So keen is James Padgett to put his finances in order that the recent
graduate’s plea for help to Times Money even included the “P”
word. “Should I be starting a pension?” he asked.
This is quite a turnaround for someone with £15,000 of student debt and a
self-confessed spendthrift tendency. “I lived away from home during
university so I could spend what I liked without my parents questioning my
willingness to part with cash,” he says. “I had lots of meals out, but my
main weakness is clothes. If I see something I like, I have to buy it.”
But the 21-year-old, who graduated from the University of Sheffield with an
economics degree in July, realises that he now needs to take a more
responsible approach to money. “I really want to know what my financial
priorites should be,” he says.
His financial reform is already under way. While he seeks permanent
employment, James has taken a temporary administration job with a
construction company, earning £300 a week, and is keeping a tight rein on
his spending. He is living rent-free with his parents, in Middlesbrough, and
his only weekly expenses are £10 for lunches and a daily paper, £15 playing
cricket and football and £30 for petrol – his mother gave him her old car to
get to work because there is no public transport to the site. His only
monthly bills are £30 to meet the minimum repayments on three credit cards,
£40 on car insurance and £50 on his mobile phone contract. “I use my phone a
lot and get 1,000 free texts and 700 minutes, so it’s worth it,” he says.
James owes the bulk of his £10,500 debt to the Student Loans Company (SLC),
the public sector organisation for loans and grants, but does not have to
start repayments until April, by which time he hopes to have found a job in
finance with a starting salary of £20,000. He would then pay back his SLC
loan at the statutory 9 per cent of earnings above £15,000 a year. “I don’t
see any point in starting to pay it back sooner as the interest is only 4.8
per cent,” he says.
James has a £1,920 overdraft in his NatWest student account. There is
currently a £2,000 interest-free overdraft facility, but this drops to
£1,000 in July. He also has £600 in an instant-access eSavings account with
NatWest, paying 4.06 per cent. James says: “I have decided to put in £600 of
the £1,000 a month I’m earning at the moment. I’m not using it to save, but
to stop me getting access to the funds with my debit card.”
He has a total of £1,300 outstanding on three credit cards – NatWest, Egg and
Barclaycard – at interest rates ranging from 13.49 per cent for purchases to
27.9, per cent for cash withdrawals. “The cards were an easy access to cash
when I was short before student-loan day or to help with the rent – OK, and
for buying clothes and an iPod,” he confesses.
James also owes his parents £1,000. “My mum and dad were very generous while I
was at university,” he says, “but to see me over the final hurdle I didn’t
want to take any more gifted money, so I asked them for a loan and I want to
repay it as soon as I can.”
James expects to have to relocate to London or Manchester for work and thinks
that his best strategy is to borrow money to set himself up for his new
career and pay off some debts, saying: “I reckon that I would need to borrow
£5,000 to pay off my credit cards, my mum and dad and to buy two or three
suits for work and pay a rent deposit. Where would I get the best deal on
this?”
James Padgett: what the experts say
FINANCIAL PLANNING
Sue Hannums, savings manager, AWD Chase de Vere
“James is in a fantastic position to combat his debts while he’s living at
home with his parents, rent-free. The first thing he should do is write out
a budget to work out how much he can pay off and for how long.
“The trick with any budget is to allow for every spending need. To avoid using
credit in the future, James should work out how much he needs, not only for
petrol and general living expenses, but also for nights out, clothes and
even birthdays and Christmas. He must be completely honest and realistic –
but perhaps not too generous – if he truly wants those debts paid off. If he
saves about £600 a month, he could pay off his credit card, overdraft and
his parents in eight months.
“James should also look to move his credit card debts because the rates he is
paying seem high. Virgin Money is offering 0 per cent on balance transfers
for 15 months, with a 2.98 per cent balance-transfer fee, while Tesco is
offering 0 per cent for 12 months, with a 2 per cent balance-transfer fee.
“Once all his credit-card debts are on the lowest interest rate possible,
James should pay off either the most expensive debt, or the debt with the
shortest 0 per cent term. He should pay the minimum required on the cheaper
debts and pay the most to the expensive debt and keep working his way down.
“The £600 in his NatWest savings account is a false economy. The interest
gained is outweighed by that charged on his credit cards, so he should use
his savings to pay off some of this debt. Alternatively, these savings could
be the start of the lump sum that he feels he will need when starting his
new job. In this case, he should work savings into his monthly budget and
move the money to a better-paying account. Sainsbury’s Bank pays 6.25 per
cent gross on its Internet Saver account.
