Wealth Check: 'I want to save but my debt drags me down'

We give 'Independent on Sunday' readers a financial makeover

The problem

The problem

Joanna Drane is struggling to pay down a handful of different debts.

She owes £5,000 in student loans and £1,800 on her Morgan Stanley credit card, and carries a £1,300 overdraft on her HSBC current account.

"I find it really hard to save any of my wages because I seem to spend half of them just paying off my debts," she says.

However, she hopes a recent £5,000 pay rise will give her a chance to address her lack of savings and investments.

Her other priorities are to start a pension and consider getting a foot on the property ladder, she adds.

"I have been meaning to arrange a pension for years but never seem to have earned enough to do so. With extra money, I hope to change this, but I'm not sure how to go about it."

Joanna is also keen to stop renting and to have a stake in a home. "I currently pay £500 a month but plan to move in with my boyfriend in the summer," she says. "Once we've saved some money by renting together, we hope to start looking at buying a place."

Interview by Esther Shaw

The patient

Joanna Drane, 26, from Balham, south London.

Job: media agency account manager.

Income: £30,000.

Savings: £100 in a Post Office account.

Investments: none.

Goal: to clear debts, start a pension and buy a property.

The cure

If Joanna used all her extra income to reduce her debts, she could clear her £1,800 credit card and £1,300 overdraft in a year, says Mike Pendergast of independent financial adviser (IFA) The One Group. "This will then free her finances to start a pension and a small savings plan."

Anna Bowes of IFA Chase de Vere recommends going back to basics and drawing up a strict budget to account for everything she spends. "On a £30,000 salary, she should be able to manage her debts and [new] savings comfortably."

Debts

Joanna's pay rise should give her an extra £280 a month - after tax and national insurance - to cut her debts, estimates Vivienne Starkey of IFA Equal Partners.

She should start by reducing her HSBC overdraft (charging 14.8 per cent) and then turn to her Morgan Stanley credit card. "Once [this card's] six-month interest-free period is over, it will become her most expensive debt at 15.9 per cent," she adds.

However, Joanna could switch this debt to another provider offering an interest-free balance transfer - if she hasn't managed to repay it by the end of the 0 per cent offer.

Property

Joanna's debts may affect her ability to buy a home with her boyfriend in the next year, depending on their joint financial circumstances.

"Lenders will take these debts into account when deciding how much she is able to borrow," warns Ms Starkey. "Joanna will also need some savings to cover the extra costs involved in buying a home."

Savings

Open a savings account for unexpected events or big purchases such as a holiday, says Ms Bowes. At first, Joanna need contribute only £50 a month to this.

This sum can be increased once a large chunk of her debt has been cleared, she adds, and then used to help fund a property deposit too.

Ms Bowes recommends a mini cash individual savings account (ISA) and picks out deals from Alliance & Leicester and Abbey - paying 5.4 per cent and 5.35 per cent respectively.

Retirement

Joanna needs to address her pension "sooner rather than later", says Ms Starkey.

"She should check whether her employer offers a pension scheme - and if it makes a contribution."

A stakeholder pension would be a cost-effective vehicle for Joanna, explains Ms Bowes, as the charges are low at 1.5 per cent.

"As she is so young, she should consider an equity [stakeholder] fund such as those offered by Legal & General and Standard Life."

Protection

With no mortgage or dependants, Joanna has no need for life insurance at the moment, says Mr Pendergast.

She should check to see whether her employer offers any sort of income protection if she were to fall ill.

If you would like a financial 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