Wealth Check: When the baby is born, who will deliver them from their debts?
Sunday 19 November 2006
The problem: How can a young family save for the future?
With another addition to the family on the way, Kelly and Craig Fleming, 33 and 32 respectively, are keen to get out of the red and start saving.
The couple, who live in Corby, Northamptonshire, with their two children, Evie, four, and Mia, two, are expecting their new arrival in March.
Kelly used to work as the manager of a travel company but left to start a soft furnishings company in April last year. "All my life, my grandmother ran her own dressmaking business," she says. "And then my mum taught me [those skills]."
She adds: "I set up my own business to provide more flexibility and to enable me to work around the family."
To achieve all this, however, Kelly has had to borrow a large sum of money, and now has debts totalling £17,500.
She owes £8,500 to NatWest - £2,000 on a business credit card at 16.6 per cent interest, a £2,500 business overdraft at 10.5 per cent, and a £4,000 personal loan at 7.9 per cent. She also has a £9,000 business car lease with financial services firm Lombard. The interest here is 7.9 per cent.
"I hope to pay off the business debt within the next year, and the personal loan - taken out for home improvements - in the next two years."
The couple have a combined salary of £28,000 - although this is mainly made up of Craig's pay as a welder. So far, Kelly has reinvested all her earnings back into the business.
They hope to increase their joint income to around £40,000 within two years.
On their three-bed house, the couple have a 25-year £105,000 repayment mortgage with Nationwide building society, currently fixed at 5.5 per cent for five years. They bought the property for £127,000 in 2003 and it has risen in value to £155,000.
In the short term, Kelly and Craig hope to start savings plans for the children to help with education costs or to get them on to the property ladder.
In the longer term, their financial aim is to be mortgage free by the time they reach 55.
Neither Kelly nor Craig currently contributes to a pension, although Kelly has pension savings worth £14,600 from previous employment.
The couple have joint £110,000 life cover with Friends Provident tied to their mortgage; this costs £45 a month. Craig also has income protection through work.
The cure: The first step: move the credit card balance
Sorting out their finances in the first few years after setting up a new company may be tricky, says Amanda Davidson of independent financial adviser (IFA) Baigrie Davies. "It's usual for resources to be heavily invested in the business, but there's a lot for them to tackle to make sure the family is adequately provided for both now and in the future."
She says they should concentrate on paying off debt and ensuring they have enough protection. Savings can be made in the future.
Chipping away at the most expensive debt first makes sense, stresses Ms Davidson. Moving the balance on the NatWest business credit card to a 0 per cent deal will slash interest payments.
Alex Pegley from IFA Calculis says that while it is difficult to transfer card balances without paying a fee, there are still plenty of interest-free deals available. He picks out a card from Capital One, offering a 0 per cent deal until January 2008, although he points out there is a 2 per cent balance-transfer fee.
Since the interest charged on Kelly's business credit card and overdraft is well above what any money could earn in a savings account, there's little point starting to save until the balances are cleared, says Justin Modray from IFA Bestinvest.
But once the debt is paid down, putting money away in a mini cash individual savings (ISA) account is the best option for short-term needs as it is safe and tax-free. Mr Modray recommends the Direct cash ISA from National Savings & Investments paying 5.55 per cent interest.
When they are ready to look long term, says Ms Davidson, they could consider investing in the stock market through an equity unit trust. "They could make this tax efficient by wrapping it up in an ISA. They have an allowance of up to £4,000 a year for a mini equity ISA."
The couple will also receive help from the Government when their baby is born - in the form of a £250 child trust fund (CTF) voucher. "Putting this into a Family Investments stakeholder CTF [managed by New Star] is a sensible choice as it invests across global stock markets and bonds," says Mr Modray.
If they keep up their repayments over the 25-year term, the couple should achieve their aim of being mortgage free by 55.
When the fixed-rate term ends in two years, they should shop around for the best rate available, says Mr Modray.
"If Craig's employer has a pension scheme in place - and makes contributions - then he should join as soon as possible," stresses Mr Pegley.
Craig must contribute at least 5 per cent of his pay to stand a chance of generating a pension of around a fifth of his salary, adds Mr Modray.
Ms Davidson stresses that, when she can afford it, Kelly must begin paying into a pension again.
"There is only enough insurance for the mortgage," says Ms Davidson. "With two young children, and one on the way, they should review this as soon as possible. The family is reliant on Craig's income at the moment."
As Kelly's business and income grow, Ms Davidson adds, she should also consider taking out income protection cover. At the moment, this would probably be too expensive.
Mr Pegley suggests that Craig and Kelly should look at buying some additional life assurance to help in the upbringing of their children, should either of them die.
Mr Modray adds that they are paying "over the odds" for their life cover, and recommends looking elsewhere.
Interview by Harriet Meyer
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