Wealth Check: 'Should I clear my debts or save as much as I can?'

Katie Ratcliffe, 23, is a social work graduate who is looking for her first job as a social worker. She lives in student accommodation but is moving back home to save money. Katie says: "I am fairly good with money, but would like to know which type of bank accounts are best for my savings."

Katie wants to save enough money to put a deposit on a house, which she would then rent out, and have enough money left to go travelling. She would like to do this within the next two or three years.

Case notes

Income: £12,434 per year.
Monthly outgoings: Tax and NICs £200, general living expenses £200, holidays £800, regular savings/insurances £250, pensions £45 (total: 1,495 per month).
Debt: £18,000 student debt.
Savings: ISA with £3,600 in Katie's name, a savings account started in June that she pays £250 into each month, and a share-save scheme through working part-time at Esure, to which she contributes £35 each month. This was started in 2007 and runs until 2010.

Advice this week is given by Danny Cox of Hargreaves Lansdown, Adrian Lowcock from Bestinvest and Steve Laird from Carrington Wealth Management...

Financial goals

Katie's main goal is to save enough money for a deposit on a house, as well as paying off her £18,000 student debt. Danny Cox says: "Simply, the bigger the deposit, the better the range of deals that will be available to Katie, the cheaper the monthly repayments and potentially the cheaper the associated mortgage fees.

He advises Katie to investigate shared ownership, which, as a social worker, Katie may be given priority for: "Katie would buy part of the property and rent the remaining part, with the option to buy a greater share later. This often works out cheaper in the short term, allowing Katie to make the first step on to the housing ladder," says Cox.

However, Steve Laird advises against buying a property until Katie has finished her travelling: "Even if she were able to cover the mortgage with the rent, there could be problems finding suitable tenants and dealing with maintenance issues while she's travelling, all of which is a hassle she could do without. In any case, she may well need some of the savings to live on while she's travelling."

Savings

Katie has an ISA, a savings account and a share-save scheme. She wants to know which bank accounts can give her the best returns. Adrian Lowcock says there are several bank accounts available, but points out the importance of being flexible and having access to the savings, so building up an emergency or rainy-day fund is the first priority: "Cash ISAs are a good starting point. However, the best ISA rates available require high minimum sums invested and have longer notice periods.

"With rates up to 3.26 per cent (Newcastle Building Society), you may be better off looking at regular savings accounts, where Barclays tops the table at 4.17 per cent. Even after tax, that's 3.33 per cent, beating the best ISA rates out there currently."

Steve Laird recommends Manchester Building Society's cash ISA, which pays a rate of 3.26 per cent (variable rate with a 45-day notice period) for a minimum deposit of £1,000: "She could perhaps start it off by transferring her current ISA, assuming that there is no penalty for doing so. She can save up to £3,600 per annum this way. If she's already used her 2009/10 allowance there are some good deals available for regular savings accounts – such as the Barclays' account, although the interest rate reduces to 2.99 per cent in any month during which she makes a withdrawal."

Danny Cox adds: "Continuing to use her cash ISA allowance (£3,600 for 2009/10) is important, as tax-free savings are worth 25 per cent more interest than taxed savings."

Debt

The experts agree that Katie needs to look at reducing her student debt as it can become a problem. Adrian Lowcock says: "Look to reduce the amount owed each year to make sure the debt doesn't get out of control. It would be better to pay off the whole amount first as any interest on it reduces your total savings amount."

Steve Laird doesn't see Katie's student debt as too much of a problem, as the interest on loans from the Student Loans Company will drop to zero for the year beginning in September. Danny Cox agrees that it is not particularly worrying at this stage: "It is more important to repay debt than to save. However, with interest rates at an all-time low, this is less of a problem, and it is not hugely motivating to see all your spare cash being used to pay debt rather than save. A balance between paying off the student debt and building further savings would be a good solution."

Pension

Katie pays into a pension scheme through her part-time job, which lets her retire at 65, but as she doesn't work full time, her contribution is often small. She wants to retire at 60 and live comfortably on her pension. Danny Cox says that Katie should join a pension scheme with her employer as soon as she finds a job as a social worker: "If her employer is the local authority or NHS, she should join the final salary scheme and not the money purchase scheme. Under this type of scheme, Katie is not exposed to any investment risk, and her pension is backed by the taxpayer. Under a money purchase scheme, the amount of pension is based primarily on how much Katie invests, how much her employer invests, and the returns."

For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email wealthcheck@independent.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
Joe Cocker performing on the Stravinski hall stage during the Montreux Jazz Festival, in Montreux, Switzerland in 2002
musicHe 'turned my song into an anthem', says former Beatle
News
Clarke Carlisle
sport
Sport
footballStoke City vs Chelsea match report
Arts and Entertainment
theatreThe US stars who've taken to UK panto, from Hasselhoff to Hall
PROMOTED VIDEO
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
News
newsIt was due to be auctioned off for charity
News
Coca-Cola has become one of the largest companies in the world to push staff towards switching off their voicemails, in a move intended to streamline operations and boost productivity
peopleCoca-Cola staff urged to switch it off to boost productivity
Environment
Sir David Attenborough
environment... as well as a plant and a spider
Voices
'That's the legal bit done. Now on to the ceremony!'
voicesThe fight for marriage equality isn't over yet, says Siobhan Fenton
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    SThree: Graduate Recruitment Consultant

    £20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

    Day In a Page

    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there