Wealth Check: 'What is the best way to reduce my £18,000 debt?'

Thomas Patrick is an administrator working for a paper company on a temporary contract. He rents a room in a six-person house share in Epsom, Surrey, and his key financial goal is to reduce his debts. "My main concern is my £18,000 debt that is being dealt with through the debt management charity CCCS [the Consumer Credit Counselling Service]," says Thomas, 28. "I have to be careful not to spend more than I earn and to budget better for holidays and those unexpected costs."

Thomas enjoys his job but has no savings or investments and is not contributing to a pension scheme, admitting: "I don't really look that far ahead." Most of his debts are owed to credit card companies but debt management means interest has been frozen and he can no longer get credit.

Thomas's income will rise if his job becomes permanent and he is waiting for that before increasing his debt repayments. "I am managing at the moment but at the current rate it will take me about 15 years to pay off the debt," he says. "I would like some advice about how to improve my financial situation."

Case notes

Annual income: £18,500
Pension: None
Savings: None
Debt: £18,000, being dealt with through a debt management charity
Unable to get credit

Lending Thomas their expertise this week are Duncan Carter of Clearwater Financial Planning, Patrick Connolly of AWD Chase de Vere, and Robin Keyte of Towers of Taunton Financial Services...

Debt

"Thomas is in a similar financial position to the UK Government and his first priority must be to reduce his level of debt," says Connolly. "I would suggest that Thomas writes down all of the money he spends and then reviews this at the end of each week. This will give him a much clearer understanding of his expenditure. I would also suggest that Thomas tries to build up a cash buffer fund over a series of months, but this should not detract from his main goal of paying off debt."

Carter agrees that Thomas needs to analyse his spending and says he must factor one-off payments, such as holidays, into his monthly budget. "Given the amount of debt incurred in the past, it appears that Thomas has never really got to grips with budgeting and this has to become his main priority," he says. "I know the debt is being managed but I would look to repay this sooner rather than later as otherwise his credit rating will be adversely affected for years to come."

Thomas's debts of £18,000 exceed one whole year's net earnings and Keyte says paying them off must be his priority. "He is doing the right thing by facing up to them and speaking to the CCCS and holding down a job," he says. "I would suggest a goal of paying off all his debts within three years and calculating how much extra income he would need, and how many hours extra a week he might need to work, and then see how that looks."

Income

"I suggest Thomas investigates whether his employer has any paid overtime available," Keyte says. "Showing such a willingness to work will put him in a good light from his employer's point of view. Furthermore, in simplistic terms, the more time Thomas spends working, not only will it increase his earnings but he will have less time to spend money."

Connolly agrees that Thomas should consider a second job, saying: "This may seem like hard work but he is in a pretty dire financial situation and much like the UK economy, tough decisions may need to be made to address this."

Despite the debts, Carter believes Thomas should try to keep some money for emergencies. "He should look to start saving in order to build up a cash reserve to meet unexpected expenses," he says. "Ideally, an amount equal to about six times his monthly expenses should be held to this end. A cash ISA would be a good home for such savings because the interest, although currently low, is tax-free and interest rates will go up at some point in the not-too-distant future."

Savings

"Starting to save for retirement, although a long way off, should also be a priority, because the longer this is delayed, the harder it gets," says Carter. He warns that many people expect too much from the state pension and says the actual amount they will receive can come as a "sobering revelation".

Connolly agrees that waiting longer to start saving for retirement makes it more difficult, but believes that Thomas has little choice at present. "Thomas is not in a position to consider serious saving for the future," he says. "People have to take responsibility for their own retirement and Thomas needs to give this serious attention as soon as he is in a position to do so."

Thomas should investigate employer-sponsored insurance and pension schemes but will have to wait before considering buying a place to live, according to Keyte. "Home ownership will only be viable once the existing debts are gone and Thomas has accumulated a reasonably sized capital deposit to put down for a mortgage deal, which is perhaps a further few years off," 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.