Wealth Check: How should we use our savings best?

Graduate students are buying a flat together in bubbling Brighton, and they want to know what they should do to make the best use of their incomes

Brighton, East Sussex, has been good to Victoria Ouse and Martyn Haigh. The 23-year olds studied together at Brighton University. Now they are buying a flat together 15 minutes from the seafront. "Brighton is brilliant," Ms Ouse, an NHS administrator, says. "There are lots of students around and there's a great social life. It's like London-by-the-sea. It's a shame what's happened to the West Pier. First, part of it collapsed and what's left has burnt down."

Ms Ouse has been a personal assistant to a general manager at Brighton General Hospital for five months. "It's really hard to get employment in Brighton," she says. "The NHS is one of the biggest employers around here. I've taken the job to give me some time while I figure out what I want to do."

Mr Haigh is a web designer for Virgin in nearby Chichester. He lives with Ms Ouse and four men in a house on the outskirts of Brighton. It takes him 45 minutes to drive to work in his Alfa Romeo. Ms Ouse walks to the hospital. "I can't justify spending £1 on the bus at present," she says. "Unfortunately, it means I have to walk up the biggest hill you've ever seen to get to work. On the other hand, it also means I get home at the same time as Martyn."

They are moving into a two-bedroom flat in a few weeks. "We came across it by chance and snapped it up because it was so cheap," Ms Ouse says. "We're really looking forward to moving; it feels like the first step towards 'grown-upness'." It cost £126,000 and their parents helped them with a £26,000 deposit. They have a 25-year flexible mortgage with Cheltenham and Gloucester, part of Lloyds TSB.

They want to know if they should pour their savings into improving the flat or to put funds aside for a rainy day. "We'd definitely save to improve the flat rather than increase the mortgage," Ms Ouse says. "We put down a large deposit to keep the mortgage repayments down." They reckon they need £5,000 to refurbish the kitchen. "We're materialistic and would like to get lots of nice things around," Ms Ouse says.

They have £5,000 in savings, part of which goes into the deposit and part for legal fees. Ms Ouse has £200 in a Nationwide current account. They have £1,000 in Glaxo SmithKline shares, £1,000 in Compass and £1,500 in Rentokil. They want to build a nest egg. "How can we make the most of what money we have left at the end of each month?" Ms Ouse asks.

They envisage staying in Brighton for five or six years. After that their plans are more vague. Ms Ouse wants to travel and would consider eventually moving to Hampshire, where she grew up.

We put their case to Tim Purdon, managing director of Paladin Financial Services in Kilmarnock, Ayrshire, Patrick Connolly, director of Chartwell Investment Management in Bath, Elise Holl, independent financial adviser for Inter-Alliance in Salisbury, and Karen Garner, spokesperson for Charcol in London.

Profile

Victoria Ouse and Martyn Haigh, both 23

Occupation: Ms Ouse is an NHS administrator; Mr Haigh is a web designer for Virgin

Education: Ms Ouse has degree in humanities; Mr Haigh has one in computer science, both at Brighton

Car: Mr Haigh's Alfa Romeo

Debts: None

Salary: Said to be "middling"

Pension: Ms Ouse is in the NHS pension scheme

Property: Renting house with four others; buying a flat in Brighton for £126,500

Savings: £5,000 in current account; £200 in Nationwide account

Shares: £1,000 Glaxo SmithKline; £1,000 Compass; £1,500 Rentokil

Outgoings: (Per month) Rent and bills £450; food and leisure £200; hockey £50; phone £30; internet £15; miscellaneous £100; petrol £7.

'Check your mortgage, change car and scrimp and save'

Solution 1: Mortgage

Mr Purdon says Ms Ouse and Mr Haigh have a Cheltenham and Gloucester CAT (charges, access and terms) standard mortgage. It has no application charge, no early repayment charge and an interest rate pegged at a maximum of 2 per cent above Bank of England base rate. Unless they arrange otherwise it is interest-only.

Ms Holl says in a flexible mortgage the interest payable on the outstanding mortgage is calculated at the end of each day. By structuring payments the outstanding mortgage amount can be reduced every time money is paid in, which also reduces the total interest. Over 25 years this can create huge savings.

They should think about slightly overpaying their mortgage each month to reduce their mortgage interest rate. This would also let them build an "overpayment fund" which can take a "payment holiday" in emergency.

Mr Connolly says flexible mortgages do not offer the most competitive rates. If Ms Ouse and Mr Haigh want to stay in the flat for a significant period and are not likely to utilise the flexibility on a fixed-rate mortgage, a repayment one may be more suitable. A fixed rate means they know their monthly expenditure, important if money is tight.

Solution 2: Refurbishing

Ms Garner says using their money for home improvements is better than personal loans, credit cards or store credit. Ms Holl says if they want to work on the house soon, it is worth saving into an instant access account. Birmingham Midshires offer 4.1 per cent on their phone account, and Northern Rock offer 4.1 per cent on their online "Tracer" account. Mr Purdon says they should strike a balance between what they want to achieve and the cost of the exercise.

Mr Purdon says £5,000 refurbishing the kitchen is not an unreasonable amount, but they should not expect to increase the value of the house because they improve it.

Solution 3: Savings

Mr Purdon says they should consider investing in an Isa with money left at the end of the month. The advantage of saving monthly is that they can benefit from pound-cost averaging, buying more units for the same amount of money when prices fall. Depending on their risk profile they could save in a low-risk, fixed-interest fund or a medium-risk UK equity-income fund. If they are prepared to take a higher risk and longer view they could save in technology-, biotechnology- or internet-based funds. Saving through an Isa means the capital or eventual income taken from it is tax-free. Mr Connolly says he would not advise any equity-linked investments, such as an Isa, until they have adequate cash savings.

Mr Holl says Rentokil has been a star for years. Compass looks worth holding, and it has just sold its Travelodge and Little Chef operations. Glaxo has suffered from the massive pharmaceuticals decline. There has not been any good news on renewed drugs or new patents, and some commentators say the stock could fall further. Since Anthony Milford, fund manager of Framlington Health and a respected healthcare expert, is not investing in pharmaceuticals, Glaxo might be one to sell.

Solution 4: Expenditure

Mr Connolly says they should review all expenditure, looking specifically at insurance policies (car, buildings and home contents) and hunt for a better deal. They should also ensure they have adequate life assurance with the mortgage. At their ages, no policy will be expensive.

Ms Holl says it is worth scrimping on the basics to help save. Ms Ouse has the right idea in walking to work. Mr Haigh's Alfa Romeo is a luxury, and the fuel consumption, insurance bills and road tax could be cut by changing to a smaller car. They can also save by getting the cheapest gas, electricity and phone. The website www.uswitch.com can find the best provider.

Ms Garner says they should concentrate on managing present commitments until they get used to the extra expenditure for their mortgage. In a few years they should review their mortgage, protection and savings needs, long and short term. By then they should be in a better position financially.

If you would like to be given a financial health check-up, please write to: Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk.