Wealth Check: 'I want to pay off my debts but still live comfortably'
Saturday 18 July 2009
Alma Stewart-Burgess, 39, is bringing up two young children aged seven and five in Preston after her 44-year-old journalist husband died from cancer five years ago. She is looking for a job after completing a postgraduate diploma in newspaper journalism at the University of Central Lancashire. "I want to be debt free, but still able to live comfortably," says Alma.
Finding a job is proving difficult, but Alma wants to pay her debts off without taking the first mediocre job that comes along. She receives tax credits, so working wouldn't be financially worthwhile unless it paid over £400 per month.
Income: £17,000 per year from late husband's pension
Monthly outgoings: car £230, gas/electricity £120, mobile phone £40, food £350, health insurance £40, life insurance £35, credit card payments £100, petrol £40, phone/TV £50 (total: £1,005 per month)
Debt: £4,000 in recent postgraduate fees, £3,500 on credit cards and £200 per month at 24% APR on car loan.
Advice this week is given by John Kelly of Chelsea Financial Services, Dennis Hall of Yellowtail Financial and Kevin Anderson of Budge and Company...
Alma's monthly outgoings do not exceed her late husband's pension income, so she can live off that for now. However, John Kelly says she will have to earn more before she can pay off debts and start making savings for her own pension. "She will need to consider her pension requirements when she has some disposable income," he says.
Dennis Hall also recommends checking the rules surrounding the pension, particularly what level of payments her children would receive if she were to die prematurely: "Depending on the amount and type of life assurance cover already in place, there may be a case for purchasing some additional Family Income Protection insurance until the children are financially independent. This should be placed in a trust so any payments are not transferred to her estate should she die." Dennis agrees with John that Alma should look at making provisions for a pension as soon as she finds paid employment.
Alma has debts of £3,500 on credit cards and swaps the balances to get 0 per cent interest. She also has a car and student loan.
Kevin Anderson says she should address this: "Alma is in the very common situation of being asset rich and cash poor. The major asset is her property, on which there is no mortgage. One solution may be to raise a mortgage on the property while rates are relatively low to pay off her car loan, credit cards and student loan. This will free up more of her monthly income for savings. Her income is very secure as it is a pension and her borrowing will be small so the rate should be very attractive."
John Kelly says her car loan should be her debt priority, as it has a high interest rate (currently 24 per cent APR). On the question of her credit cards versus the loan, he says the key issue is the rate payable. "She is able to manage the credit card debt by moving them around to whoever is offering 0 per cent. So, in the short term, she is probably better off doing that than moving it somewhere with a higher interest rate."
However, Dennis Hall's advice differs: "The reason why even 0 per cent interest credit card debt is more expensive than the 1.5 per cent interest charged on student loans is that when transferring from one 0 per cent deal to another there is typically a 3 per cent transfer charge. With an average 0 per cent interest rate period of three months, this could mean four transfers a year at a cost of perhaps 12 per cent. Suddenly these 0 per cent deals don't appear so cheap."
Instead, he suggests a cheap, unsecured personal loan, as it has the added advantage that the debt is paid down over an agreed number of years, whereas credit card debt can take decades to repay when paying the minimum each month. "Sainsbury's and Tesco each have finance divisions offering personal loans from as low as 7.9 per cent APR."
Dennis agrees with John that Alma's priority in terms of debt reduction should be paying off her car loan, although he advises her to check the terms and conditions, as some of these types of loans have additional charges because of the commission that might have been paid to the firm that arranged the finance.
Savings and investments
Alma is reliant on her widow's pension and tax credits. Kevin Anderson says saving is not an option until Alma can secure a job. However, John Kelly advises building up a cash emergency fund to at least three months' outgoings – just over £3,000. "This could be done by saving monthly into a cash ISA. The best rate on instant access cash ISAs is currently offered by Barclays at 2.55 per cent."
He also suggests that, while paying off debt is currently more important than investing, she could start monthly saving into a stocks and share ISA, starting with a core fund like M&G Recovery, or Invesco Perpetual High Income. She could then add riskier funds like First State Asia Pacific Leaders or Rathbone Global Opportunities.
Dennis Hall agrees that using an ISA to build up a cash reserve will ensure she can save tax efficiently. Abbey and Nationwide (both part of the Santander Group) are offering an ISA savings rate of 5.5 per cent, which includes a 4.5 per cent bonus for 12 months.
"The savings don't actually affect your entitlement to Child Tax credits, but the interest earned on the savings could affect the amount of tax credits received."
Alma does have some life cover, which all three experts agree is important in view of the fact that she has two young children. Kevin Anderson recommends that she continues to review the adequacy of this, and John Kelly agrees that the cover should be a priority to financially protect her children.
- 1 Malaysian cyclist could face disciplinary action after 'Save Gaza' gloves protest
- 2 Is Gideon Levy the most hated man in Israel or just the most heroic?
- 3 McDonald’s removes chicken nuggets from the menu in Hong Kong amid major food scare
- 4 Students offered grants if they tweet pro-Israeli propaganda
- 5 Satellite full of sexually experimental geckos adrift in space, Russia loses control of mission
Malaysia Airlines MH17 crash: Vladimir Putin is given 'one last chance' to end hostilities in Ukraine
The 'scroungers’ fight back: The welfare claimants battling to alter stereotypes
The truth about conspiracy theories is that some require considering
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
Malaysia Airlines MH17 crash: Ukrainian military jet was flying close to passenger plane before it was shot down, says Russian officer
Malaysia Airlines MH17 crash: Massive rise in sale of British arms to Russia
iJobs Money & Business
£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...
£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...
£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...
£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...
Day In a Page
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar