Wealth Check: 'I need capital but I have debt and no savings'

Stephanie Lewis, a 23-year-old from Eastbourne, works with teenagers in care, but would like to set up a shelter for the homeless in the town. To do that, she'll need to put up some of her own capital - a prospect that is some way off, given that she has no savings.

For now, Stephanie's priority is to learn to manage her money better. All of her monthly salary goes on living expenses and debt repayments - she owes £500 and £900 on Egg and Barclaycard credit cards respectively, and she is also paying off a £5,000 loan from HSBC.

In the sector in which she works, salaries do not tend to rise quickly, but Stephanie will at least get a £1,000 pay increase when she passes an NVQ for which she is currently studying. She also boosts her basic income with an extra £3,000-a-year allowance for nights that she stays at the project where she works.

For Stephanie, property and a pension remain some way off. For now, she'd just like to be able to save some money each pay day, for her own purposes and to put towards the shelter.

We asked three independent financial advisers to offer their suggestions to Stephanie: Susan Hannums, of Chase de Vere, Marc Ruse, of Swallow Financial Planning, and Philippa Gee, of Torquil Clark.

Case notes

Stephanie Lewis, 23, project worker, Eastbourne

Salary: £15,500, including basic salary of £12,500 and a further £3,000 for night duty.

Monthly spending: From a post-tax income of around £1,040, Stephanie spends £800 on general living expenses, plus a further £215 on debt repayments.

Savings: None.

Debt: Around £1,400 owed on Barclaycard and Egg credit cards, plus a £5,000 personal loan from HSBC.

Property: Lives in rented accommodation.

Pension: No savings.

BUDGETING

Stephanie needs to analyse her spending in detail, says Gee. She should go through her bank statements systematically searching for ways to cut back. Are there regular payments for, say, gym membership or DVD clubs she no longer uses? How much is she spending each month on luxuries? Keeping a spending diary itemising money spent on even cups of coffee will help identify where her money is going and enable her to cut back.

If Stephanie is willing to get tough with herself, she should set a weekly spending target to cover all her outgoings other than fixed regular costs, Gee adds. By withdrawing this sum in cash at the beginning of the week, she will always know exactly what she has left to spend.

Finally, Gee is sure there will be ways to reduce some of the fixed outgoings - for example, her mobile phone bill. Websites such as www.moneysavingexpert.co.uk can help her find ways to cut back without her lifestyle necessarily having to suffer.

Hannums is also keen to see Stephanie budget more strictly. "This doesn't always have to be about saving money," she says. "Simply monitor your spending and allow yourself a set amount each week or month for each type of spending."

DEBT

Ruse says Stephanie's debt and savings dilemmas are, in effect, two sides of the same coin. "There is no point in setting funds aside as savings on the one hand while on the other still servicing a debt," he says. "That never makes sense unless the cost of borrowing is extremely low and you are prepared to take a high risk with your investments in order to earn a significantly higher return."

Ruse thinks one option would be to consolidate the debt into a single personal loan. He points out that some employers offer their staff very cheap lending facilities, or a parent may be able to help by offsetting savings against Stephanie's borrowing.

Failing that, she must look for the cheapest loan deal possible and then cut up her credit cards to be sure she doesn't run up further borrowing. Ruse also thinks that once Stephanie gets her pay rise, she must direct as much as possible of this cash towards debt repayments, rather than putting it into savings.

Hannums is keen to see Stephanie transfer her £1,400 of credit card debt on to plastic offering a 0 per cent introductory rate of interest. She suggests a deal from Halifax - even though it carries a balance transfer fee of 2 per cent, this will only amount to £28 for Stephanie and will save her much more in interest.

The key to cutting interest charges is to pay back the money as quickly as possible. If she can make repayments of £150 a month, the debt will be gone in 10 months' time, Hannums points out. If she doesn't clear the debt before the 0 per cent offer at Halifax comes to an end, she will need to move the debt again.

Gee says it's worth at least finding out whether there would be penalties for transferring the HSBC loan to a cheaper lender. But the rate she currently pays - 6.7 per cent a year - is reasonably competitive and she may struggle to find a better offer.

SAVINGS

Stephanie's lack of savings may be one reason why she is in debt, Hannums adds. Without an emergency fund to fall back on, even for events such as birthdays and holidays, any one-off expenditure can be difficult to finance.

Hannums would like Stephanie to start a cash individual savings account (ISA) with a provider such as Kent Reliance Building Society, which pays 4.96 per cent a year, tax free. Putting £20 aside will help, but Stephanie should aim to get as close to the £3,000 maximum ISA allowance during the course of the financial year as she can.

Gee says it's good news that Stephanie has a guaranteed pay rise on the way and urges her to find out whether there are any additional qualifications she could take that would further boost her income.

PROTECTION

While Stephanie is understandably keen to put as much cash by for the shelter, she also needs to think about protecting herself, says Ruse, who is concerned she has no insurance in place that would pay out if she was unable to work due to ill-health. This should be her next priority once the debt is gone, he suggests.

Ruse also thinks Stephanie should find out whether her employer offers an occupational pension scheme. If so, joining it makes sense as she'll get tax relief and probably a pension contribution from her employer.

The alternative, suggests Hannums, is a stakeholder pension with a decent insurer such as Standard Life or Legal & General. She can opt to pay in as little as £20 a month and then increase contributions later in life, as and when she can afford to do so.

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