Wealth Check: The retail is therapeutic, the debt isn't

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

The problem

The problem

Surely no 21-year-old can be expected to have their finances in perfect working order? Just out of college or school, few youngsters will be investing in individual savings accounts (ISAS) or putting away thousands of pounds for their retirement.

Zoe Peartree is no different but says she has become aware she needs to take action, especially now she is about to move out of her parents' home and rent a house with friends.

"I find it hard to stop spending. I'd like to establish a plan that lets me use my money much better. My credit card debt is really hard to manage."

Her debts amount to just over £8,000. She owes £80 on a New Look store card, £1,200 on a Mint credit card, has a £400 overdraft with HSBC, and owes £6,700 on a personal loan she took out to buy a car

The interest incurred is considerable as Zoe makes either the minimum payment - 5 per cent of the balance - on her store and credit cards each month, or as much as she can afford.

The New Look store card may be her smallest debt but the interest is huge as it has an annual percentage rate (APR) of 29.5.

She pays 14.8 per cent interest on her overdraft but hasn't paid any interest on the balance on her Mint card for the past threemonths as it has a 0 per cent introductory period; this has three months left to run.

The personal loan is with Nationwide but Zoe actually pays her father £236 a month as it is in his name; the lender turned down her application. "I have tried to pay the store card off, but quite often I end up adding more debt to it," she says.

Zoe has made some provision for her future. Since starting her job as an office assistant 18 months ago, she has been paying £50 a month into her employer's final salary pension scheme.

She has managed to save money by living at her parents' home but is poised to move out and rent a shared house near Chatham in Kent for £200 a month. "Renting will be fine but with all the bills that I'm going to have to share, I might find it even harder to keep track of my money," she says.

Although her car is a big expense, she will spend less time and money travelling once she has moved.

Her other savings - £150 in a mini cash ISA with Kent Reliance - earn 4.61 per cent. But she is planning on spending this on a forthcoming holiday.

Interview by Sam Dunn

The patient

Zoe Peartree, 21, from the Isle of Sheppey.

Job: office assistant.

Income: £12,500 a year.

Savings: £150 in a mini cash individual savings account.

Investments: none.

Debts: £8,400 spread across credit cards, a personal loan and an overdraft.

Goal: to cut monthly spending drastically.

The cure

"It's always hard to straighten a crooked tree," says John Donaldson at independent financial adviser (IFA) Positive Solutions, "so Zoe is right to try to get her finances organised at an early stage."

However, today's trend for spending rather than saving means it won't be easy for Zoe to chip away at her debt, warns Caroline Anstee at IFA Destini Fiona Price.

Setting herself a reasonable timescale for whittling down her debt should be the priority, adds Mr Donaldson.

Card debt

At the end of the 0 per cent period with Mint, Zoe should switch the debt to a similar offer from another card provider to avoid racking up interest, Mr Donaldson says.

With an APR of nearly 30, New Look's store card is expensive and should be switched to the same 0 per cent deal.

General debt

One way to clear her overdraft would be to take out a loan and then make the regular monthly payments, recommends Ms Anstee. "It would then be better to run the bank account in credit as it gives a much more positive feeling."

However, Mr Donaldson disagrees: he believes Zoe should simply aim to reduce her overdraft.

Income

It is a tedious chore, but Zoe should make a list of what she spends her money on each month, says Ms Anstee. Whether it's small change for a pint of milk or a full tank of petrol paid for with her credit card, she can then see exactly where her cash is going.

This will enable her to spot when she makes impulse purchases and overspends.

Zoe must then cut back on less important expenditure and set down a "repayment programme" - even if it is as little as £20 a month.

Savings

Although it is always wise to build up savings, clearing her debt should be Zoe's priority, advises Ms Anstee.

However, Mr Donaldson suggests she carry on saving in the Kent Reliance mini cash ISA and uses this to build up a "rainy day" fund equal to three months' salary.

She could even consider investing in a stocks and shares ISA, he adds. Some providers accept as little as £25 a month. And even this sum invested for, say, 15 to 20 years should grow into several thousand pounds.

Retirement

Joining her employer's scheme "was the right thing since a delay of five years at this stage could reduce her eventual benefits dramatically", says Mr Donaldson.

Even after she has reviewed her finances, Zoe should try to maintain her £50-a-month contribution, adds Ms Anstee.

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