Wealth Check: On top of his debts, but not his savings

Each week we give 'Independent on Sunday' readers a financial makeover

The problem

Stewart Horne has organised his finances well. He clears the balance on his Egg credit card every month and recently paid off his NatWest overdraft after years of being in debt. He is now chipping away at £3,500 of outstanding student loans.

However, he still feels he isn't doing enough to secure his financial future. "I'm worried that I'm just earning money and spending it - and it will be very easy to carry on doing this. A financial goal will help."

He has little in the way of monthly commitments except the £400 cost of renting a room in Fulham, where he shares a house with friends. "I've been renting for a number of years and, with the astronomical cost of buying in London, I think I'll carry on doing so."

His savings could prove useful when he does decide to buy his first home. So far, he has tucked away £4,000 with National Savings & Investments (NS&I). This is spread across premium bonds and a savings account paying 3.25 per cent interest. However, he's unsure if this is the best use of his cash, although he did win £500 on the premium bonds 10 years ago.

As result, Stewart plans to begin investing in a mini cash individual savings account (ISA) from September. An ethical stance is driving his choice of provider, Smile, the online banking arm of the Co-op.

"I plan to put away between £200 and £400 each month - and I might swap my current account from NatWest to the Co-op too."

In the longer term, he is prepared to make stock market investments, whether through an equity ISA or directly in individual shares.

As for a pension, Stewart has invested in his employer's final salary scheme for two and a half years. For every 3 per cent he pays in, his employer adds a generous 7 per cent.

The patient

Stewart Horne, 26, lives in Fulham, south-west London.

Job: a civil servant employed by the Office of Fair Trading.

Income: between £23,000 and £26,000.

Savings: £2,000 in an NS&I easy-access account; £2,000 in NS&I premium bonds.

Investments: none.

Goal: to line up a financial goal and save more efficiently.

The cure: Don't be blinkered on ethical investing

Although his student loan debt is big, it's probably not worth trying to pay it back early because he incurs such a low rate of interest. "It is likely that Stewart's priority over the next few years will be funding a house deposit," says Julian Griffiths at independent financial adviser (IFA) Towry Law. To this end, he could start both a mini cash and a mini equity ISA, says Justin Modray of IFA Bestinvest.

Scrapping the premium bonds and investing elsewhere will make his money work harder, adds Darius McDermott of IFA Chelsea Financial Services.

Savings

"The cash held in premium bonds and the savings account is not working hard enough," says Mr Griffiths. In particular, the easy-access NS&I account only pays 2.6 per cent interest after tax; in a cash ISA, he wouldn't pay any tax.

Taking an ethical stance might be good for Stewart's conscience, but it is unlikely to do as much for his money, warns Mr Modray. Neither Smile nor the Co-op's cash ISA offers the best returns on the market, at 3.75 and 3.25 per cent respectively. The Abbey postal ISA currently pays 5.1 per cent.

Mr Griffiths says invest now, because the annual total that can be saved in a mini cash ISA will be reduced from £3,000 to £1,000 from April 2006.

Current account

Although Stewart is thinking of switching from NatWest, Mr McDermott says: "Ethical banking does not mean you must limit yourself to the Co-op. Many high-street banks take ethical stances on issues that may fit your criteria."

HSBC, Abbey and Barclays have a restrictive investment approach to the arms trade, he explains, while Lloyds TSB takes a strong stance on Third World debt. "The Co-op's current account is also uncompetitive," adds Mr Modray. "Cahoot [the online arm of Abbey] offers 3.93 per cent [on accounts in credit]."

Investments

To spread the risk of investing in the stock market, Stewart could consider a portfolio of equity funds, says Mr Griffiths. An online fund supermarket is a cheap way of doing this.

Mr McDermott suggests building up a balanced portfolio with a base in core funds such as Cazenove UK Growth & Income, Liontrust First Income and Invesco Perpetual High Income. If Stewart wants an ethical fund, he could try the Isis Stewardship fund, he adds. The website www.eiris.org will let him check which investments fit in with his ethical outlook.

As long as he won't need to touch the money for at least five years, Mr Modray suggests putting up to £200 a month in a mini stocks and shares ISA. Artemis Global Growth would be a good start.

Retirement

Stewart is lucky to be part of such a final salary scheme, says Mr Modray. "The private pension pot that would be required to provide equivalent benefits at retirement could run into hundreds of thousands of pounds."

Protection

Without a mortgage or dependants, Stewart's need for insurance is low, says Mr McDermott. His employer, however, does provide death-in-service benefit.

If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email m.bien@independent.co.uk