Case Study #1
Louis of London (contact details supplied):
“I am 26 years old and since graduating from university four years ago I have been working in the music industry—a job that I love but the flipside being that I get paid very little for it. I have been working freelance for the past 18 months, earning £1,200 per month (£14,400 p.a.). I confess to not being very good with finances and although I have registered with the Inland Revenue as self-employed I have not yet completed a self assessment tax return (though I am being badgered about it and will have to do so imminently).
“I don’t have any savings and though I have attempted to budget once or twice, it hasn’t been very successful and I always end up struggling through the last few days before my client(s) – I work predominantly for one company – pay my invoices.
“I do, however, have rather a lot of debt: A student loan that stands at around £9,000 that I am not yet paying off as my low salary currently makes me exempt; three credit cards on which the balance totals around £1,500 and my monthly minimum payments total £70; two overdrafts, one of £3,000 and one of £1,500—the latter is being paid off at a rate of £50 per month, as agreed with the issuing bank. This debt is clearly eating into my disposable income and, with monthly household rent and bills totalling around £600, leaves me with approximately £100 per week to spend on living, and this is before any as-yet-unpaid income tax or National Insurance payments are considered. This doesn’t stretch far, given that I live in London and my job entails regularly attending music events and clubs, etc.
“I realise that my finances are a mess but don’t know where to start to try to sort them out. Getting paid more would be a good place to start but is not really a viable option if I want to stay in my current position, working for my current client, which I do. Any help would be much appreciated.”
The Answer
Dennis Hall APFS AIFP, Chartered Financial Planner with Yellowtail
Financial Planning Ltd:
“My first piece of advice is to deal with your tax affairs promptly. Apart from the feeling of being harangued, HMRC can and will levy fines for late submission of self assessment returns and late payment of any tax due. Fines and penalties are completely avoidable yet the Revenue still rake in millions each year from people who leave things too late.
“Credit cards with only the minimum monthly repayments being made will take a long time to clear, and at the sort of interest rates applied this is debt you can ill afford to have hanging around for that amount of time. The student loan isn’t a particular worry right now, and has the most attractive interest rate terms, but the other debts should be looked at with a fresh set of eyes. There is a total of £6,000 of debt across the credit cards and the overdrafts, with the larger £3,000 overdraft seemingly not yet being repaid. Approximately £120 per month is being applied to the remaining £3,000 of card and overdraft debt, and if the average interest rate was 17% it would take just over three years to clear this portion if payments were maintained.
“I would suggest converting all the credit card and overdraft debts into a single personal loan provided you can obtain a reduction in the interest rate. This would ensure that there was a fixed repayment period and amount. There is a temptation with credit card debts to allow payments to reduce as the debt gets smaller; this merely adds to the credit card issuers' profits as they continue to charge interest on the ever present debt. Do yourself a favour and make a plan to repay it in the next three-four years. A £6,000 loan at an APR of 8% for example would be cleared in 48 months and cost £145 per month. Counting down the months to being debt free is more satisfactory than the current open-ended spiral of debt when you just don’t know when you will be free. Also, counting down the months will feel so much better than trying to count down in years, it takes so long to count down from four years to three years it’s almost soul destroying!
“To find out about consolidating your debt, I would suggest approaching you own bank in the first place, failing that, the credit card issuer—they may be linked to another bank/building society that can arrange loans. Complete consolidation may not be possible, but key here is that converting from open-ended variable interest rate credit card and overdraft arrangements into something that is fixed-term fixed repayment, and arranged at a time when interest rates are extremely low, is a sensible option to take.
“A useful thing to do is to physically write down everything that you spend, to get an understanding of where every penny goes. It’s surprising how small, seemingly unimportant expenditure adds up over a month. Once you see your spending it becomes easier to find a solution to prevent those situations when you run out of money before the end of the month.
“Armed with that information you can also make a conscious decision to cut out certain expenditure for a while to allow you to get ahead of yourself and build some emergency savings. Without a target it is difficult to deprive yourself of some existing pleasures, but if you can identify a specific goal, such as to build up three months of expenditure as an emergency fund, then you can find ways to achieve this. It’s not painless, but clear objectives, and built-in rewards for achieving milestones along the way, can be highly motivational.
“Don’t underestimate the power of making seemingly small sacrifices. A large number of people grab breakfast or lunch on the run, sandwiches, a latte and a muffin. Add the cost of these over a year and you’ll be in for a shock. With a bit a planning and preparation you can make your own at home and save a couple of hundred pounds each year.”
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Disclaimer: The financial adviser was provided by the Institute of Financial Planning. Morningstar is not responsible for the selection of the financial adviser nor will it be liable in any way for any advice or information provided by the financial adviser.
