Wealth Check: 'How can I pay my debts?'

As Emma Storey has discovered, it is difficult to pay off your debts when all your money goes on essentials every month. Ms Storey, 22, graduated from university last year and is a reporter for Real Radio FM in Yorkshire. She has £12,000 in student loans, which she will start paying in April, as well as £1,000 on her HSBC credit card and a £1,500 overdraft.

As Emma Storey has discovered, it is difficult to pay off your debts when all your money goes on essentials every month. Ms Storey, 22, graduated from university last year and is a reporter for Real Radio FM in Yorkshire. She has £12,000 in student loans, which she will start paying in April, as well as £1,000 on her HSBC credit card and a £1,500 overdraft.

She accumulated her debts when she was studying broadcast journalism at Leeds University. "I'm not particularly happy about it," she says, "I was prepared to take a student loan out, and at the rate they take it out of your wages, I'll still be paying it off when I'm 40."

She is keen to pay off her HSBC credit card first but finds she has no spare cash at the end of each month. "I'm living within my means, but I'm not in a position to put anything aside." Her overdraft is interest-free but her bank has told her she must reduce it to £1,000 by July, then £500 next year, or risk penalties. To add to her troubles Ms Storey is yet to join a pension scheme. But she is enjoying Real Radio FM. "I produce passages for the news programme and do research and editing." Her ambition is to go into sports journalism. "I do mainly football but we also cover rugby and cricket when the season is on," she says. Ms Storey is renting a one bedroom flat in Armley, just outside Leeds city centre. "It's really great having my independence and my own flat," she says.

We put her case to Lisanne Mealing, director of MDM Associates in Surrey, Doug Brodie, director of Master Adviser in London, Mike Metcalf, principal of the Metcalf IFA consultancy in Kent, and Yvonne Goodwin, independent financial adviser at Pearson Jones in Leeds.

EMMA STOREY, 22, RADIO JOURNALIST

Status: Single;

Occupation: Radio journalist for Real Radio FM in Yorkshire;

Education: BA in broadcast journalism at the university of Leeds;

Salary: £14,000 a year;

Debts: £12,000 student loan; £1,000 on HSBC credit card; £1,500 overdraft

Savings: £100 in an Isa;

Pension: None;

Motoring: Peugeot 106;

Property: Renting one-bedroom flat in Armley, Leeds;

Outgoings: Rent £400; council tax £57; phone bill £60; car insurance £50; bills £50; food £150; going out/clothes/ petrol £150.

Solution 1: Property

Mr Brodie says Ms Storey could buy a three-bedroom house in Leeds for £110,000 and by renting out a room she could take £4,250 a year in rent, tax-free. In two years, if the value of the property grew by 10 per cent, she could sell her property and pay off her student loans. Since it would be her principal private residence, she would have no capital gains tax to pay.

He suggests Ms Storey looks at the website of the Jump Now estate agent (www.jumpnow.co.uk), who do 100 per cent mortgages and offer to pay expenses. She could also ask her father for financial help. If the value of the property went down she would still have a roof over her head and two rooms to rent out. Even if it took 10 years for her investment to come good it would still be preferable to paying off her debts through her income.

Ms Goodwin says as Ms Storey's career progresses she should think about buying a property and says it is still possible to pick up one in Leeds for as little as £40,000.

Ms Mealing says renting a one-bedroom flat tends to be expensive and thinks Ms Storey should consider sharing. Her outgoings on the flat are £557 a month. By sharing she could get it down to £300 a month. The bills would be shared and she would also not have to pay the council tax on her own.

Solution 2: Student loan

Ms Mealing says graduates begin paying off their student loans a year after leaving university and when their earnings surpass £10,000. Repayments are 9 per cent of earnings above that. For Ms Storey this will mean £30 a month. The student loan has a 3.1 per cent interest rate, which still makes it a very cheap form of finance.

Mr Metcalf notes that Ms Storey is paying 22 per cent income tax, 11 per cent national insurance and 9 per cent on her student loan, which effectively works out at a higher marginal rate of tax than most people pay.

Solution 3: Overdraft and credit card

Ms Mealing says Ms Storey's overdraft is interest-free but she should reduce it as the bank requires. It may be worth asking her bank if they will let her refinance. She should switch her credit card to a company offering a 0 per cent six-month deal, such as Egg.

Ms Goodwin says Ms Storey needs to find out what penalties she may incur for not reducing her overdraft to the levels stipulated by her bank. If this will result in a higher interest rate than her credit card charges she should pay her overdraft off first. Provided she has a good credit history she can also apply for an interest-free, six-month credit card deal. There are many deals around since many people over-spent on their cards over Christmas.

Mr Brodie agrees that Ms Storey should take advantage of interest-free credit card deals but warns her to be careful. She must make sure to shut down previous credit card accounts or a credit check will show them all up and affect her chances of taking out future loans.

Mr Metcalf cannot see how Ms Storey can pay off £500 of her overdraft in a few months. She should try to consolidate her overdraft and credit card debt into a personal loan. Her bank will probably prefer this.

Solution 4: Pension

Ms Goodwin says Ms Storey should check if her employers have a stakeholder pension scheme, which is likely since they employ more than five people. If not, Ms Storey should save into on a tax-efficient basis into a cash-mini Isa

Solution 4: Car

Ms Goodwin says Ms Storey's diesel car is economical but the cheapest return train ticket to London from Leeds when she visits friends and family costs about £19, less than she spends on fuel. To travel by train at this cheaper rate she would have to book a couple of weeks ahead and check for availability on www.trainline.com.

But Ms Goodwin advises Ms Storey against getting rid of her car despite the savings it would create. She works irregular hours and driving to and from work, rather than using public transport, makes sense from a safety perspective.

Mr Metcalf says Ms Storey's car insurance seems high for a fairly normal car and advises her to look for a cheaper deal.

If you would like to be given a financial health check-up, write to: Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk.