Overstretched and overdrawn

Karl, 27, from Liverpool needs help matching his income to his outgoings: 'I desperately need to escape from a financial black hole. It is now three years since I left law college and became a trainee solicitor in Liverpool. I have always had a reasonable salary and had a £10,000 increase in September 2001 when I qualified, plus another £2,000 performance-related increase a few weeks ago.

'I earn £33,000 a year. After deductions for tax, pension contributions and the rest, my take-home pay is around £1,800 a month. The cost of living and house prices in Liverpool are fairly low. Until now my girlfriend and I have been renting a flat for £625 a month, which we split equally.

'We have now decided to get on to the housing ladder and will be moving to a newly built property in July. We have arranged a two-year fixed-rate mortgage, which will cost about the same as the rent we are currently paying.

'I borrowed my share of the deposit from my parents. My girlfriend earns slightly more than I do, so I am basically supporting myself at present. I am repaying a graduate loan from my bank (taken out to cover a mixture of my law college fees and the purchase of a car) at £250 a month. I took out the loan in November 2000. It was for £10,000 repayable over five years.

'I am also making student loan repayments of around £50 a month and (slowly, at £50 to £60 a month) paying off my credit card balance of around £1,800, which mainly relates to holidays and flights, which I put on the card and never got round to paying off. However, I have transferred my balance to a card with a 0 per cent introductory rate, so at least it is not getting any larger through added interest.

'My problem is that I have been overdrawn pretty much every month since I started work.

'I don't spend a massive amount on clothes, food, or hobbies, though we do go out for meals most weekends.

'For me the three main issues are: I go through a monthly cycle of financial angst whenever I am forced to look at my bank balance; I feel I am frittering my money away rather than saving, which I badly need to do because my girlfriend and I are planning to get married next year; and I have a vague sense of guilt that many people seem to be able to support a family on the same amount as I earn.'

Action plan

There is no magic wand that I can wave over your
finances to get them back into shape. You will just
have to be a lot stricter with yourself if you are serious
about wanting to gain control and save money.

You are earning a very decent wage compared with
most people, and if you were spending your money
more sensibly I'm sure you would not be running into
the problems you describe.

There is no obvious reason why you should be finding it
so difficult to make ends meet. Naturally the
repayments you make on your loans are a drain on
your resources, though at about ?350 a month they
still leave you with considerable disposable income
and even after paying your rent/mortgage repayments
you should not be hard up. Basically what you need is
more self-discipline to avoid over-spending.

You are already doing a number of things right. You
are a member of your company's pension scheme.
You are paying a competitive rate of interest on your
graduate bank loan. Shifting your credit card balance
to a 0 per cent introductory rate was also a good move,
as was taking a fixed-rate mortgage for two years. This
should enable you to budget and gives you an
opportunity to really get on top of your finances during
this period.

But your first priority should be to balance your income
and expenditure so you are not overdrawn each month.
You say you don't spend a 'massive amount on
clothes, food or hobbies', but your money must be
going somewhere.

You urgently need to work out exactly what you are
spending it on. Write down all your outgoings. Start
with all your known bills, such as council tax,
electricity, gas, telephone and petrol and make
allowances for other expenditure, such as birthdays
and holidays.

You will probably need to keep a 'money diary' for a
month or so, as it is often incidental expenses that you
least expect that mount up and eat into any spare
cash.

While you are writing everything down, look for things
you can cut back on. Small economies, such as
taking your own lunch to work, can save a
considerable amount. Make a concerted effort to avoid
impulse-buying. If you are tempted by something, ask
yourself at least three times if you really need it.

Cut down on your social life. You needn't stop going
out entirely. Eating out every other weekend, instead of
every weekend would help. Look for other savings,
such as making fewer calls on your mobile, or walking
more instead of driving so you use less petrol.

Check that you are getting the best possible deal on
your current account. If you do not already have a free
overdraft facility, consider switching to the Alliance &
Leicester Premier Account which is currently charging
no interest on authorised overdrafts in the first year. It
also pays interest on credit balances.

Be disciplined. Use any day-to-day savings plus the
extra money you are getting from your wage rise to
clear your credit card balance as fast as you.

Don't let the fact that you have a zero-rate deal on your
card lull you into a sense of false security. The money
you are using to clear that bill could be going into a
savings account instead, where it would be earning
interest.

Once you have paid off your credit card bill, start
building up your savings. You should aim to have an
emergency fund to fall back on equal to about three
months' outgoings. You also want to save for your
wedding next year. The best place for these savings is
a cash Isa, followed by a telephone or internet savings
account. The advantage of cash Isas is there is no tax
to pay on the interest.

One of the best rates today is offered by Safeway's
mini cash Isa, paying 4.2 per cent on deposits of ?10
or more. When you move into your new home, make
sure you are getting the best possible deal on your
insurance and utility bills.

Karl's plan

1. Make a decision to spend less and save more.

2. Work out exactly what you spend day to day.

3. Decide where you can make savings and
cutbacks.

4. Use the money you save and from your recent
pay rise to clear your credit card quickly.

5. Once you have paid off your credit card bill,
start saving in a cash Isa.

6. When you move, use
www.insuresupermarket.com and www.uswitch.com to help you find the cheapest home
insurance and gas, electricity and telephone
suppliers.

Let us help you

Do you need some financial coaching? We help
readers to solve their financial challenges. This
might be to stop spending and start saving, pay
off debts, plan a pension or even to choose a
bank account. You do not have to be identified.
We deal with as many cases as possible in the
paper but cannot give personal advice if your
letter is not selected for publication. Write to:
Money Coach, Cash, The Observer, 119
Farringdon Road, London EC1R 3ER or email: cash@observer.co.uk.