“Alternatively, James could use his Isa allowance. Every UK resident can
invest £3,000 (£3,600 from April 6 next year) each year tax-free. Egg’s
internet-only Isa pays 6.05 per cent gross and has penalty-free acess.
“James’s idea of consolidating his debts is also a false economy. It will make
his monthly payments cheaper, but total repayment will be much more
expensive. But if he is determined to go down the consolidation loan route,
one of the best loans on the market is with Bradford & Bingley, with an
annual percentage rate (APR) of 6.7 per cent.
“However, James will be better off if he has only his student loan to pay when
he starts his new career, rather than adding to his debts.”
SAVINGS AND INVESTMENT
Mark Dampier, head of research, Hargreaves Lansdown
“Before considering any investment James needs to pay off his debts – and I
strongly advise against borrowing any more money to do so. That’s a strategy
for a life of debt.
“As his student loan can be paid gradually once he has a well-paid job,
James’s priorities must be his credit cards and overdraft. The savings in
his NatWest instant-access account should go towards paying off the credit
card with the highest interest rate. Then he should work through his debts,
picking off those with the highest rates first. He should also cut up two of
the credit cards – he definitely doesn’t need three.
“Once his debts are paid, I suggest James saves the equivalent of three to six
months’ salary as an emergency buffer, using a cash Isa such as that from
National Savings & Investment, which pays 6.3 per cent gross.
“He can then look at longer-term investment, the most obvious being a pension.
I would advise waiting until he is in full-time work and then look at the
options. Unless he works in the public sector he is likely to be offered a
private pension. This means that investment performance is crucial and he
must look at the fund options and not just tick the box that puts him in a
default – usually poorly managed – fund. A bit of research on the internet
will uncover which are the quality funds.
“James could also consider a monthly savings plan in a stocks and shares
mini-Isa – even small sums will build over the years. He could start with a
global fund, such as Artemis Global Growth. For something closer to home, he
could go for Jupiter UK Growth. As his pay rises he should increase his
savings plans and pensions by the same amount, thus ensuring they keep up
with inflation.
“But none of this is possible unless James has a good budget. He should work
out his total monthly expenses and an amount to put into savings.
“The most important things James should take away from this MoT are not to
borrow any more money and to pay off his credit cards every month if he uses
them.”
BEST DEALS
Steve Weller, head of communications services, uSwitch.com
“It sounds like James is taking steps to keep his debt under control. He is
right not to pay off his student loan until he has to, but he does need to
tackle the credit card debts. He should cut up his cards, possibly keeping
one for emergency use only.
“He could take out a loan to repay the cards. For instance, Alliance &
Leicester’s Moneyback Bank offers £5,000 over three years at 6.3 per cent.
The monthly repayments would be £152 and the total repaid over the term
would be £5,486. However, James may not get this rate because he has a
limited credit history. Alternatively, he could transfer the debt to Virgin
Money, at 0 per cent for 15 months, with a balance-transfer fee of 2.98 per
cent.
“The £50 a month he pays on his phone seems high. He could look at the O2
Online 40, an 18-month contract at £40 a month, which includes 800 minutes
of calls, anytime to any network, and 1,000 texts. He can top up with
another 100 texts for £5. Almost any new phone would be free, too. This
would save James £120 a year.
“Alternatively, an 18-month contract with Orange Panther, at £45 a month,
includes 1,000 minutes of calls and unlimited texts. This means that James
could text as much as he likes and still save £60 a year.”
LINKS
AWD Chase de Vere: 0845 7959112, www.awdplc.com
; Hargreaves Lansdown: 0117 9009000, www.hargreaveslansdown.co.uk
; uSwitch: 0845 6012856, www.uswitch.com
.
James’s response
“From the experts’ advice, my priority has to be clearing my credit card
debts. I will look into an immediate balance transfer and I hope to make
real inroads into clearing them into the new year. Once the cards are paid
and the overdraft starts to shrink, I will look at a regular savings plan. I
like the idea of having all my finances accessible on the internet, so the
Egg saver interests me.
“I took out my phone contract for the nice phone rather than the financial
deal, which was a bit stupid. It’s up in January, so I’ll look for cheaper
line rental and curb my phone use.
“Budgeting will be my biggest test. I find it very difficult not to buy
something I want when I see it. I could stick to a budget for a few weeks
but then easily blow all my good work in one afternoon. If I can crack
staying away from needless shopping I think my financial situation will
improve quickly.”
Would you like a financial makeover? Write to Money, The Times, Times
House, 1 Pennington Street, London E98 1TB, marking your envelope Money MoT,
or e-mail moneymot@thetimes.co.uk. Please include current finances, short
and long-term goals and a daytime phone number. You must be prepared to
disclose your income and be photographed.
