‘I’m 52 with £13k of credit card debt – how can I buy a Range Rover?’
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Jo Howarth is a trained hypnotherapist with her own business that teaches people how to look after their mental health.
“My clients started saying to me ‘I need to put you in my pocket and take you home with me’. That’s how it was born.”
The popularity of her online resource – which offers 24/7 access to a qualified therapist for “in the moment support” – has grown “slowly but surely” over 12 and a half years.
But while the firm is still “doing OK”, it took a big hit during the pandemic. Ms Howarth, 52, now wants to build more financial security for herself and her two girls, aged 14 and 16.
“I’m currently bringing in around £5,000 a month. I’d like to double that.”
Her business, The Happiness Club, is her sole source of income, but her flexible work schedule means she’s considering taking on a part-time job.
“I work full time but I do odd hours because I don’t have to work 9-til-5. I could make the time.”
Ms Howarth, who is going through a divorce, has lived on her own for two years in a rented property in St Helens, Merseyside. Her children, she said, are her “number one priority”.
“I’m very impulsive. If I have the choice between a £3,000 holiday in Crete – that I’ve booked for me and my children – and putting the money in a pension, I’ll go for the holiday every time.
“I like to spend money on my kids. I grew up thinking money doesn’t grow on trees, and that it’s hard to come by. It’s part of the reason I sometimes struggle with money.
“I don’t want my children to have the same mindset. I try to show them that whatever they want is possible – even if they have to work hard for it.”
She pays around £600 a month to service £13,000 of credit card debt, most of which goes on interest. She has no pension or other savings.
“I’d like to be able to pay off my debts, but it always seems to be neverending.”
She has around £70,000 of equity in a family home. While the money would “easily” clear her debts, it is tied up until the divorce is settled.
Ms Howarth wonders about the best thing to do with the money once she has access to it.
“I want to pay off the debt and put a chunk of money aside for each of my children. I’m conscious they will want to go off to uni or go travelling soon-ish.
“I’d also put a chunk of money into savings for myself – but would be very strict about spending it. I’d also buy a new car.
My Vauxhall Meriva is lovely but falling apart. I’d like a Range Rover instead.”
Lisa Caplan, chartered financial planner at investment manager Charles Stanley
There are some basics that Jo should set in place, some of which she can do now, and some with the money from the house when it becomes available. She also needs to decide on her priorities.
The first thing she should tackle is the credit card debt. The interest rate she is paying is very high. She is paying £7,200 a year to cover a £13,000 debt. She should see if she can switch her credit card to a new one and potentially pay 0pc interest for an initial period.
She should then set aside £13,000 of the £70,000 from the house to pay off the credit card debt completely.
As she is an impulsive spender, it would make sense for her to set up a regular savings plan, which automates the process for her. She could divert the £600 per month she is currently paying to a savings account that will give her “passive income” in the form of interest that she will be receiving rather than paying.
As a first step, she should make sure she has an emergency fund set aside for unplanned but necessary spending. That is usually 3 to 6 months of expenditure or income after tax. If income from her work is steady and reliable, she can consider a smaller emergency fund. A cash Isa with easy access would make sense for this to keep things simple and tax efficient.
Jo is looking at increasing the amount of work that she does. As a higher rate taxpayer, she will pay 40pc tax on any income from employment or self-employment. However, she can avoid this by paying any extra money she earns into a pension.
A pension also makes sense as she has nothing in place for retirement yet. As she is self-employed, she will not have benefitted from an employer pension. But she may be able to make employer contributions, which are treated as business expenses and will save corporation tax, as well as national insurance and income tax. This can be very tax effective indeed.
The downside of a pension is that she will not be able to draw on the money until she is at least 55. Yet this may be helpful if she is an impulsive spender, and the tax efficiencies involved make it a compelling option.
If her children are financially dependent on her, she should look at setting up some life cover and income protection in case something happens to her.
As she wants to put money away for her children, the most tax efficient way to do this is to set up Junior ISAs for them both. The maximum she can contribute to each is £9,000 per year and the children won’t be able to access the money until they’re 18.
Jo can also consider putting some of the money from the family home towards a deposit on a new property if that is affordable to her.
Zoe Gillespie, investment manager at wealth manager RBC Brewin Dolphin
Like most people going through a change in their circumstances, it is vital to re-establish your goals.
Looking at Jo’s current debt position, she should prioritise paying off the outstanding credit card balance to clear her debts.
Credit card companies can offer favourable terms for balance transfers, so comparison websites could provide her with better alternatives. This might mean her monthly payments go down as at the moment she is mostly paying interest.
Given that Jo is renting, she may wish to consider buying a property which could be a long-term investment. She will soon be receiving a capital sum which could be used as part of a deposit.
She also has a sizeable monthly income, making a mortgage a realistic prospect. Most lenders have mortgage calculators on their websites which would give her information on affordability. Renting long term does not make good financial sense as you are effectively paying off someone else’s mortgage!
Buying a car is also a priority for Jo, as well as helping her children, so she would have to decide how best to use the capital available.
Jo is fortunate she has the flexibility in her working day and taking on a part time job could help her increase her earnings.
As Jo has no savings or a pension, I would encourage her to make provisions for her future. Adding to a pension is highly tax effective as the contributions are taken from your gross salary, effectively meaning she would pay less tax on earnings.
Accessing a pension is restricted and the earliest she might be able to draw on it is age 55. As part of a long-term strategy, it is a useful tool though and Jo should explore this as an option.
To make any savings as tax efficient as possible, Jo could set up an Isa. The annual allowance is currently £20,000 and any income generated within an Isa is free of tax, making it attractive for savers. Interest generated outside an Isa could be subject to tax which would eat into returns, making them less attractive for higher earners.
With cash being eroded by inflation, Jo may wish to consider investing some of her savings to potentially get a higher return. Naturally, any investment carries a degree of risk. But if Jo can invest for the longer term, this could be an option to make her money work harder for her. Investing in an Isa wrapper would ensure any income or capital gains would not be subject to tax.
