They say the best gift you can give a child after a loving family is a quality education. For Traci Steel, 39, a hairdresser from south London, providing a private secondary education for her children, Dylan, three, and Daisy, five, is a subject that is close to her heart.
Having left school aged 16, she had to start at the bottom to work her way up to where she is today – running Lawler Steel, a profitable salon in Dulwich, south London. But being thrown in at the deep end also had advantages, giving her natural aptitudes a chance to shine through. By the age of 19, she was styling the hair of fashion designer John Galliano and, a few years later, presenting on stage at the Salon International exhibition – one of the industry's most prestigious annual shows.
Since opening her salon in May, she has built up a staff of seven hairdressers, including six self-employed and one full-time employee, and the salon is generating a weekly income of between £2,500 and £4,000. She takes a monthly salary of approximately £3,000 and generates further income from letting the two-bedroom flat she owns in Croydon, south-east London, for £800 per month.
Her expenditures include £1,250 a month rent on the two-bedroom flat she occupies with her husband and two children near the salon in Dulwich and staff salaries, which are deducted from the salon's monthly income and typically amount to £8,800 per month.
She has an outstanding balance of £7,000 on a Mastercard credit card which charges 12 per cent interest and estimates private school costs will be in the region of £5,000 per term for each child – meaning she will need to raise £210,000 to fund both children's educations from ages 11 to 18.
The three financial planners who have analysed Mrs Steel's financial situation commend her on her entrepreneurial flair for getting her salon up and running profitably so quickly, but say she should wait a few years before deciding whether to commit to what will be a costly private education.
Repaying the debt
Before she can begin to save for the education, Mrs Steel would be wise to repay her credit card debt which is currently gobbling up a sizeable amount of her monthly income and which, left unchecked, could spiral out of control.
Andrew Merricks, the head of investments at East Sussex-based Skerritt Wealth Management, says she should transfer her credit card debt to a balance transfer card which charges 0 per cent interest for a defined period of time – typically between 12 and 18 months.
"A number of credit card providers are offering 0 per cent balance transfers. The longest duration I can find is the Barclaycard Platinum with a 17-month period at 0 per cent for transferred balances. The fee for transferring is 2.9 per cent of the overall balance, which in Traci's case will be £203. This is closely followed by the MBNA and Virgin cards which charge no interest for 16 months and carry transfer fees of 2.89 per cent and 2.88 per cent respectively."
Mr Merricks calculates that if Mrs Steel transfers £200 (the amount of profit she generates letting her Croydon flat after she has deducted her monthly mortgage payment on it) towards repaying her credit card, she can be debt-free in two years and 11 months. But to avoid debt building up unnecessarily again, he says she mustn't forget to switch to another 0 per cent balance transfer card when the existing period expires.
Funding a private education
While sending her children to a quality school is an admirable ambition, Jason Witcombe, a chartered financial planner at Evolve, an IFA, says she should take some time to review her finances before committing to this.
"Private school for two children is a huge commitment and there is little margin for error. If you think of another financial commitment, like retirement, if you get to age 65 and realise you have not got enough money to retire, you can carry on working. But if your children are two years into private school and you realise you can't pay the fees, you have a big problem," he says.
"The best advice for Traci is to focus on growing her business, paying down her debt and building up some savings. Then, in a year's time, she should review the position and see how much she has actually been able to save and review again in a further 12 months. That way, she will be able to see if there is a pattern building and establish whether all her goals are achievable."
Traci would need to save £1,500 every month for 11 years and eight months to accumulate £210,000 – a sum which may prove unaffordable – and Mr Witcombe says that calculating school tuition fees is never an exact science.
"The difficulty with working out how much to save to help to fund school fees is that Traci will probably end up paying some of each year's fees out of income and some out of capital that she has saved up. Therefore, although she estimates that she needs £210,000 in today's money to fund her two children through school, that cost is spread out from Daisy's age 11 to Dylan's age 18, meaning she doesn't actually need to build up a fund of £210,000."
Mrs Steel has done well to put a pension plan in place recently, but as she is starting saving relatively late in her life she is advised to establish an affordable contribution level now to ensure she has enough money to see her through retirement comfortably.
Steve Martin, the managing director of Cheshire-based Smart Financial Planning, calculates that she will need to contribute £475 to her pension each month to build up a pension worth £400,000 at retirement, generating an annual income of £20,000. If this is too much for her, he says, a monthly contribution of £237.50 per month would generate a fund worth £200,000 and a yearly income of £10,000. Both cases assume a 5 per cent growth rate on her pension savings net of all charges.
When it comes to finding the best retirement product, Mr Smart says she should use pension fund withdrawal – formerly known as income drawdown. "This will allow her husband to draw the same income in the event of her death and, as a result of the new rules proposed by the Government, her children to receive 45 per cent of the fund after both she and her husband have died."
Using this product, he calculates that Mrs Steel will be able to draw a maximum pension of £22,300 per annum from the outset, in addition to a lump sum of £100,000.
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Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF