she should be able to afford this.
It is vital that she maintains a strong credit rating as she will need to review the card when the 0 per cent deal ends – although she should aim to wipe out as much of her debt as she can by then. "There are very few similar deals around now and she must spend the time to research the best available to try to avoid slipping on to Virgin's standard variable rate," says Mr Woodbridge.
Once she has dealt with her debt, Jenny should make use of a decent-paying, tax-free, cash individual savings account (ISA) to build an "emergency" fund equal to three months' pay.
Intelligent Finance pays 1.75 per cent on balances of £1 or more on its ISA. The maximum that can be saved into a cash ISA is currently £3,600 a year, but increases to £5,100 from April 2010. It is a "use it or lose it" allowance and makes a great starting point, particularly if Jenny slips into the higher-rate tax bracket in the future.
When Jenny is eventually in a position to buy a property, she could consider a shared-ownership scheme such as one run by a housing association, say the advisers. She could own 25 per cent of her new home, and then pay rent on the balance.
By 2012, Jenny's employer will have to offer her access to a pension scheme under the new Personal Accounts system. The final plans are not yet in place, but it is likely that Jenny will be able to join a pension scheme where she pays 4 per cent of her salary, her employer pays 3 per cent and the Government pays 1 per cent, says Mr Cox.
"This will be a reasonable start but Jenny will be about 10 years behind in her planning by this stage," he says. "She will need to make additional contributions over the years if she is to get a good pension when she retires."
As Jenny has no dependents, there is no need for life cover. But she should check if benefits such as income protection are available through her work.
She may find that her employer has an arrangement with an insurance company to offer employees reduced premiums for either income protection or critical illness cover. The former will pay an income should Jenny be unable to work due to, say, an accident or ill health, whereas critical illness pays out a lump sum should she suffer a life-threatening illness such as cancer or stroke.
If Jenny's employer doesn't offer access to discounted insurance, Jenny should check with an independent financial adviser how much it would cost to arrange cover herself. She can then make a decision as to whether she feels she can afford protection policies.
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