Wealth Check: 'Tell me this: where's the fun in saving?'

Claire Fraser, 20, will go back to Manchester University on 21 September for her third year of studying drama. She has been spending her holidays doing internships and gaining work experience, but is worried about the effect it has had on her financial situation.

"I have been doing unpaid internships, which have been amazing experience and will hopefully benefit me eventually. But it means that I am accumulating an ever-growing amount of debt," says Claire. She is concerned that she is not going to be able to pay this debt off anytime in the near future.

Although she is living with her parents during the holidays, Claire is eager to become self-sufficient and find her own accommodation once she leaves university next June.

However, this is challenged by her desire to have fun regardless of her growing debt. "Having expensive things doesn't interest me and I can budget very well in many ways. However, I do think it is important to enjoy life to the full when you're young and so most of my money goes on being sociable."

Case notes

Income: Approximately £350 a month
Debt: £1,200 in student overdraft
Living Expenses: £8,040 per year
Other: Holidays, about £1,000 a year

Giving advice this week are Alan Smith, CEO of Capital Asset Management, Dennis Hall of Yellowtail Financial Planning and Juliet Schooling Latter, head of research at Chelsea Financial Services...

Socialising

"I have some sympathy for Claire's comment about enjoying life to the full when you're young, though I can assure her that that desire doesn't go away!" says Dennis Hall. "While most students will leave university burdened with debt, any steps that Claire can take to keep debt to a minimum should be taken.

"I have seen too many young people struggling to make ends meet simply because they are servicing debts built up while at university."

Claire also has difficulty holding on to short-term emergency cash and saving. "She should draw up a simple budget and aim to economise where possible and keep spending to a minimum while she is still studying – without giving up on the fun and social side of being a student!" suggests Alan Smith.

"While one can certainly applauds Claire's lack of materialism, unfortunately idealism won't get her very far with life essentials," points out Juliet Schooling Latter. "The fact is that modern life demands us to make money so we can provide for even the most basic things. It is also important to regularly save money, building up a pot for retirement and some funds for emergencies."

In order to increase her monthly income while working – and at university – Hall suggests: "It may be worth looking into opportunities to earn some extra cash at weekends. One possibility is mystery shopping, which can be fun and help supplement much-needed cash for concerts and socialising."

Debt

Although Claire is building up debt by not taking paid work in the holidays, this should pay off in the end. "Of course, part of her debt can be viewed as an investment in her future. By not taking paid employment during the holidays she is making contacts and gaining experience that could help her gain early employment after she graduates," says Hall.

In terms of her spending habits, however, they are more critical.

"Claire is a victim of our spend-now, worry-later culture. Unless she is serious about getting her finances in order, she will walk head-first into a debt-filled life," says Latter.

"This means watching her monthly expenditure, building up an emergency cash buffer (normally this should be three months salary), and thinking about her future financial needs. One way Claire could get her debt-free status back quickly is by cutting back on luxuries.

"Spending £1,000 on holidays seems exorbitant when she has accumulated a considerable amount of debt and has a meagre income."

Retirement

When it comes to retirement planning, the experts agree that it is never too early to develop good saving habits.

"If Claire is short on one commodity – income, she has a great deal of another – time! Even a modest savings amount will build significantly over the long term using what Einstein dubbed the Eighth Wonder of The World – compounding. Claire should ensure that any prospective employer offers her access to a good pension scheme (by 2012 this is likely to be the law when the new Personal Accounts are introduced) and add to the pot even at a modest level," says Smith.

"The generation of young people coming out of university now will find that the responsibility for providing for themselves financially in later life sits firmly on their shoulders," adds Hall.

"The State pension age is rising and employer pensions (for those that get jobs) are not as generous or secure as for previous generations. I know it seems too far into the future, but good savings habits adopted early in a working career will be of tremendous benefit later on."

"I fear that, for people of Claire's generation, if they don't take this on board soon enough, they will be a generation of people with insufficient money to live on in later life," he says.

For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email wealthcheck@independent.co.uk