Wealth Check: My children cost a fortune – how can I put cash aside?

With a seven-year-old and a new baby, one young couple want to rearrange their finances to make sure they give their kids the best possible start in life

(LORNE CAMPBELL)

The Patient

Liz Booth, 35, has just returned to work after maternity leave, and is now keen to get her finances back on track.

Liz, who is from Holmfirth, West Yorkshire, has been married to her husband, Neil, for nine years, and the couple are determined to provide the best possible start in life that they can for their two children, aged seven and 10 months. Before going on maternity leave, Liz worked for the Halifax, but when she returned to work, at the end of January, she moved to the Yorkshire Building Society as a customer representative.

She earns around £7,750 a year.

The financial demands of bringing up two young children have made it difficult for Liz to build up substantial savings, but she has managed to slot away £700 in a Halifax children's saver account paying 4 per cent, as well as £50 in a Santander account paying 0.25 per cent, and £20 in a Halifax individual savings account (ISA).

"I'd like to know how I can reduce my outgoings and free up a bit of spare cash each month," she says. "I'd also like to be able to build up a buffer of around £5,000."

Over the years, Liz has amassed some debts, and owes £5,000 on a staff loan from the Halifax, and £5,000 on a Barclaycard credit card. "I took the loan out at a preferential rate of 6.4 per cent and this still has three years left to run," she says. "The card is interest-free until October, and I'm keen to get this paid off as quickly as I can. I also dip into my overdraft up to the £300 limit each month, but never go beyond this."

Looking to the longer-term, Liz has amassed around £3,000-£4,000 in a Standard Life stakeholder pension which is currently frozen. "I also have a Halifax staff pension and am waiting to find out the final figure, and have just begun paying into a staff pension at the Yorkshire, contributing 5 per cent of my salary, around £40 per month."

Liz and Neil bought their two-bed house in 1999 for £50,000, but have remortgaged since then and now have £91,000 outstanding on a five-year repayment deal with the Halifax, fixed until 2013.

"We were unfortunate to remortgage just before rates went down and now pay £640 per month," says Liz. "We are also keen to upsize to a three-bed place in the next few years."

Liz pays £45 a month for an £80,000 joint life insurance policy with £50,000 worth of critical illness cover from the Halifax.

The Cure

Our panel of independent financial advisers agrees that while Liz has some sensible financial objectives, she first needs to get her debts under control, as expenditure and income are tight – and then needs to focus on building up her savings.

Deal with the debts

Martin Bamford from Informed Choice says paying off the £5,000 on Barclaycard should be the number-one priority for Liz. "When the 0 per cent deal ends this October, it will become harder to pay off this debt," he says. "The Halifax staff loan should be her next target – although this rate is competitive, and it sounds as though she is on track to fully repay this over the next three years."

Draw up a budget

Mr Bamford warns that dipping into the £300 authorised overdraft each month is evidence of poor budgeting.

"If Liz and her family suffer a financial emergency, they would find it hard to avoid getting into real difficulty quite quickly," he warns.

Tom Beckett from Salisbury Financial Services urges Liz to sit down and plan a household budget.

"She needs to identify areas in which she can cut back in order to pay down her debt and improve her savings," he says. "Assuming that essential spending cannot be trimmed back, she needs to review her non-essential commitments. An initial suggestion may be for Liz or Neil to take on a second job in the evenings or at weekends."

For emergencies only

Once Liz has drawn up a budget, she can then look to build up an emergency fund. "This should be equivalent to between three and six months of expenditure – so a £5,000 target for this looks sensible," says Mr Bamford.

Once Liz is in a position to save, she should use a cash ISA, as the interest is tax-free, recommends Danny Cox from Hargreaves Lansdown.

Property

While fixing for five years just before rates went down was bad timing, this can only really be judged with the benefit of hindsight, and Liz needs to think carefully before moving to a new deal now, as she is likely to face early repayment penalties. Instead, Mr Beckett suggests she could ask her lender if the mortgage could temporarily be moved to interest-only to free up cash and pay down her debts.

"Or, Liz could ask her lender for a further advance on the mortgage to clear the other debts, as the interest rate is normally lower," he says.

"While the debt could cost more to repay, the debt consolidation could reduce monthly outgoings."

He also urges Liz to cater for the uncertainty of interest rates in 2013.

"Based on current expenditure, the family may struggle with higher repayments," he says. "They also need to bear in mind that while moving to a larger property is always an ideal, they may be hindered by stricter lending criteria when trying to borrow more money, not to mention the prohibitive costs of moving."

Pension planning

Mr Cox urges Liz to check the details of the Halifax pension. "If this is a final salary scheme, she should probably leave it where it is until retirement," he says. "If it is a money-purchase scheme, Liz could consider transferring this into the Yorkshire's scheme; she could also do the same with the Standard Life pension. Consolidation reduces paperwork, but there are unlikely to be any cost savings; it's also crucial to check if there are any penalties for transferring."

Protection

Mr Cox says Liz could save money by reviewing her current life cover and critical-illness plan.

"The current policy appears expensive, and it's unlikely she and Neil have enough life insurance," he says. "They should at least have enough cover to clear their debts and provide the survivor with a decent income. Liz should also check if her employer offers death-in-service benefits."

Mr Beckett adds that when finances permit, Liz and Neil should look to take out income protection, which would provide a monthly benefit in the event they are unable to work through illness.

Do you need a financial makeover?

Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF

j.knight@independent.co.uk