Wealth Check: Tomorrow the world, but today the debts

We give 'Independent on Sunday' readers a financial makeover
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Anna Poole's finances are under the cosh. Moving from London to the West Midlands to live with her partner meant she had to find a new job and, jointly, buy a first home.

After Anna had found employment, the couple bought a property for £138,000 in April, financed with a 100 per cent graduate mortgage from HSBC.

A repayment loan fixed at 4.89 per cent for six months, the deal runs out at the end of the summer.

Anna is also saddled with heavy debts. Just two years out of university, she has £8,000 in outstanding student loans.

She has borrowed a further £18,000 in the shape of an unsecured personal loan from HSBC, with interest at 6.9 per cent, to clear a student overdraft and buy a car.

Despite the debt, she has £2,000 in a mini cash individual savings account (ISA) paying 4.35 per cent, and £50 in an instant access savings account. Both are joint accounts, though, and again with HSBC.

Anna has no pension and will be eligible to join her occupational scheme only after three years of service. Her company will contribute up to 5 per cent.

With some capital behind them, the couple plan to take a year out travelling round the world.

But they're not sure whether to sell the flat or rent it out while away.

Anna has both life insurance and income protection from her bank.

Interview: Esther Shaw

The patient

Anna Poole, 23, from Birmingham.

Job: public affairs executive.

Income: £38,000 (joint with partner).

Savings: £2,000 in a mini cash ISA.

Investments: none.

Goal: to clear her debts for financial stability, before saving up to take a career break travelling around the world.

The cure: Move on from your one-stop bank

Anna does too much of her banking in one place, warns Anna Bowes of independent financial adviser (IFA) Chase de Vere. "By making a few alterations and shopping around, she will save herself some money and make a little more interest [on her savings]."

Before starting any sort of pension or investment, Anna must get a grip on her debt, says Mike Marigold from IFA Montgomery Charles Financial Management.

He adds that building up her current mini cash ISA savings into an emergency fund of around three months' salary would also be a sound move. As would calculating the costs of her planned trip now, so she can budget for it.

Debts

Anna should be in no hurry to pay down extra chunks of her student loan, says Justin Modray at IFA BestInvest, as the 2.6 per cent interest rate - linked to inflation - is very low. She should focus instead on saving to try to clear the £18,000 HSBC loan early, although this won't be easy given its size.

Any early settlement would probably incur a fee. But, since her loan's interest payments are more than those earned on her savings, it would be worth seeing if she could budget for this.

An alternative is to shop around for a more competitive deal, says Ms Bowes. With a decent credit rating, Anna could qualify for the same £18,000 loan but at a cheaper rate, such as the 5.9 per cent offered by Northern Rock.

Switching the debt would obviously reduce her monthly repayments. But she must check if an early-repayment fee to HSBC would cancel out the benefits of a move.

Savings

Anna can improve on her current ISA rate of interest, says Ms Bowes. For example, Halifax offers 5.15 per cent on its Saver Direct ISA.

And although she and her partner have only minimal savings here, they could certainly do better than the 1.5 per cent return on the HSBC instant access account. If they are prepared to save online, Halifax's Websaver offers 4.9 per cent.

Property

Anna must "get cracking" to find another mortgage to replace her six-month HSBC deal. Otherwise, she will slip on to the lender's 5.75 per cent standard variable rate, says Ms Bowes.

Cheap fixed rates for two years have hit the market, she adds, so a competitive deal should not be hard to find.

The decision on whether to sell or let during the couple's travel break can be left for now, as it will depend on circumstances at the time, says Mr Marigold. "A clean sale before she travels could be the least hassle, but if property prices start to move up again in a few years' time, [she] may be reluctant to stay out of the market."

Ms Bowes says that, if the couple can save enough for their trip, the most cost-effective option would be to let the property.

Retirement

Temporary ineligibility for the company fund shouldn't deter her, says Ms Bowes. "Anna could start a stakeholder pension. Companies such as AXA, Clerical Medical and Standard Life offer a good range of equity funds, which will be important as Anna is young and investing for the long term."

She should then join her employer's fund as soon as permitted.

Protection

"HSBC is not usually competitive in [basic life cover] so Anna should shop around. It [ought] to be possible to get life cover for under £7 a month," says Mr Modray.

Anna should ask an IFA to review this and her income protection, says Mr Marigold. A cheaper deal for both can probably be found.

But, he says, in HSBC's favour, the protection policy allows for a 12-month career break. In other words, it would pay out if she were hurt overseas - and that would fit with her travels.

Any cheaper replacement policy would need to offer the same.

If you would like a makeover, write to Sam Dunn at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email s.dunn@independent.co.uk

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