Wealth Check: Family seeks help with fast-growing home work

Couple who run a booming business from their garage seek new ways to improve their savings and stabilise their financial future

Over the past six months a successful business has been growing in the Bagulay family home. Diane Bagulay, frustrated in her job at a direct-marketing company, started a telemarketing one, Open Door Marketing, last November in their garage, in Needingworth, Cambridgeshire.

She does business-to-business marketing. "One of our clients, a sports flooring company, asked us to target independent schools and establish whether they have a budget for renovation," Mrs Bagulay says. "That's an example of what we do."

They have a client base of 24 companies which is encouraging since 36-year-old Mrs Bagulay had to start from scratch. "I'm still under contract with my old firm not to deal with their clients, so I can't use my previous contacts, although that situation will end next year."

Mrs Bagulay is happy with her progress. "Everyone warns you to expect to lose money when you start out, but we've been doing amazingly well." She has hired two employees and will take on more staff when she moves to a permanent office in an industrial estate in nearby St Ives next month.

Her husband Adam, 37, is a police officer and they have an eight-year old son called Lewis. The family live in a 200-year-old cottage worth £170,000 which they bought three years ago. They plan to remortgage in September and would like to pay off their £89,000 home loan early. They do not plan to move.

They have two cars; a Volkswagen Polo which Mrs Bagulay uses to visit clients and a Peugeot 206 which her husband drives to work. They have a £2,000 loan on the Polo, to be paid off by October 2004, and a £3,000 loan on the Peugeot 206. They would like to pay off the loans soon and Mrs Bagulay wants a BMW.

Mr Bagulay is in the police pension scheme and Mrs Bagulay has had a Scottish Equitable pension for the past 11 years. They also have critical illness and life assurance schemes.

The Bagulays pay £50 a month into a Canada Life Isa and £50 into a Woolwich Isa. "They are losing money," Mrs Bagulay says. " Is there an alternative savings scheme?"

They would also like advice on how to make their money go further. "We don't go without but we seem to use all our spare cash on holidays and home improvements." We put their case to Meera Patel, of Hargreaves Lansdown in Bristol, Ray Boulger, of Charcol in London, Darryll Connor, of Towry Law in Bracknell and Steve Buttercase, of M2 Financial in St Ives.

Diane Bagulay, businesswoman Adam Bagulay, police officer

Ages: 36 and 37

Family: One son, Lewis;

Occupation: Mrs Bagulay owns Open Door Marketing, a telemarketing services company; Mr Bagulay is a police officer;

Salary: £44,000 combined;

Motoring: Mrs Bagulay drives a VW Polo; Mr Bagulay a Peugeot 206;

Debts: £89,000 mortgage; £5,000 in car loans;

Savings: Canada Life Isa (£50 per month); Woolwich Isa (£50 per month);

Pension: Mr Bagulay is party of the police pension scheme; Mrs Bagulay has a Scottish Equitable private pension

Property: Two-bedroom cottage in Needingworth, Cambridgeshire, worth £170,000; Mrs Bagulay rents an office for £3,000 a year;

Life insurance: Friends Provident critical illness £31.51 per month; Scottish Provident critical illness £23.07 per month; Norwich Union life assurance £19.76 a month;

Outgoings: £1,200 ar month, including mortgage.

Solution 1: Savings

Mr Buttercase says the Bagulays should save the equivalent of six months' outgoings in an instant access account as a safety net, as well as saving for tax and national insurance. For a small business, especially one with staff and paying for premises, cash flow is king.

Ms Patel says they may wish to review their Canada Life stocks-and-shares Isa. They could transfer to the Foreign & Colonial Investment Trust Isa, a broad-based fund with 35 per cent in the UK and the rest overseas, with low charges. If they wish to stay closer to home, they could invest in actively managed funds such as the Insight UK Dynamic or Schroder UK Alpha Plus, both of which have proven fund managers at the helm.

Mr Boulger says equity-based savings will inevitably be depressed due to stockmarket performance over the last three years. If the Bagulays' Isa has lost money it is probably best to leave it until it has had a chance to recover some of the losses. The Baghdad bounce has pushed the FTSE 100 over 4,000 again but it is too early for tell for sure whether this is a short-term blip or the start of a real recovery. If it is a recovery, the savings Isa balance should increase.

Solution 2: Mortgage

Mr Connor says the Bagulays have plenty of equity in their property and the family should represent a good risk to any mortgage lender. Interest rates are at their lowest levels for more than 40 years and there are excellent offers available. Larger mortgage brokers are able to negotiate deals that would not normally be available on the high street.

Mr Boulger says it may make sense for the Bagulays to put their car loans on to their mortgage. They should do a "remortgage" check (a free service by Charcol) to see if they would be better off remortgaging or even switching from their present lender. By remortaging to a better deal, the Bagulays may be able to increase their savings and reduce their debt.

Mr Buttercase says if the Bagulays were to consider an offset mortgage for capital repayment their goal of paying it off early would be more realistic and they could select an even shorter term as motivation. Offset or current account-style mortgages require discipline but offer great flexibility.

The new loan could include the car upgrade and reduce monthly payments on total debt. Intelligent Finance and Virgin One offer offset accounts that enable the customer to set debt-reduction goals and see them reflected on their statement.

Solution 3: Car

Mr Connor says car prices have fallen, and so has the rate on loans to finance them. He advises them to shop around for the lowest rate, and ask the dealer to beat that rate. They can find further information on www.moneyextra.com. It is important not to stretch the debt over a long period or they will have an asset worth less than the outstanding loan that bought it.

Solution 4: Business premises

Mr Connor says there are many considerations in buying business premises, including whether or not to run the business as a sole trader or limited company.

Mrs Bagulay should discuss with her accountant which would be most beneficial. Forming a limited company may be more expensive to administer but there may be tax advantages and it may increase her company's credibility to suppliers and clients.

A limited company could also be used to buy the premises, although the Bagulays may have to give a guarantee, such as their home.

Ms Patel says as Mrs Bagulays' business is new it would make sense to rent an office first and wait until she makes reasonable profits before buying. Given time, property prices are likely to fall, so there is a fair chance she will be in a better position to buy in a few years.

Mr Buttercase says a self-invested pension plan can help a small business looking to rent or buy premises. Sipps allow commercial property to be bought by the pension fund as an asset for the future. In the meantime, the business can rent the premises and all rental payments go into the pension fund with full tax relief.

If you would like to be given a financial health check-up, write to: Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk.