Wealth Check: I must cut my debts and build nest eggs for my daughters

Bank worker Laura Dunlop has three credit cards, one store card and two overdrafts, but now she's desperate to start saving for the future

The patient

Laura Dunlop wants to clear her debts so she can focus on building nest eggs for her daughters Emma, seven, and Amy, four. The 28-year-old works in finance for a bank, and has been in this job since November 2007. She earns around £24,000 a year.

Laura is desperate to pay down her debts, as she has three credit cards, one store card and two overdrafts.

"I have two credit cards at 0 per cent with First Direct and Tesco, and owe £1,200 and £1,000 on these respectively," she says. "I have a balance of £7,500 on an MBNA credit card and am paying interest on this. I'm also paying interest on my Next store card which has a balance of £500."

In addition Laura owes £1,500 on a Santander overdraft, and £1,000 on a First Direct overdraft.

"These debts have built up over the last few years after paying for holidays and occasionally needing to borrow to cover living expenses," says Laura. "I want to reduce the amount I owe as much as possible this year – and am already trying to be more savvy about my spending by using sites such as Topcashback to boost my income."

Laura, from East Kilbride, Glasgow, is also determined to start saving again, as she currently has no savings or investments, having used all the money she had squirreled away on general living expenses.

"I would like to save for my girls' future," she says. "At present, they both have Child Trust Funds (CTFs) with a small balance in each, but these need to be reviewed."

Emma has around £500 in her CTF account with the Halifax, according to Laura, while Amy has around £550 with NatWest. "As well as building a nest egg for the girls, I would also love to be able to save for a holiday to the US for us all," she adds.

Having bought her three-bedroom end-of-terrace home back in 2006 for £92,000, Laura now has a mortgage for just £55,000. "This is an extremely low base rate tracker deal at base rate plus 1.5 per cent, on a repayment basis," she says.

While Laura has a work pension into which she contributes £60 per month, she feels this is not a priority. In terms of protection, she currently pays £6 a month for a protection policy with Pinnacle. Her employer also provides life cover equivalent to four times her salary.

The cure

Our panel of independent financial advisers (IFAs) say that with two young children and lots of demands on her money, it's not surprising Laura has got into debt. They agree she's right to prioritise clearing these debts, but add that she then also needs to look to build up cash savings and to make pensions and protection key parts of her financial planning.

Deal with debts

If Laura is serious about getting rid of her debts she needs to take control of her income and expenditure and look at ways to reduce her outgoings.

"As a starting point, Laura must concentrate on the debt where she is paying the highest amount of interest," says Patrick Connolly from Chase de Vere. "She could potentially be paying 25.99 per cent on the Next store card and 15 per cent on the MBNA card."

Claire Walsh from Pavilion Financial Services urges Laura to check the rates on all her debts – and also to see how long she has left on her 0 per cent card deals. "Laura should see if she can transfer any of the debts on cards where she's paying interest to another 0 per cent deal," she says. "If this isn't possible, she should prioritise paying off the cards with the highest rates, and also clearing her overdraft. Equally, she could also look into consolidating these debts into a low-rate personal loan, as this may be more affordable."

In addition, she says Laura should aim to try to repay her 0 per cent credit cards before she comes to the end of the interest-free period.

 

Clear debts before starting to save

While everybody should have accessible savings in cash to cater for any short-term requirement or emergency, Mr Connolly says Laura should focus on paying off her debt before looking at cash savings. "This will hopefully avoid the need for Laura to take on more debt in the future," he says.

Ms Walsh agrees that in the short term, rather than saving for the future, Laura would be better off using any surplus money to reduce her debts.

"If Laura wants to get her finances back on track, she is going to have to be very disciplined and forget about things like expensive holidays," she adds.

Crucially, Laura must not take on more debt to pay for a trip abroad.

"The holiday might last for two weeks, but the outstanding debt will probably be around for a long time after that," warns Mr Connolly.

Once she's cleared her debts, Laura should aim to save into a cash individual savings account (Isa), as interest is tax-free. Useful sites for comparing rates include Savingschampion.co.uk and Moneyfacts.co.uk.

 

Continue with existing mortgage arrangements

As Laura has a relatively small mortgage and is paying a low rate of interest she doesn't need to worry about this for the time being, according to Mr Connolly. "This home loan is set up on a repayment basis, so she is paying interest while also reducing the amount she owes," he says. "Laura can continue with the present arrangement, and then look to review it again if interest rates go up significantly in the future."

 

Don't ignore pension saving

Tom Dean from Plutus Wealth Management says that while saving for retirement is not usually a focus for many 28-year-olds, starting early is always best. "My advice to Laura is to take full advantage of a work pension scheme, as employers will have to make contributions to boost her retirement pot," he says.

Mr Connolly says that, as things stand, repaying debt and building cash savings should be her main priority but adds that once she is able to afford to Laura should aim to increase her pension contributions.

 

Review children's savings

While Emma and Amy both have cash CTF accounts, Mr Dean says potentially better return may be on offer by investing in stocks-and-shares accounts. "As both girls have quite a long investment horizon, they ought to have some exposure to equities," he says. "To keep costs low, perhaps a global equity tracker fund or similar should be considered."

Mr Connolly agrees that over a period of more than 10 years returns are likely to be better with investments.

"Equally, following a recent Government announcement, it is looking as though transfers from CTFs into Junior Isas will be permitted from April 2015," he adds. "This will give Laura more choice about where to invest."

Our advisers also point out that while it's commendable that Laura wants to focus on saving for her children, she must also not neglect her own financial future.

 

Review protection policies

As Laura has two young daughters, protection needs to be an important consideration. "She needs to contact Pinnacle and find out exactly what cover she has in place already, and whether she needs this," says Mr Dean. "Even if it's only £6 a month, it may still be being wasted. In the past few years, Laura's circumstances have changed, and life cover to look after loved ones should anything happen may be more of a priority."

If Laura does need life assurance this will be quite cheap if she is in good health. As she has two young daughters she must also have an up-to-date will to protect them if she dies.

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