Wealth check: How do we save for a rainy day?

Having a family is not easy on your bank balance and as children get older, they become more costly. Like millions of other couples, Susan Smith and her husband, Peter, face financial headaches every day to provide the best for their children.

Having a family is not easy on your bank balance and as children get older, they become more costly. Like millions of other couples, Susan Smith and her husband, Peter, face financial headaches every day to provide the best for their children.

Susan, 41, and Peter have been married for 22 years and have four children, one starting university in September. Susan is a data enterer for Alkermes Europe, a pharmaceutical company, and her husband works for Cambridge University.

The couple lived in London but when they had the children, they moved to Cambridge and Susan gave up work. But as the children grew older Susan needed to occupy herself more, so she studied for a history and economics degree at Anglia University. After the course, Susan wanted to get into architecture, so she took a part-time job at Alkermes and spends the rest of her time studying for an MA in architectural conservation at De Montfort University (DMU) in the Midlands.

Alexia, Susan's eldest, will be starting university in September, so Susan has the worry of how they are going to fund her daughter's course. Alexia is more than willing to help pay her way, but Susan doesn't want her to get into debt.

As well as finding the funds for her daughter's education, Susan also has to find the fees for the second year of her own course, which will cost approximately £1,500. "Last year we used my husband's credit card," Susan says. "We were hoping for some money from DMU's hardship fund, but I did not qualify, even though we were £2,000 overdrawn at the time. Of course, I could use his credit card again, but our policy at present to try to keep bills to a manageable level and not run up huge debts again."

Susan wants to find out how they can stop struggling and put some money aside for a rainy day. They have not had a decent holiday for years and had hoped that by this point in their lives, they would have plenty of money in the bank to enable them to take nice holidays, handle all the DIY on their home, and generally not have to worry about money. "It is a never-ending cycle that I would like to break."

We have put Susan's financial dilemma to our panel of independent financial advisers: Matthew Morris at Rickman Tooze, Harry Katz at Norwest Consultants, Robert Jackson at Baronworth Investment Services and Kevin Morgan at Ezi UK.

Profile

Name: Susan Smith

Age: 41

Status: Married to Peter, 43; two daughters, two sons

Occupation: Part-time data entry for Alkermes

Education: Degree in history and economics and studying for an MA in architectural conservation

Salary: : £12,500 per annum (£44,000 combined with husband); child benefit £186

Property: Four-bedroom mid-terrace house in Cambridge worth £300,000

Motoring: Citroen Xantia

Outgoings: Per month: mortgage £750; loan £314; utilities £136; AA car insurance £29; council tax £104; Denplan £10; life assurance £33; Isa £75; kids' allowance £80; entertainment £130; music lessons £196; food £440.

Investments: "Christmas" Isa £85; £9,000 in French standard savings accounts with Caisse d'Epargne bank

Debt: £90,000 mortgage, £10,000 loan, £1,200 credit card

Solution 1: Planning

"One of the first things Susan should do is establish a strategy," Matthew Morris says. "The couple should assess where they are, what their short-term needs are, and their longer-term ones. This should all be linked into one cohesive plan to move forward." Harry Katz adds: "Susan has chosen a wealthy person's pursuit in embarking on an education programme which appears to be more for pleasure than immediate fiscal advantage." He asks if Susan qualifies in architectural conservation, will she earn more than she would have done by working full-time now?

Kevin Morgan says the Smiths should work out how "to provide the necessary capital" so they can afford the funding for university etc, "and keep within existing budgets and clear expensive debts".

Susan and Peter have a four-bedroom house in Cambridge, worth £300,000. They originally had a mortgage of £70,000 but remortgaged for extra cash. The mortgage they have now is for £91,000 and is set at a fixed rate for five years with monthly repayments of £750 and they are tied in for a further two years after that.

Each adviser agrees the couple would be better off if they looked around for a better deal. Robert Jackson believes their problems are caused by their home. He suggests they check Northern Rock, which lends 2.75 times joint income, in their case, £121,000. But this rate is not set in stone and they will agree a higher multiple based on the applicants' ability to service the loan.

Mr Jackson say Susan should "check what penalties they will incur if they redeem their existing mortgage early. If they want to continue their existing mortgage, they should consider extending the term until Peter's 65th birthday, rather than his 60th. This will reduce their monthly repayments."

Kevin Morgan believes remortgaging a higher loan over a longer term would be the best solution.
The Smiths are embarking upon a period of some expense and should release equity from their property to ease their proposed spending over the years. They should remortgage their home to approximately £120,000 over 22 years (taking Peter to 64). This loan to value is low and is within three times the joint income." Mr Morgan recommends the Woolwich Open Plan base tracker offset mortgage. This tracks the Bank of England's' base rate plus 0.75 per cent, which gives a current repayment of 4.75 per cent. This means the couple will be making mortgage repayments of £733.50 a month.

Another option would be to take on a flexible mortgage. Matthew Morris says one costing around 5 per cent interest could save them £400 a month assuming a capital repayment mortgage, against their existing payments. "This will allow them more freedom, help with their lump sum needs and set them up more efficiently."

As well as a £91,000 mortgage, the couple have debts of £11,200 from a personal loan and credit card. Mr Morgan, who suggested the couple should remortgage their house for £120,000, says: "They would have released £30,000, enabling the loan and credit card debts to be repaid, and provide funds for university fees. With the expensive money (loan and credit card) gone, the savings could be directed into a 'Christmas' Isa (see right)''. He also encourages the Smiths to build a cash contingency fund, equivalent to three months' net take-home pay.

Mr Morris has his hesitations. 'This sort of planning, using debt to pay for items, needs to be entered into with great care," he says. "For the sensible financial planner it is an excellent way of stretching sudden short-term outgoings over a longer period or using equity in the property to boost prospects. For the ill-disciplined it can lead to a downward spiral which ends in serious problems."

The only savings the couple have is a short-term "Christmas" Isa, set up at the beginning of the year. The money they put in will go towards paying for a good Christmas with lots of presents for the children. They have managed to save £85. Mr Morris suggests they extend their Isa and consider an investment-linked fund for the medium term to sit alongside their shorter-term Isa.

More importantly, having four children and large debts, the Smiths must check their life assurance. Mr Morris says they should "both ensure they have at least £200,000 in cover each, and if possible, within budget, should build in critical illness cover, for a minimum of £50,000 each." Mr Morgan agrees and suggests they take out an attendant life assurance cover on the mortgage. They could pay less than £22 per month on a "joint life, first death" basis with Legal & General. He also recommends critical illness cover, which with Scottish Provident will come to around £60 per month.