Wealth Check: 'I want to start a business - but I'm in debt'

Rick Edwards, 23, is just starting out in his career as a personal trainer, which makes his financial decisions over the next few years vital.

After leaving Edinburgh University, he did a six-month course in personal physical training. However, he is yet to find a permanent job. Rick is also keen to keep his working hours down to have time to train and concentrate on his own fitness. "But I am conscious that with a credit card debt and overdraft, my finances need to be looked at," he says.

With no dependants, his primary goal is to resolve his debt obligations before the interest rates start spiralling. Then he will be looking to take out a loan to start a training business, but he is unsure whether this would be a sensible move given his debts.

We asked three financial advisors for their suggestions: Mike Pendergast from Zen Financial Services, Martin Bamford from Informed Choice and Ajmer Somal from the Montpelier Group.

Case notes

Rick Edwards, 23, personal trainer, St Albans

Income: £9,000
Property: lives with parents
Pensions: no current plans
Savings: £1,050
Debts: credit card overdraft – £1,000 at 15.9 per cent; student loan
Monthly outgoings: £241

Debts

Martin Bamford is adamant that Rick's existing debt must be his financial priority. Bamford says: "He is paying 15.9 per cent on his credit card debt so a transfer to a 0 per cent balance-transfer deal could lead to a beneficial saving."

He suggests that Rick switches to the Tesco Bonus Mastercard, which has a 12-month interest-free period with a 2 per cent transfer fee. "While his graduate overdraft is currently interest free, he should be making plans to pay this off as soon as possible," says Bamford. "It will not be interest free forever."

He adds: "Also, if Rick is serious about borrowing for commercial purposes, lenders will not be enticed by unpaid credit cards and student loans in the background."

Savings

As Rick wants to ultimately set up a training business after sorting out his debts, Bamford recommends he investigates the various financing opportunities available to him. He proposes The Prince's Trust, which offers loans of up to £4,000 to sole traders at a low interest rate. Alternatively, Business Link has details of over 2,500 business schemes within their grants and support directory.

Somal advises Rick to keep some cash as an emergency fund and says that he could use his expected inheritance of £10,000 to £15,000 to clear his debts and allocate towards savings for emergencies, such as sickness cover.

This is particularly important in a fitness-based job. Somal adds: "If there is anything left from the inheritance, he could look towards utilising his ISA allowance for the year, perhaps a £3,000 mini cash ISA."

Protection

Although Rick has no dependents, Somal says that he should consider taking out critical illness cover . "This will provide a tax-free lump sum on diagnosis of a listed illness. And, as he is young and in good health, he would get a sizeable amount of cover at an affordable price."

Pension

Pendergast stresses that while self-sufficiency in business is desirable, with it comes the necessity to plan for retirement, as no former employer is available to assist with a pension. He advises Rick to start a personal pension scheme, to which he should contribute on a regular basis. As a self-employed fitness instructor Rick should "look to put the effort in, build up a client base and expand organically. Then an annual income of more than £9,000 a year and a pension scheme will be realistic targets."

To find an independent financial advisor in your area visit www.unbiased.co.uk. 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