Fabric

The risks of unplanned spending

This is Sam. He is 19 years old and has just left school. Sam would now like to do a course for six months to become a qualified electrician. While he completes the course, Sam will also work for two days a week in a supermarket, but will need to borrow money from the bank to pay for his course, tools and some of his living costs.
Help work out his monthly expenses and how well his budget holds up over the next six months.

Costs

Sam has done some research to get an idea about how much he thinks he will need for these six months. It’s a pretty tight budget, but he thinks he can stick to it, if he’s careful with his money. Take a look at his estimated expenses.

Cost of course	£2500
Cost of tools	£260
Travel costs	£35x6 = £210
Rent and food contribution	£85x6 = £510
Spending money	£40x6 = £240

What is his total estimated overall budget for the next six months?

During the six months of his course, Sam will be working for two days a week, earning £400 a month. He will need to pay for the course and the tools upfront, and needs enough money for living costs in the first month, so he has calculated that he will need to borrow £3000. He’s spoken to a couple of banks and he has been offered the following three options for a loan:

Length	APR	Monthly repayment	Cost of credit	Total amount repayable
12 months	5%	£256.67	£80.04	£3080.04
24 months	8%	£135.30	£247.21	£3247.21
36 months	15%	£102.62	£694.22	£3694.22
APR stands for annual percentage rate, the cost of the loan that will have to be repaid in addition to the loan.

Which loan option should he choose?

12 months

24 months

36 months

October

Sam’s loan has been approved by the bank, and £3000 has been released into his account.

I am so excited. I have just paid for my course and bought my new tools. College is great. I have so much freedom and I have made lots of new friends. The only problem is that I am spending so much money on food instead of eating my packed lunch!

Once Sam has paid for his college fees and tools, he has £240 of the £3000 left. He has started working, but won’t be paid until the first day of next month.

Monthly expenditure
Monthly loan repayment	£256.60
Monthly travel costs	£35
Rent and food contribution	£85
Spending money	£40
Eating daily in the canteen	£60

How much is left at the end of Sam’s first month?

November

Got my first pay cheque!! It's become so cold and rainy now and I've noticed a hole in my trainers - I'm going to have to buy some new ones, but they're so expensive, ouch! Also, my best friend from college has his birthday next week and is doing go-karting - I can't really miss that!

Monthly expenditure
Monthly loan repayment	£256.60
Monthly travel costs	£35
Rent and food contribution	£85
Spending money	£40
Go-Karting	£25
Cost of a new pair of shoes	£35

Sam was paid £400 for the first time, but he ended last month with a negative balance.
How much is Sam spending this month?

December

The lead-up to Christmas is super busy at the supermarket where I work at weekends, so I got myself some extra shifts. I could definitely do with a little bit more cash to buy Christmas presents for a start – I have a pretty big family!

Monthly expenditure
Monthly loan repayment	£256.60
Monthly travel costs	£35
Rent and food contribution	£85
Spending money	£40
Christmas presents	£70

Sam's earnings this month amount to £520. How much does Sam have at the end of December? Remember to start with his balance at the end of November.

January

I am so annoyed with myself. I left my tools in the common room at college, and when I came back they had gone. I can't believe that somebody would steal them. Now I have to buy some new tools out of my own money.

Monthly expenditure
Monthly loan repayment	£256.60
Monthly travel costs	£35
Rent and food contribution	£85
Spending money	£40
Cost of replacing tools	£260

How much will Sam's expenditure amount to this month if he buys new tools?

February

Absolutely gutted! I was in a rush to leave this morning and my phone fell out of my pocket and smashed. I don't have insurance, so I need to get a replacement. I found one second-hand, but it's still £80.

Monthly expenditure
Monthly loan repayment	£256.60
Monthly travel costs	£35
Rent and food contribution	£85
Spending money	£40
Mobile Phone	£80

How much will Sam have left at the end of the month once he's purchased the phone? Don't forget his monthly earnings of £400.

March

To celebrate the end of our course, a group of friends are planning a trip to Barcelona. It will cost £280. I would really like to go but I'm not sure I can afford it. It's my birthday this month and my Aunty has given me £50. I should treat myself - I might not get a chance to go away once I start work.

Monthly expenditure
Monthly loan repayment	£256.60
Monthly travel costs	£35
Rent and food contribution	£85
Spending money	£40
Trip to Barcelona	£280

Taking into account Sam's earnings of £400 and £50 from his aunty,how much will Sam have left at the end of the month?

Paying back the loan

Sam’s course is now over and he did very well, which has helped him to find a job as an electrician starting next month. However, he still has to finish paying back his loan.

Total loan amount	Paid so far	Remaining repayment period
£3080.04	£1540.02	6 months
£3247.21	£811.80	18 months
£3694.22	£615.72	30 months

How much of his loan does Sam still have to pay?

Reflection

What could Sam have done differently?

What are the pros and cons of each loan options?

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