Wealth Check: 'I used all my savings to buy a house. Now I'm worried...'

Jo Roberts, 23, is from Shropshire and works in public relations. Last year, she bought her first home and rents her spare room to pay off her debts.

Despite being on the property ladder, contributing to a pension and having a relatively low level of personal unsecured debt, she feels financially nervous and uncertain about her level of financial responsibility at a young age. She used all her savings as the deposit for her house.

Jo wants to focus on clearing her debts and finding out what she should be doing at this stage of her life to best secure her financial situation for the short and the longer term.

We asked a crack team of financial advisers to help Jo achieve her goals: Colin Rothery from Throgmorton Financial Services; Martin Bamford from Informed Choice; and Kevin Anderson from Budge & Co.

Case Notes:
Jo Roberts, 23, PR, Shropshire
Salary: 20,600 (plus 10 per cent bonus)
Monthly spending: 1,200
Debts: personal loan 1,500, credit card 2,000
Mortgage: 87,000 remaining
Savings: none

Mortgage and debt

Jo's fixed-rate mortgage of 5.7 per cent until May next year is reasonable. But she should keep a close eye on the standard variable rate as it will be considerably more than her current rate.

When her fixed-rate deal expires, she should shop around for a new rate. With the Bank of England base rate likely to fall between now and the end of her deal, she should be able to secure an even lower monthly payment than she currently has.

But Colin Rothery adds that she might also consider asking Halifax for a further advance on her mortgage to pay off her higher-rate credit card. He warns, however, that she should be careful not to incur any penalties by switching out of her current deal early.

Kevin Anderson urges Jo to focus on the high rate of interest she is paying for her credit-card balance and unsecured personal loan. "Jo may want to increase her pension contribution and retire at 55, but her priority at the moment must be to repay her expensive debts," he says.

"Then she can start saving for an emergency fund on a regular basis into a cash ISA, which allows instant access but pays a good rate of interest."

Martin Bamford says Jo should aim to amass an emergency fund of between 3,500 and 7,500, equivalent to between three and six months of her net annual salary.

"She should not worry about building this emergency fund until her credit card and kitchen loan debts are fully cleared, as the net interest she gets on her savings will always be lower than the interest she has to pay on her debts," he adds.

Protection

Jo should be applauded for considering protection, but paying 17 per month for life insurance is probably not the best way of insuring herself when she has no dependants.

She should look at a form of income replacement insurance that will provide a benefit if she is unable to work due to long-term sickness or accident.

"Based on her current salary of 20,600 and a retirement age of 55, Jo could put in place Income Replacement Insurance, with maximum cover, for 15.30 per month," Bamford suggests. "From a financial perspective, a loss of income is a far greater risk for Jo than death."

Anderson adds: "Jo should check whether there would be any death benefit paid by her employer, and she should check how long her salary will be paid if she is unable to work through sickness or accident."

Retirement

Jo wants to retire at 55 with a monthly income worth 700 in today's money.

This is ambitious, but achievable with a disciplined approach to saving. First, Jo should find out the details of her occupational pension scheme and get an idea of her projected benefits at 55. With large restrictions on her disposable income because of her debts, however, all three advisers urge Jo to clear them first. She should then set to work building up an emergency fund before starting to increase her pension contributions.

Tax

Finally, our adviser panel has found that Jo may be able to save money by managing her taxes more efficiently. If she is receiving 300 per month in rent from a tenant, then as a taxpayer she should be eligible for the "Rent a room" scheme. Instead of paying income tax on the full amount, this exemption scheme lets her receive a certain amount of tax-free "gross" income (receipts before expenses) from renting furnished accommodation in her home an exemption currently worth 4,250 per year.

Given that her total annual rent from the room is just 3,600, she should not need to pay any additional tax on this income.

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For a free financial check-up, write to Wealth Check, The Independent, 191 Marsh Wall, London E14 9RS, or email cash@independent.co.uk