Time for a reality check

James Lowe
Age 23
Lives in East London
Occupation Civil servant
Earns £17,000
Mortgage None
Debts Student loan £7,000, bank loans £5,800, credit card bill £750
Investments £600 in savings account, £20 in National Savings account, £350 in credit union account
Pension Member of occupational scheme
Aim To pay off debts and start saving to buy own property

Like many young graduates nowadays, James is finding it difficult to juggle paying off his debts with the type of lifestyle he would like to lead.

Although he graduated in 1999 and therefore benefited from free tuition and some grants, he still ended up with student loans of around £7,000. Since completing his studies he has been earning less than £18,000 so he has not had to start paying back these loans - though he would like to. 'The problem is I would have to repay over £100 a month. If I could pay £50 it would be more manageable.'

He has also run up other debts since leaving university: loans totalling £5,800, which he used to raise the deposit to rent his flat, buy a suit for work and pay for a holiday. Repayments on the loans currently cost him £130 a month. He also pays £350 a month in rent for his flat in East London, where he lives with his flatmate, Mark.

He is up to his £750 limit on his Barclaycard. He pays off £200 each month but then goes back up to the limit paying for such items as his railcard. He says he is reluctant to put too much effort into clearing his balance because the last time he did this he just let it mount up again buying clothes, bottles of wine and so on.

He recently received a tax rebate of £900: he used £300 to help clear an overdraft on his current account and put £600 into his Abbey National Savings account. He does not want to use it to pay off other debts. 'I would rather go shopping or have a holiday,' he says.

But it is not all spend, spend, spend. He is saving £25 a month in a credit union account based on the Isle of White, where his par ents used to live. There is around £350 in that account and James is glad to have a little 'pot' of money that he cannot easily touch. His other spare money goes on drinking, smoking and travelling. He went to Budapest for a weekend in May and has just been to visit his parents, who have retired to South-west France. In September he is going to Barcelona for a week to stay with friends.

In a few years' time he would like to be able to buy his own place and possibly go back to university to do an MA in Development Studies. But he realises he will need to get to grips with his finances in order to do so. He says: 'What I really need is someone to give me a good talking to, someone wagging their finger at me and telling me what to do with my money instead of just squandering it.' He wonders if saving through an Isa would be a good idea.

Adviser 1: Amanda Davidson

James has champagne taste and a beer budget. He can't afford to live the high life with lots of holidays and expensive habits such as smoking and drinking.

He needs to clear his debts first, or he will never be able to buy his own place. It's time for a reality check. James needs to sit down with a piece of paper and a calculator and work out - honestly - what he spends his money on. His bank statement will help.

He then needs to look at the list to see what is essential and what is a luxury. He should find that he can do without a lot of the non-essential things.

He then needs to decide on his priorities: for instance, is he going to give up smoking or is he going to give up his holidays? This is the harsh reality, and he is the one to make the decisions and take responsibility for them. The priority has got to be to clear his debts so that he can then start life with a clean slate. It is tough doing this, but he needs to. He could allow himself small rewards along the way, but nothing excessive until he has cleared these debts. If he is tempted to buy anything that he knows is a luxury item, he should ask himself at least three times whether he really needs it.

At the moment he doesn't have to repay his student loans, but he will once his income increases. He therefore needs to factor this in to any pay increases to make sure that the budget still balances. Once James has paid off his debts, he can save to buy a property and make some investment into other savings.

Amanda Davidson works for financial adviser Holden Meehan.

Adviser 2: Gordon Wilson

Banks and credit card companies must just love James. He will be paying for the holidays and the bottles of wine long after the memories have faded. Most credit cards charge interest of about 20 per cent. That £5 bottle of wine on a credit card costs James £6 if he keeps the debt for a year; if he keeps the debt longer he may pay twice over for the bottle. A £500 holiday will cost £600, maybe £1000 if he fails to clear his debt. Overdraft interest often comes close to 30 per cent.

When debt free, James may be able to afford twice as much wine and more holidays. He needs to reign in his spending and focus on a programme of debt reduction. The prize is a stress-free life with more cash to spend in future. There is little point in James having savings of any kind until his debt is cleared. If he has £1,000 in the bank, he may receive £40 in interest a year at the most, but his £1,000 debt is probably costing him £200 or more in interest. Paying the debt off saves £160.

He is facing a real financial crisis if he continues the programme of debt consolidation from overdraft to loan. There will come a point where it is exceptionally difficult to turn the position round. He needs to start right now and live within his income with a tough programme of debt repayment. The first targets are the debts with the highest interest.

James need not worry about Isas: these are savings accounts for spare cash, once his debts are cleared.

Gordon Wilson works for financial adviser Thomson & Shepherd.

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