Wealth check: I want to save for a flat, but I'm really in the red

The patient

Living in London is a blessing and a curse for Lauren, 21. After graduating last year, it is the only city to offer the career opportunities she seeks, but it is eating into her budget. "I am on a graduate salary and it really doesn't stretch very far," she says. "But then again, it is the right place to be to kick-start my career."

Lauren currently earns £18,000 a year as a head of PR, but hopes this will be raised following a pay review. "I was initially there last year for three months on an internship, and was then offered a full-time position."

She graduated from the University of Huddersfield with a degree in public relations with media. The cost of student living has left her with £18,000 in tuition-fee and maintenance loans to repay.

Fortunately, she has steered clear of any credit-card debt, but tends to live in her overdraft on her NatWest Graduate Account. "This is £1,600 in the red at present," she says. "And I'd really love to pay this off even if it is interest-free."

She has been renting a room in a two-bedroom house in Wandsworth, south-west London, for £600 a month since October. "The rent isn't bad for the area and all bills are included," she says.

Even so, after rent and living expenses, she has no spare cash to put aside each month. "I'd love to save for a flat deposit and all the usual other things – holidays and clothes – in the right savings account."

As she has many decades to go before retirement, she has not considered joining the company pension scheme. "This is something I will do in the future."

The cure

Lauren is new to the world of employment and at an important financial stage in life.

"The decisions she makes now could create a solid financial foundation for the future," says Martin Bamford from independent financial adviser (IFA) Informed Choice.

There are two priorities for Lauren to consider – establishing a manageable budget, and starting to repay her student debt.

Alan Moran, from IFA Interface Financial Planning, adds: "She already has so many positives at the early age of 21: she is a graduate, in full-time employment, and has a clear goal to take her finances seriously."

Debt

Many banks offer graduates interest-free overdraft facilities. "This is an attractive perk; however, despite being interest-free, Lauren should aim to repay this overdraft as soon as possible," says Danny Cox from IFA Hargreaves Lansdown.

Running an overdraft to the limit is an easy habit to get into – but it won't remain interest-free forever. "Keeping debts manageable will save thousands of pounds over a lifetime," says Mr Cox. "At the same time, repaying debt is normally one of the best investments that anyone can make."

First, Lauren should set a goal for the repayment of her overdraft, taking into consideration her other spending habits and the requirement to make payments on her other student loans. For example, if Lauren's goal were to repay her overdraft in 12 months, she would need to set aside £133 a month, says Mr Cox.

To meet this target, she would need to cut down on other spending. But Lauren should set a target that is "testing", but not unrealistic, otherwise the danger is that she will lose motivation and give up, say the advisers.

Her student loan is currently being repaid at 0 per cent interest and Lauren would be best advised to retain this loan and repay in the normal monthly way.

Budgeting

"Lauren is at just the right age to understand her relationship with money – and the first essential is for her to get some good learning material," says Mr Moran.

With a pay review coming up shortly, she should avoid falling into the common trap of increasing her expenditure to meet rising income, says Mr Bamford. "Instead, she can use most of the pay rise to reduce debt and build wealth for the future," he says.

She should keep a detailed budget and expenses record and look at ways of minimising her expenditure. She may be able to save by paying bills by direct debit, or by switching suppliers. Her mobile phone bill could also be switched to a cheaper provider.

One method of reducing outgoings is to curb her social life. She could stick to going out just once a week, or invite people to her house for drinks instead of meeting in expensive pubs.

Savings

Lauren should eventually build an emergency fund in a cash Individual Savings Account (ISA) from the income she saves from reducing her outgoings. She can access the capital when she wants to go on holiday or when she has enough for a deposit on a house.

She can open a cash ISA with as little as £1 and can transfer in an amount each month by direct debit. Up to £3,600 can be saved into a cash ISA this tax year and £5,100 a year from April 2010.

Property

The advisers warn that Lauren will find it impossible to buy a home in London until she is earning much more and has saved a substantial deposit.

"Getting on the housing ladder in London requires commitment and hard work – so Lauren has the right attitude seeking advice at this stage," says Mr Bamford.

Retirement

Turning to pensions, if Lauren has the opportunity to join her company's pension scheme, she should do so as soon as possible. "Starting to make pension contributions at such an early stage in your career makes long-term financial sense, but only if it is affordable," says Mr Bamford.

Most employers pay into a pension scheme for their employees, meaning that every month Lauren is not a member, she misses out on this contribution.

"Any contributions that Lauren makes personally will attract tax relief, meaning that every £50 a month paid into a pension will cost just £40," says Mr Cox.

This may seem a small start but its importance cannot be underestimated. By taking an interest in planning for retirement now, it will make it much less of a financial challenge later in her career.

Do you need a financial makeover?

Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF j.knight@independent.co.uk