Wealth Check: 'How can I stop sliding into the red?'

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

The problem

The problem

Natalie Thomas has an agreed overdraft limit on her Nationwide current account. She needs it. As soon as she gets paid each month, her rent and credit card payments push her back into the red. By the end of the month she is usually overdrawn by around £700, on which she pays 6.75 per cent interest.

Natalie owes £2,200 on an Egg credit card with a 0 per cent introductory deal until February 2005, and has £800 outstanding on a Nationwide card charging 15.9 per cent. She is trying to pay each debt off with £100 a month, but this is difficult when she's overdrawn.

She has £2,000 in savings but this is in a French bank account - a result of her family living on the Continent. "Unfortunately, I don't really know how the money is doing or what kind of account it is."

She also has £50 in a Nationwide mini cash individual savings account (ISA) which she opened two years ago.: "I would love to save but, especially living in London, it's very hard."

She may only be 23 but Natalie has begun saving for her retirement. For three years, she has paid about 5 per cent of her salary into a company stakeholder scheme - a sum matched by her employer.

Natalie, who pays £320 a month in rent, would also like to get into a position where she can buy a place of her own. "The savings in France might come in handy for a deposit on a house in the next few years - but, at the moment, it is off the agenda."

She doesn't have life insurance, income protection or critical illness cover. "I only really have one goal: to get rid of my debt as soon as possible."

Interview by Sam Dunn

The patient

Natalie Thomas, 23, from south-east London.

Job: public affairs assistant for insurer Churchill.

Income: £15,000 to £25,000.

Savings: £2,000 in French bank account; £50 in Nationwide mini cash ISA.

Investments: none.

Debt: £3,000 on credit cards; £700 overdraft.

Goal: to clear her debts.

The cure

Natalie's finances are "being pulled in too many directions", warns Philippa Gee of independent financial adviser (IFA) Torquil Clark.

"Her savings may be useful for a house deposit but getting rid of debt is more important," says Ben Yearsley of IFA Hargreaves Lansdown.

Patrick Connolly of IFA John Scott & Partners agrees and suggests that, once she has cleared her debt, she should start building up her savings in the UK via a mini cash ISA.

Spending/debt

Natalie needs to stick to a strict financial "diet" to clear her debt, advises Ms Gee. "She should calculate a maximum weekly spend, withdraw [this sum] at the start of the week and [spread it] across the seven days.

"This would leave room for a £250 monthly saving, and I would hope that, over 12 months, the debt could then be virtually wiped out."

Mr Yearsley agrees she should look at her monthly spending but also has an alternative suggestion: "I know she [may not] want to but I think Natalie should use her £2,000 to pay her debts. This would be a great start.

"Her priority is to clear her Nationwide credit card debt as she is being charged 15.9 per cent on this."

Once she's settled the Nationwide debt and overdraft, Mr Connolly recommends that she chips away at the Egg debt. When this 0 per cent deal ends in February, she should switch any outstanding debt to a similar deal so she doesn't incur any interest.

And once Natalie has rid herself of her overdraft, she must refrain from slipping back into the red, Mr Connolly adds.

Savings

"It is great having savings but not when you are wallowing in debt," says Mr Yearsley. Natalie may have £50 in a Nationwide mini cash ISA but, given the cost of her debt, "I see little point in her contributing more to it".

Only once Natalie has paid off her debt should she think about longer-term saving, Mr Connolly adds. "She will then be in a position to start looking forward and saving money towards a house deposit." Deals worth considering include Newcastle building society's 5.85 per cent fixed-rate deal and Abbey's postal ISA, which pays 5.1 per cent interest.

Retirement

Natalie's decision to start a pension is welcomed by all our IFAs and her monthly payments should continue. "As and when she gets the opportunity, Natalie should look at other forms of long-term savings, such as an equity ISA," says Mr Yearsley.

Protection

Life cover "is really not that relevant" to a 23-year-old, says Mr Yearsley, especially as Natalie doesn't own a house or have dependants. However, both he and Ms Gee suggest she considers an income protection policy that would pay a percentage of her salary if she were unable to work due to illness or injury.

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