An education in finance

Financial planning is essential for students and graduates, says Moneyextra.com.

The Government’s new plans to shake up the school curriculum with the introduction of a subject called “economic well-being and financial capability” come far too late for this year’s crop of debt-laden graduates.

As another academic year comes to an end, new graduates across the UK are waking up to the realisation that they are in a significant amount of debt and are worried about how they can repay it.

However, by making a budget early on, graduates can avoid a deadly spiral of debt and bring their finances back into the black, says online independent financial adviser; Moneyextra.com.

What to budget for

Robin Amlôt of Moneyextra.com said, “Graduates should budget for everything to ensure that nothing is missed, that it’s all written down.”

To make things manageable, split outgoings into the following categories:

Essentials – such as living costs (including rent, council tax, food & utilities) insurances and travel costs

Luxuries – such as nights out, clothing & holidays

Debts – including credit cards, overdrafts and loans from the Bank of Mum & Dad

Manage interest rates

Once a budget has been established, it is important to be disciplined with any money that is left over each month – use it to pay off the debt with the highest interest rate as this will be the most expensive.

Any loan from the government backed Student Loans Company will incur interest set at the rate of inflation (currently fixed at 2.4% although due to double to 4.8% from September this year), so it will usually cost less than any other debt and, in any case, is only repayable once graduates are earning more than £15,000 a year.

Another way to manage interest paid against graduate debt is to switch to a product offering a 0% or a low interest rate; for example if your graduate credit card charges 15.9% APR, see if you can transfer your balance to a card offering 0%; or even consolidate the debt into a personal loan as the interest rate charged is likely to be considerably less.

Check the small print

“It is important that graduates get into the habit of checking the small print before they sign on the dotted line – especially if it relates to their finances,” adds Moneyextra’s Robin Amlôt. While headline grabbing 0% interest rates and a sizeable overdraft sound great, other fees or charges could be heavily weighted in favour of the bank and so have the potential to catch many graduates out. Things to look out for include:

The amount that the 0% threshold reduces by each year; for example Lloyds TSB reduce their threshold by £500 per annum whilst others reduce at a rate of £1000 per annum.

The rate charged on any overdraft that exceeds the 0% threshold; as rates vary from 9.9% with Abbey to 15.6% with Barclays.

Other charges; including those for bouncing a payment or for any unauthorised overdraft.

Time limits that could be imposed on paying back an overdraft.