Wealth Check: How can I pay my debts and save for my daughter?

A single mother owes £30,000 and has no savings, but wants to give her 15-year-old a good start in life. How can she turn her situation around?

(JASON ALDEN)

The Patient

Alison Moore is struggling with the financial demands of being a single parent, but is keen to do all she can to give her 15-year-old daughter the best possible start in life. The 51-year-old from Hersham in Surrey earns £27,000 a year working as a team administrator in oil exploration, but has no money in savings and over the years has amassed debts of about £30,000.

These include a £1,750 overdraft with the Halifax which incurs a daily charge of £1, and a £1,900 overdraft with NatWest – with a monthly charge of about £25. She also owes about £8,000 on a NatWest credit card, £4,000 on an HSBC card, £3,000 on an Egg card, £2,000 on a Tesco card and £2,000 on a Santander card – all with hefty rates of interest. Aside from these, Alison pays £399 a month on a NatWest personal loan which is due to expire in about five years' time.

Now that her daughter is about to start college, Ms Moore is determined to turn things around.

"Having hit the 'big 5-0' and with my daughter leaving school and starting college, this has highlighted the need to have money set aside for her – and so that both of us can have a better quality of life," she says. "If I didn't have so much debt, I could do so much more. I'm worried that I've reached the point of no return, but hope there is time and opportunity to turn this situation around."

Ms Moore has not neglected saving completely, as she does pay into the company share plan. "I invest £100 a month into two different Save-As-You-Earn (SAYE) schemes," she says. "These started two to three years ago, and are due to mature in two to three years' time."

She also pays about £90 a month for critical illness cover and mortgage payment protection for up to 24 months, and gets life cover through her employer; while she does have a pension through her employer, she does not pay into this at present.

Ms Moore and her daughter live in a two-bed semi-detached cottage which she bought eight years ago for £219,000. Her £60,000 repayment mortgage is currently on a tracker deal with the Halifax.

"I have looked into other options to boost income, such as taking in a lodger, but there is no third bedroom," she says. "I've also tried obtaining quotes to extend the loft area, or along the side of the property, but there just isn't enough room."

The Cure

Our panel of independent financial advisers (IFAs) agrees that Alison needs to focus on working out what she can realistically afford to save each month to help her to pay off her debts. They also agree that she must modify her spending habits to keep within her means to avoid ending up back in the same position.

Pay off debts

"Alison understands the need to sort out her debts," says Danny Cox from Hargreaves Lansdown. "The situation is serious and radical action is needed to resolve the problem."

He points out that the combination of minimum payments on her credit cards, mortgage, bank loan and overdraft charges are absorbing about 50 per cent of her income.

"Without action, Alison is in a vicious circle where the interest and overdraft charges will only get worse and the debts continue to escalate," he says. "Alison has to put herself in a situation where she can start to turn the vicious circle into a virtuous circle. Repaying the debt will ease the interest payments which will free up money to repay debt and so on. The first step is to cut up the cards to take any temptation out of the way."

Restructure debts

Chris Wicks from Bridgewater Financial Planning suggests Ms Moore could consider restructuring all of her outstanding credit card debts and overdraft into a single loan and then repay this over a sensible timeframe.

"Given the equity in her house, Alison could investigate the possibility of taking a further advance on her mortgage," he says. "If her unsecured debts are added to her existing mortgage, she would still have about 50 per cent of the equity left."

He adds that even if she is not able to restructure her borrowings in this way, she should still try to pay off as much as possible, starting with the debts with the highest rate of interest.

Minimise spending

Alison needs to sit down and look carefully at what she is spending, says Jaskarn Pawar from Investor Profile.

"Alison has about £1,600 of net income to play with each month, and needs to work out where this is going," he says. "She could do this by writing down everything that she spends, or by making use of one of the free online budgeting tools."

He adds that without controlling her cashflow, paying off her debts will be impossible. "There are ways of cutting costs on every expenditure that will all add up to something significant," he says. "And, if there are 'luxuries' such as mobile phones or cable television, these need to be cut."

Mr Cox adds that Ms Moore should check that she is getting all the benefits she is entitled to, such as child benefit and tax credits; she can do this at direct.gov.uk or her local job centre. For free debt advice, she could also contact one of the charities, such as cccs.co.uk, nationaldebtline.co.uk or citizensadvice.org.uk.

Property

Mr Cox says Ms Moore could consider selling her house and using the equity to repay her debts.

"I appreciate this is a radical decision, but Alison could then downsize to keep the same mortgage size or rent," he says. "If this is not an option she could look at alternatives such as converting her repayment mortgage into interest-only for the short term, and use the money saved to repay her more expensive debt. However, in the longer term, she will need to find alternative ways to repay the capital."

Savings

According to Mr Cox, in an ideal world, the SAYE schemes should be left until maturity as this will provide the best potential for returns.

"However, unless something can be done with the mortgage, I don't think Alison can wait two years before they mature," he says. "It would make sense to cash these in now, and use the cash proceeds plus the £100 she is currently saving into these schemes each month to pay down borrowing."

Mr Pawar agrees that while it's important to have a sum of savings set aside for unforeseen circumstances, with this level of debt, Ms Moore needs to focus on this first – especially as the interest exceeds anything she could earn on savings.

Mr Wicks urges Alison to find out more about her employer's pension scheme and what benefits are offered. "Alison may be able to improve on her benefits by making additional contributions once she has her debts under control," he adds.

Protection policies

Mr Cox says Alison needs to review her protection policies.

"Given that Alison has life insurance through work, paying £90 a month to protect a £60,000 mortgage does not seem good value," he says. "She should check to see if she can get covered more effectively and more cheaply."

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Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF j.knight@independent.co.uk