Wealth Check: 'I've moved home to get out of debt'

After renting a house for the last two years, and now that his girlfriend is living and working in London, Tom Green, 25, has recently moved back home.

He earns £26,000 a year as a BBC radio producer in Sheffield - producing a monthly take-home pay of a little over £1,600 - where he has been for three years.

Student debts are still troubling Tom and his main priority is paying off his loans, overdrafts and credit cards, which cost him £460 every month.

Aside from that, he pays £150 towards living costs at home, and spends around £125 a month running his car.

Tom would like to capitalise on the fact he is paying no real rent to reduce his monthly outgoings and make it to pay day without going into the red.

He recently joined his employer's final salary pension scheme, and pays £100 a month into it, but doesn't have any other savings or investments. Tom is hoping to move south next year, and reckons he will need to replace his ageing car within the next 12 months.

In the long-term he would like to start putting some money away for a deposit to get his foot on the property ladder. We asked three financial advisers to help: Stuart Glendinning, of Moneysupermarket.com; Nick White, of uSwitch. com; and Ashley Clark of Needanadviser.com.

Case notes

Tom Green, 25, radio producer, Sheffield

Salary: £26,000 (just over £1,625 a month after tax and National Insurance).

Savings: None.

Debts: £10,450, including a £2,000 interest-free loan from parents, a bank loan of £1,800, a graduate loan of £4,000, and three credit card debts of £2,000, £500 and £150.

Pension: £100 monthly contribution into BBC's final salary pension scheme, which provides guaranteed benefits at retirement.

Monthly outgoings: £1,015 on general living expenses: this includes £150 paid to mother for rent, £125 on petrol, £30 on car tax and upkeep. In addition, Tom spends £460 each month on debt repayments.

Property: Has recently moved back into parental home.

DEBT

Tom has sizeable debts, but is in a much better financial position than he may realise, the experts say. Partly this is because he has a decent disposable income thanks to his low rent, but also he is paying much more than necessary to service his borrowing.

The loan he has from his parents is interest-free but the 10 per cent he pays on his bank loan is excessive - the cheapest rates are below 6 per cent a year, though Tom may not qualify for the best deals on the market because he is not a homeowner.

He should, however, be able to cut the cost of his credit cards. His biggest plastic debt is with HSBC, which charges 15.9 per cent, while Egg and American Express are charging 16.9 and 17.9 per cent respectively, albeit on significanly smaller balances. Cutting the cost of these debts could be the key to paying them off more quickly. "Hunt down a pair of scissors and cut up two of your cards," says Stuart Glendinning as a starting point.

The idea is to leave Tom with one piece of plastic for emergencies, while he starts to look around for a 0 per cent balance-transfer deal, ideally one that doesn't charge a balance-transfer fee. Sainsbury's Bank, and the Norwich & Peterborough and Stroud & Swindon building societies offer this. Capital One Bank Platinum Mastercard and MBNA Platinum Plus only charge low rates.

"Tom shouldn't use this card for new purchases as it's specifically a balance-transfer card and could end up costing him a lot of money," warns Nick White. It's also important he switches the balance to another card if he hasn't paid it off in full by the end of the 0 per cent grace period.

Moving home is probably the best thing Tom could have done. "I suggest Tom has a lean three months," says Ashley Clark. "After paying parents and minimum credit-card payments, he still has £795 a month. Paying £600 a month would clear the bank loan by Christmas."

SAVINGS

Getting the most out of his current account should be Tom's next priority. "It's important he receives a good in-credit interest rate, as he credits £2,000 each month, and just spends a small amount of time using his overdraft," says White.

Alliance & Leicester's Premier Current Account could be ideal. It offers a 6.1 per cent in-credit interest rate, plus an overdraft facility of £2,500 that is free for 12 months (5.9 per cent thereafter). Part or all of his outstanding graduate loan could be switched to this more competitive overdraft rate, saving yet more interest. A&L will even help with moving any direct debits or standing orders.

Tom doesn't have any savings, but he is looking to the future by putting £100 a month into the BBC's final salary pension scheme. "It's a fantastic scheme," says Ashley Clark. "If he stays with it for 40 years he would receive a pension of up to two-thirds of his salary." This will easily pass the £16,000 a year target, in today's money, he has set for a pension income.

BUYING POWER

Buying a new car could end up landing Tom in even more debt, so Glendinning recommends trying to keep it on the road as long as possible. "Find a good mechanic and keep it going, because if you get a loan to buy another vehicle you are increasing your debt."

Looking longer term, buying a home seems a daunting prospect when one's cashflow is controlled by debt. Once it's paid off though, Tom should start saving up for a deposit. Despite rising property prices, he still has various options for buying his first home.

Housing Association schemes and other shared-ownership schemes are worth checking out, and a young professionals mortgage is worth considering.

"Many lenders also offer stepped mortgages for young professionals," says Ashley Clark, who suggests First Active, because it offers a five-year deal where the rate starts low and then increases.

"They will lend slightly more than normal or charge low rates in the first few years so you can initially afford a larger mortgage," Clark explains. "Lenders anticipate your income rising quickly in later years."

For a free financial check up, write to Wealth Check, The Independent, 191 Marsh Wall, London E14 9RS or e-mail cash@independent.co.uk