Find the right financial balance
Claire Lodge, 34, lives in Robin Hood, near Wakefield, with her husband Andrew, also 34, and three-year-old son Robbie. Claire is coming to the end of a fixed-term contract with the Department of Work and Pensions in Leeds as a marketing manager, earning £2,000 a month after tax.
She also does occasional freelance work to supplement her income, and is currently looking for a permanent position. Andrew is a team manager at revenue management company 1st Locate in Leeds, earning £1,800 a month after tax.
The couple currently pay £900 a month into a Woolwich repayment mortgage on a fixed rate of 6%. Their home in Wakefield is worth around £210,000. Claire owes £2,700 on a 0% credit card, which she is paying back at a rate of £150 a month.
Claire is worried about her credit card debt and wants to be able to keep her head above water.
"Since becoming a fixed-term contractor, I have been salaried rather than paid weekly freelance rates. Although this means I have more benefits such as paid leave and sick pay, it also means my income has dropped significantly and I'm really struggling to make everything balance," she says.
As their household budget is tight, Claire and Andrew should check their employee benefits with their respective employers in case they ever find themselves unable to work, advises Kathryn Andrassy, independent financial adviser at Tony Revans Financial Planning.
It would be wise to find out how much and for how long each would still be paid, if either were unable to work due to accident or illness.
Another option is to consider redundancy cover for Andrew, to protect against the risk of unemployment in the short term. "An accident, sickness and unemployment cover plan in the region of £35 a month would cover their mortgage payments," Andrassy says.
She also suggests both Claire and Andrew ask their employers whether they offer childcare vouchers. These schemes allow both parents to pay up to £243 a month into an account before tax and national insurance is deducted from their pay, saving a maximum of £1,195 a year.
The couple can then use these vouchers to pay their childcare provider directly. Even if their companies don't offer the scheme, it's worth raising the subject with the HR departments as the voucher scheme will also reduce the employers' NI bills.
As Claire hopes to soon be in permanent employment, she should consider stopping her pension contributions to save some money in the short term.
"Until her employment situation is resolved, she could consider suspending her contributions to her stakeholder pension for the next few months," says Andrassy. "When she starts another job, she can join the pension scheme of her new employer."
As to Claire's credit card debt, Andrassy suggests leaving the remaining balance of £2,700 until next May, when the 0% introductory rate ends.
"When her childcare costs reduce next year when Robbie starts school, Claire should be in a position to repay the remainder of the debt," Andrassy adds.
However, Claire must remember to make other arrangements and transfer the balance to another 0% card when the initial interest-free period runs out.
"She should consider paying the minimum on the credit card while it is on 0% and utilising the balance of the £150 monthly payment she is currently paying to minimise her overdraft," Andrassy advises.
To control her day-to-day spending, Andrassy suggests Claire stops spending on cards and starts using cash. By withdrawing a certain amount of money each week it's much easier to monitor your spending and not blow your budget.
"Cards can be dangerous as you don't visualise how much you're 'spending' at the time. When you part with cash, however, reality takes hold and this can help to reduce your actual spending," Andrassy says.
She also thinks that making small cuts to the couple's utility bills will really add up. By using the Moneywise energy switching service they can review their current providers.
Claire and Andrew are committed to investing in their son's future: the Lodges invest their child benefit into their son's child trust fund, with the hope that it can be used for his further education or to help him start on the property ladder when he reaches adulthood. Andrassy says this is a sign of good financial planning.
To provide a modest 'rainy day' fund, she also suggests that Claire pays a small monthly contribution of £25 into a regular cash individual savings account. She recommends the Halifax instant access cash ISA, which pays 2.8% interest.
For more ISAs check our round up of the best rates.
With a few changes to the couple's lifestyle, Andrassy believes that next year their financial situation will be much brighter.
"The family are doing most things correctly, with Claire's interest-free credit card and investing their child benefit for their son's future," she says.
"Money will probably never be as scarce as it is now – and I'm sure that many families reading this will see many similarities with their own situation."
Claire found the makeover a valuable experience as it reassured her that she's on the right track with her finances. "It's a comfort to know I've been doing all the right things," she says.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
A special government scheme operated through employers that allows you to pay for childcare from your PRE-tax salary. The vouchers cover childcare up to 1 September after your child’s 15th birthday (16th if they are disabled) and can be used at any registered and regulated nursery, playgroup and for nannies, childminders or au pairs.