Bringing up a family has prompted Simon and Paula Hawking, 34 and 32 respectively, to reassess their finances.
"We want to know if, by reining in our spending and cutting debt, Paula could stay at home with the children rather than return to work," says Simon. "Her earnings would only be spent on childcare if she worked anyway."
The couple live with their two children Eleanor, two, and Jack, six months, in Irthlingborough, Northamptonshire. They earn a combined income of around £39,000; he works as a field service engineer and she is an administrator.
As a priority, they wish to tackle their debt. They owe around £5,900 on credit cards, made up of £400 on a Barclaycard at 16.9 per cent, £1,500 on a Barclaycard at 0 per cent until December; around £2,500 on a Nationwide card at 16.9 per cent, and £1,500 on a Halifax card at 0 per cent until January. "Until this month we were paying £320 a month for a car loan, so we plan to redirect this sum towards wiping out our credit card debt," says Simon.
They pay £95 a month into a with-profits endowment policy with Legal & General. "This was started in 2002 over 25 years to repay the original £45,000 mortgage on our previous property but we carried it over," says Simon. "We haven't had a statement this year, but last year there was a shortfall of around £5,000, although there is 15 years to go."
They bought their three-bed house in 2007 for £145,000. They pay £740 a month for a £110,000 20-year five-year fixed-rate part repayment part interest-only mortgage with Nationwide at 6.7 per cent, which expires in October.
For longer-term planning, Simon has a money purchase pension plan with Friends Provident from a previous job worth around £2,000, while Paula has yet to contribute to a pension. "I haven't continued to add to my pension as I didn't have the spare cash," he says.
They pay around £150 a month for various protection policies to cover their credit card and mortgage payments in case of sickness or unemployment. "I have had to use redundancy cover on two occasions and given the current climate I am keeping these in place," says Simon. This includes several policies with Nationwide for their credit cards and one with St Andrews for redundancy and sickness for Simon that pays £500 a month for up to 12 months.
At this stage in their lives couples should be looking to build pension contributions, but our panel of independent financial advisers (IFAs) agree that in Simon and Paula's case their priorities are to clear debt, reduce outgoings, build savings and ensure they have adequate protection in place.
But they shouldn't neglect retirement planning, and by reorganising their finances should find some spare cash to slot away for later life.
They are paying high rates of interest on the Barclays and Nationwide card and there should be a focus on trying to clear this debt as quickly as possible, agree the advisers. "It would be a good idea to redirect the funds that went towards paying the car loan to clear these," says Tony Byrne from IFA Wealth and Tax Management.
"They shouldn't worry about the Barclaycard platinum and Halifax cards for now as they are interest free," he adds. However, they should concentrate on building up their savings buffer with spare cash to pay off these remaining balances before the interest is due to start.
Mortgage and endowment
The couple are currently paying a high rate for their mortgage, stress the advisers. As they approach the end of their fixed-rate deal they should consult an adviser to shop around to find a much better deal.
"It might be prudent for Paula to remain in employment until this is in place, as it may not be possible to switch mortgage based solely on Simon's salary," says Claire Walsh from IFA Pavilion Financial Services.
As the mortgage has an element of interest-only they should consider how they will repay the outstanding capital at the end of the term if the endowment does not produce the required capital. As they have a young family who are likely to still be dependent on them when the endowment comes to an end they may wish to consider a lower-risk strategy, by switching to repayment only.
Ms Walsh recommends surrendering the endowment policy and using the capital released to repay some mortgage or credit card debt now. "Any capital left over could be used as a basis for cash savings," she adds. First they should look at the current surrender value and factor in any loss of life cover provided by the endowment, although this could be easily replaced.
Ideally the family should aim to have at least three months' worth of living expenses in an instant access cash account, such as a tax-efficient individual savings account (ISA) for emergencies. "This should avoid the need for credit card debt," says Ms Walsh.
They should also consider making notes of all of their current expenditure and check to see if there is anything they can cut back on.
Cashback websites such as Quidco and Topcashback could put some money back in their pockets when they buy anything, add the advisers.
Paula giving up her job would dramatically reduce the family's income, but if childcare costs exceed income it may be the best solution. "It could be worth seeing if there is family support that could reduce the need for full-time childcare so Paula could work part-time," adds Mr Byrne.
"They may be entitled to child tax credits, depending on whether they pay for childcare. If they do, then they could get credits up to £7,745 per year," says Jason Stather-Lodge from IFA OCM Wealth Management.
With young children and a mortgage, protection is a key priority for the Hawkings. "But while they are currently spending a hefty £150 per month I am not sure they have the right cover," warns Ms Walsh.
"As a minimum they should have life cover on a joint life decreasing term basis to ensure the mortgage would be repaid," she adds.
Simon should check what benefits his employer offers as they may provide life and income protection cover. Also, while they have some cover for sickness and unemployment these types of policies will only pay out for a short period – typically up to two years. They could consider a long-term income protection policy, structured to retirement age with guaranteed premiums.
With an emergency savings fund there is also less need for expensive unemployment cover.
Although still young, they should consider pensions, warn the advisers. They should check with their employers to see whether a company pension scheme is offered and their employer will contribute. New auto-enrolment rules coming into force in October that require companies to enrol their employees into a pension scheme and provide contributions along with the employee.Reuse content