Wealth Check: 'How can we put a bit aside to enjoy luxuries?'

A high-earning, debt-free couple want to organise their budget to have more spare cash and still be able to pay off their mortgage early

The patient

Heather Stephen, 49, and husband Neil Macoustra, 47, find meeting household bills leaves them with little spare cash to enjoy life. "Neil earns a good wage in comparison to other people but after paying a sizeable mortgage, running two cars and covering all our bills we hardly have anything left at the end of each month for the little luxuries," says Heather.

The couple live in Crowborough, East Sussex and like most people their biggest outgoing is their mortgage. They pay £1,400 a month for a £195,600 repayment mortgage with Nationwide on a three-year fixed rate at 4.93 per cent. "We have 17 years left to pay, but we'd love to pay this off early," says Heather. Their three-bed house is currently worth around £320,000.

"We don't have to pay a redemption penalty at the end of this year so we may switch to a more favourable rate to help achieve this."

Heather switched careers a year ago, when she began working as a freelance journalist. Since then she's earned around £2,600, while Neil earns £60,000 a year as a systems administrator. However, the couple say they're unsure how much disposable income they have. "We'd like to work out a proper financial system so we both know how much we have available for extras to avoid tipping into the red," she says.

Aside from their mortgage the couple have no debt. And they have managed to stick to the savings habit, amassing £11,720 through paying £200 a month into a cash individual savings account with Lloyds paying 0.41 per cent. "This is to pay for any extras such as holidays, work on the house and Christmas." They also have £10,044 in a savings account with Nationwide paying 0.16 per cent to save towards future family needs.

Turning to long-term retirement planning, Heather has several private pensions from previous employment. "As I moved jobs quite a lot I have six different company pensions which were all also contributed to by my employer, aside from a private pension I've paid into for the past decade," she says. In total, she has around £6,000 in various company pensions, alongside a Norwich Union stakeholder scheme which she pays £100 a month into with a current value of around £18,000. Meanwhile, Neil has paid 2.4 per cent of salary into his employer's final salary scheme for the past 16 years.

The cure

Drawing up a budget before dealing with other goals is wise financial planning, agree our panel of independent financial advisers. Then the couple can assess where additional cash is best used and maximise the return from their savings account. It could, say, be put towards their goal of paying off their mortgage early. In addition, Heather's numerous pension pots need tackling to ensure they're on track for a comfortable retirement.

Prepare a budget

"Heather doesn't feel in control of day-to-day spending despite the couple having a decent sum in combined income and savings," says Anna Sofat from IFA Addidi. "So sitting down and drawing up a budget should be their first step." There are various online tools alongside iPhone apps that can help you calculate expenditure and see where you can save money. For example, the Money Advice Service has a budget tool at moneyadvice service.org.uk/yourmoney that will help calculate where they can make savings. Alongside maximising savings income, this gives the greatest chance of accessing extra cash. "Sticking to a budget needn't be a hard task and means they'll never go into the red, but they should ensure they include some savings so that emergency expenditure can be catered for," says Mike Pendergast from IFA Zen Financial Services.

Maximise savings

Heather and Neil are wise to have made some cash savings. However, the advisers stress that the couple are languishing on paltry interest rates for their savings accounts. Even in the current climate of low interest rates they can do far better by doing some research and looking at best buy tables, such as those available at www.moneyfacts.co.uk.

"There are several providers paying in excess of 3.5 per cent and existing ISAs can be switched easily without affecting this year's allowance," says Mr Pendergast. For example, as they are Nationwide customers, it offers its Flexclusive ISA paying an attractive 4.25 per cent to existing FlexAccount customers. If a proportion of their savings aren't needed in the next five years they should consider investing some of this money in the stock market for greater long-term growth potential. "Legal & General offers decent FTSE 100 tracker ISAs," says Ms Sofat.

Robert Forbes from IFA Plutus Wealth Management adds: "All cash accounts should be held in Heather's name as she's a non-taxpayer at present and she'll be able to reclaim tax on any interest earned."

Consider a remortgage

They want to pay off their mortgage in a decade, which will cost around £2,100 a month compared with £1,400. "However, as Heather's income increases they should consider increasing the monthly repayments," says Ms Sofat. "Or if they manage to get a lower rate at the end of this year, they could maintain repayments at the current rate so in effect she will pay off the mortgage quicker."

Nationwide tends to offer relatively competitive products, says Ms Sofat. "Their current standard mortgage variable rate is 3.99 per cent so they will benefit from a lower rate once their current deal comes to an end," she says. The couple should contact their lender at the end of this year and see what rate they would offer and speak to a broker. If they can set aside a substantial sum, they might want to use this to pay off a chunk of the mortgage in several years' time, says Mr Forbes. This way they could also access more competitive mortgage rates with a lower loan to value.

Retirement planning

The couple have sensibly been contributing to pension plans, and should continue to do so. However, Heather should get in touch with previous employers to apply for a pension statement with current values and projected benefits at age 65. If they are money purchase schemes, and therefore invested in funds, she should check they meet her risk profile.

Heather should also ensure she reviews her current stakeholder plan. Despite regular contributions, the sum in this plan is "pretty woeful" says Ms Sofat. "This is worth £18,000 which could grow into a pot worth around £44,000 assuming a growth rate of 7 per cent a year, and a pension of around £2,500 a year, so it's good she has other provision."

Neil has a final salary scheme. Ms Sofat says: "Given his 16 years of service, he has accumulated around £12,000 in this if it's a 1/80th scheme, and £16,000 if it's a 1/60th scheme, so by the time he retires, assuming the scheme remains in place, the pension should double. This will also carry a spouse's pension entitlement, which is good news for Heather."

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