Wealth Check: The debt is now a drama and a film-maker wants to edit it out
Sunday 13 January 2008
As a self-employed film producer, Ben Butt, 28, is unable to rely on a stable salary.
He earns between £15,000 and £20,000 a year. "I'd obviously like to earn more," he says. "But I've only been freelance for about three years, so I'm building my experience and aim to increase my salary to around £30,000 next year."
But he also has to contend with debts totalling £11,700. He owes £2,000 on an Egg credit card with interest charged at an annual percentage rate of 16.9 per cent, and has an outstanding balance of £700 on a Barclaycard at 14.9 per cent APR.
On top of this, Ben has a £9,000 personal loan from Cahoot, used to help make ends meet, at a rate of 5.9 per cent. He pays £151 a month for this.
"I am paying off the minimum on all my debts," he says. "But it's something I really want to get rid of. I was considering going down the bankruptcy route just three months ago, but managed to just about get on top of things."
He divides his week between London and Brighton and rents a room in both cities, paying a total of £480 a month.
Despite his debts, Ben would like to get on the property ladder. "Next year I hope to get help with this by speaking to my parents – perhaps making a dual investment."
He is not paying into a pension and has no savings or protection policies.
Ben's priority should be reducing his debts, says our panel of independent financial advisers (IFAs).
Once this is dealt with, he needs to take action for his longer-term financial security by increasing his income and seeing where money can be saved.
Focus on paying off the most expensive debt first, says Adrian Kidd from IFA Mint Financial Services. "This is the credit card debt."
He could switch this to a card offering 0 per cent on balance transfers. Abbey's Mastercard has an attractive interest-free period of 13 months, although there is a 2.5 per cent balance-transfer fee.
It is common for pro- viders to charge this fee, and it needs to be weighed against the potential interest saved. In Ben's case, it is worthwhile, says Matthew Woodbridge from IFA Chelsea Financial Services.
However, he will still need to work at wiping out the debt, stresses Mr Kidd.
The rate on the Cahoot loan is competitive, but he must concentrate on repaying this as quickly as possible, adds Mr Wood- bridge. Drawing up a bud-get and sticking to it is vital.
Once his debts are cleared, Ben should look at taking out a tax-free individual savings account, comments Ian Hudson of IFA Hudson Green & Associates.
As a freelance, Ben must be sure to offset any expenses he incurs in his job, such as travel and equipment costs, against his tax bill. This will free up more spare cash for future savings.
When he is in a better position to do so, Mr Woodbridge recommends saving a deposit of around 5 per cent of a property's purchase price. This will allow him to qualify for more competitive interest rates.
But Brighton and London are two of the most expensive places in the UK to get a foot on the ladder, so he is wise to consider turning to his parents for help.
Ben has more pressing financial priorities than a pension, says Mr Hudson.
But after he pays off his debts, he should start saving 5 per cent of earnings into a stakeholder pension scheme – as he is self-employed and doesn't have access to a company plan.
Scottish Widows offers a stakeholder with low charges and a variety of funds to invest in.
As Ben has no dependants, there is no need for life cover. But, when possible, paying for an income protection policy may be worthwhile to provide a salary if he is unable to work due to long-term illness.
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