Yvonne and Steve Woodward are like chalk and cheese with money. Steve, 46, saves regularly, spends little and travels to work on a moped. Yvonne, 40, is permanently overdrawn, has £26,000 of loans outstanding and recently splashed out on a Hyundai Coupé. Understandably, it was Yvonne who asked for a Money MoT.
She says: “We never row about money, we are just different. I am impulsive whereas Steve takes weeks to make his decisions. He has tried to encourage me to save more and spend less, but I think he has given up.”
The time is right for Yvonne to start learning how to manage her money — she was recently promoted and is now earning £60,000 a year as chief finance officer for Rochford District Council. She is aware of the irony of being in charge of a large budget at work but out of control of her personal one. “Luckily, my approach to finances at work is very different to my personal finances,” she says.
Her pay rise will generate £1,000 a month extra income. “Actually having spare money is a bit scary,” she admits, “I want to make sure that I don’t blow it all.”
Yvonne and Steve do not have children and live in Southend-on-Sea in a house worth £150,000. Their £48,000 mortgage is on a discounted rate of 4.94 per cent with Leek United Building Society and costs £497 a month. They recently remortgaged to this deal and reduced the remaining term from seventeen to ten years. All Yvonne’s debt is on a 5.8 per cent deal from the AA, costing £700 a month.
Since 1987 they have also been paying £51 a month into a Friends Provident endowment policy, which will mature in 2012. In 1998 they received a bonus of £473. The total guaranteed amount plus bonuses is £18,219. It also pays out £34,000 if one of them dies.
The couple have 753 shares in Friends Provident, which they received when the insurer demutualised in 2001, and 5,000 shares in Lloyds TSB through the bank’s sharesave scheme. Steve earns £30,000 a year from his job in IT support and has £20,000 in Premium Bonds. He is taking four weeks off in September to train as an electrician, which he hopes will earn him a higher salary.
One of the advantages of a lifetime of public sector employment is the pension scheme. Yvonne pays in 6 per cent of her salary, and the Government contributes double this, giving a total of 18 per cent. Steve’s retirement is not as well funded. He left a scheme from employment with BT with £8,000. This is now invested with Abbey Life.
In addition to the car and moped, the couple also own a motorbike and camper van. Vehicle insurance, plus their buildings and contents cover, totals £1,215.
Yvonne would like to know how best to make use of the extra £1,000 a month and whether she could support Steve while he trains as an electrician. In the long term, she wants to improve the performance of her savings.
What the experts say:
SAVINGS & INVESTMENT
Justin Modray, adviser, Bestinvest
“Yvonne’s safest option is to use the additional income to pay off her AA loan, but she may want to retain some flexibility, especially if she hopes to support Steve while he trains. Transferring the £1,000 monthly saving to a high-interest savings account, such as Bradford & Bingley’s eSavings 2, paying 4.85 per cent, would be prudent. Alternatively, Steve could cash in some of his Premium Bonds to tide him over.
“Another priority is to build a rainy day fund. For this, Yvonne should use her cash mini-Isa allowance. The National Savings & Investments Direct ISA currently pays 5.05 per cent.
“Selling off the Lloyds TSB shares, worth about £27,000, and the Friends Provident shares, at £1,300, would be a straightforward way to pay off the loan, but the Woodwards should check whether this would trigger a capital gains tax (CGT) bill.
“They both have a CGT allowance of £8,800 in the current tax year, so this may not be a problem. If they prefer to keep their money in shares, it would be more sensible to invest across a range of investment funds that give exposure to global stock markets, corporate bonds commercial property and commodities.
“Yvonne could divert surplus income into funds such as Rensburg UK Select Growth, Jupiter Income, Artemis Global Growth, Aegon Global Bond, SWIP Property and JPM Natural Resources. The couple’s annual stocks and shares Isa allowances offer a tax-efficient way to hold these investments.
“Yvonne and Steve may be locked into their endowment by harsh penalties, but they should check whether it would be worth surrendering the policy.
“Steve, meanwhile, should review the fund choice within his Abbey pension.”
DEBT
Philippa Gee, adviser, Torquil Clark
“Yvonne is in a fantastic position to regain control of her finances, but she must use the additional money in a structured way by setting up regular monthly payments.
“She must tackle the debt first. In the first year she should aim to reduce it by half. This should enable her to negotiate lower monthly payments. After 12 months she should aim to free up an additional £350 a month.
“Yvonne should continue to pay off the debt in year two by £1,000 a month, so that it is wiped out within 26 months. At the same time, she can use the extra £350 to start building savings. When the debts are repaid there will be £1,700 available, some of which Yvonne may want to hold on to as a reward for sorting out her finances, but most of it should go towards establishing her investments.
“Initially, savings should be directed to a cash Isa or a regular savings account with Alliance & Leicester, Barclays or Abbey. Once Yvonne and Steve have each used up their £3,000 allowance, I would suggest starting a monthly investment into a stocks and shares mini-Isa.”
MORTGAGES
James Cotton, specialist, London & Country, Mortgages
“Yvonne and Steve have a lot of equity in their property and could consolidate Yvonne’s unsecured debt into the mortgage, but I would not recommend that. Although the interest rate would be lower, it would stretch the debt over a longer period and they would pay more in the long run.
“Thanks to Yvonne’s pay rise, they will have enough income to meet the mortgage and loan payments with plenty to spare. They could use this to make overpayments.
“Overpaying by £200 a month would cut the mortgage term by a further three years and save about £4,500 in interest. They could overpay by more, but that will depend on how much they wish to invest elsewhere.
“They are not relying on their endowment to repay the mortgage, but they should be aware of their life assurance gap. With their endowment due to pay out £34,000 on death and a mortgage of £48,000, they have a shortfall of about £12,000. But with only ten years left on the mortgage, the balance will reduce quite quickly, so the gap will close by itself.”
Yvonne’s response
“This makeover has given us both a kick-start. I was keen to start building an investment portfolio. However, having just become a higher-rate taxpayer, I did not realise how much I had to earn in interest to be in profit — that has certainly focused my mind on repaying the loan quickly.
“I will start by putting aside £1,000 a month and try to negotiate a lower payment after a year. I will then look at the funds suggested.
“Steve likes having his money in Premium Bonds because he lives in hope that he will become a millionaire. However, he is interested in high-interest regular savings accounts so will take a look at those.
“He does not want to lose money on his Lloyds TSB shares, but we will be watching the price and will set ourselves a reasonable target at which to sell.
“Although I will focus on debt repayment and saving, after years of hard studying to qualify, I plan to spend some of the extra on myself. We will continue to manage our money separately.”
