Wealth Check: 'How can we make our money stretch further?'

Click to follow
The Independent Online

Bruno and Joanne Rost feel that they never have enough money left at the end of each month, and the situation will become tighter still in the autumn, when Joanne starts to work one day less each week.

Bruno and Joanne Rost feel that they never have enough money left at the end of each month, and the situation will become tighter still in the autumn, when Joanne starts to work one day less each week.

They are still paying off debts from a failed business venture, and have to pay for childcare for their son, Louis, 18 months old, until state contributions start when he is three years old. But the couple want Jo to be able to cut her working hours so she can develop her creativity.

They have taken steps to deal with the debt, including moving an expensive loan to the Co-op Bank. They have moved their largest credit card debt to Capital One, with a fixed rate for the life of the balance.

But the couple want to know if they are saving enough and if there are other ways to make their finances stretch further.

We put their case to Vivienne Starkey at Equal Partners, Mike Metcalf at the Metcalf Consultancy and Caroline Anstee at Destini Fiona Price.

BRUNO & JOANNE ROST, PR EXECUTIVE AND ART TEACHER

Salary: Bruno, 40, £40,000 + car, Joanne, 38, £28,000

Debt: £3,000 on Capital credit card (5.9 per cent), £900 others. Tesco loan at 8.9%: one year left. £9,000 loan (5.9 per cent) Co-operative Bank.

Property: £210,000 home. £117,000 Halifax (interest only)

Investments: GUS shares £20,000. £170 a month into Deutsche Bank Isa, £20,000 saved. Sharesave scheme.

Pension: Bruno: Five years with GUS final salary scheme ongoing. Joanne: 13 years' with Teacher's scheme.

Outgoings: £3,060 monthly.

DEBTS

Vivienne Starkey points out that debt repayments currently cost the Rosts about £600 a month. As a higher-rate tax payer, Mr Rost would have to earn 9.83 per cent on his savings to pay off the Capital One debt and 14.83 per cent to repay the Tesco loan.

The couple should look to cash in some of their savings or investments to pay back the debt, as even investments are very unlikely to cover the gross cost of the debt interest. Ms Starkey suggests that this could be worth doing, even if there are penalties for early repayment.

Ms Anstee agrees, pointing out that Mr Rost will have made a profit on his sharesave scheme, and that as equities are a risky investment, he might be best off taking some of that profit now.

MORTGAGE

The Rosts' mortgage is on a standard variable rate, so is relatively expensive. Ms Anstee advises remortgaging. This could cut outgoings. It might also give the couple a chance to clear their expensive credit card and personal loan debt with money from remortgaging; the Rosts have plenty of equity in their home to support this.

Ms Starkey points out that most people expect mortgage rates to rise over the coming year, so it could make sense to lock-in to a fixed or variable rate deal now. Mr Metcalf says that an offset mortgage, where savings are set against the loan to reduce interest, could be an option to consider.

PENSION

Both Mr and Ms Rost are fortunate to be members of final salary pension schemes. But they could both boost their retirement savings.

Mr Rost could transfer his "frozen" pension either to his current plan or to a personal scheme; any additional pension contributions will attract tax relief at 40 per cent. Ms Rost could also take out a personal pension as a way to save: for example, if she pays in £234 a month, tax relief tops it up to £300, Mr Metcalf says.

Ms Anstee suggests Ms Rost could buy extra years' benefits from the Teachers' Superannuation Scheme. Although this can be expensive, the advantage is that the extra benefits are locked in and linked to length of service. A private pension depends on the markets for growth and annuity rates fluctuate.

Ms Anstee adds that the couple could earmark the money they are now using to pay for childcare for pension payments later on.

SAVINGS

The Rosts should review their savings, including the Isa and the sharesave scheme, Ms Anstee suggests. But as the couple's debts are rising faster than their savings, paying off debt must be the priority.

INVESTMENTS

The Rosts have a relatively large portfolio, but it is heavily concentrated on the mortgage-linked Isa and the GUS shares.

Mr Metcalf cautions that this approach is high risk. They could either use some or all of the shares to settle debts, or they could diversify their holdings.

Ms Starkey points out that the Rosts should review their holdings regularly, and look at alternatives such as a multi-manager fund, which would spread the risks. But if the Rosts do decide to sell some shares, they should allow for a possible capital gains tax bill, if the gains come to more than their joint CGT exemption (currently £16,400 for a couple).

Looking for credit card or current account deals? Search here

Comments