Wealth Check: 'I'm struggling to cope with finances after my divorce'

The Patient

Following Karen Ritchie's divorce three years ago, she finds it difficult coping with the cost of living. "I cannot afford the lifestyle I lead, and I have no financial security for the future at all," says Karen, 41, from Worksop, Nottinghamshire. "I am constantly trying to get in control of my finances, but never succeed."

She frequently switches credit cards to take advantage of interest-free deals, and currently owes £6,000 spread across three cards. One is a Virgin credit card, and another Barclaycard – both with 12-month interest-free periods for balance transfers. She also has a First Direct credit card with an APR of 19.9 per cent used for spending, although she pays the balance off on this every month.

"I don't like paying interest on my debt so move it around," she says. "I also owe £1,500 to a friend. I'm a single parent with two girls at university. I do struggle, although I manage to help them out with clothes and food."

Despite earning a "good" income of £31,000 for her role as manager of children's charity Home-Start Sheffield, she usually finds herself overdrawn as pay day approaches.

Karen rents a three-bed house for £475 a month. "I'm still on the mortgage for my old house, but I don't pay anything towards it. My ex-husband considers this his house, so it's his debt," she says. "We were married for 19 years and the split was amicable, but there wasn't any equity in the house at the time."

With no savings or investments, Karen is keen to start sorting out her finances. "When I save money it's almost guaranteed that something will happen that will mean I have to use it, such as my car breaking down, or the dog needing to go to the vet," she says. "My main expense is petrol."

Turning to retirement planning, Karen contributed to an employer's pension paying 6 per cent of salary, with an additional 8.25 per cent paid by her employer for 10 years. "I am hoping to start up contributions again, and unsure how much it's worth now." She has no protection policies in place.

The Cure

Many will empathise with Karen's situation, agree the advisers, as she is one of millions who earn a good salary but still struggle as the cost of living continues to spiral.

"In Karen's case, she has been getting used to a new phase of her life following her divorce, and it is understandable that she has placed short-term priorities over long-term planning," says Robert Hair, from Solicitors and asset managers Turcan Connell. "The good news is that with a few pragmatic steps, she could be on the way to achieving her financial goals."

Debt

Karen is burying her head in the sand on a couple of matters, warn the advisers. Despite viewing the mortgage for her old house as being solely her husband's responsibility, if her name is on the mortgage it's technically her debt too, the advisers stress. If he fell into difficulty and was unable to repay this, debt collectors would be able to seek payment from her. She must ensure that her name is taken off the mortgage as soon as possible.

Matthew Rich from IFA Alan Seward Financial adds: "She should also get an independent valuation of the house she owns with her ex-husband to find out how much is outstanding on the mortgage. This will tell her if there is any equity and she can negotiate a deal with her ex to remove her name from the mortgage."

She also needs to wipe her credit card debt, which should be possible given her income – as after all, interest-free periods don't last for ever and it is a task to switch cards constantly. "By cutting up her credit cards up and setting up a direct debit of £250 a month, it will take her two and a half years to get rid of the credit card and loan to her friend," says Mr Hair. "This should be easily possible – and she might be able to put even more towards this if she budgets carefully."

Once she has cleared her debts she can focus on saving for a deposit to buy a house, as well as creating an emergency savings "buffer" of ideally three months' income. Cash individual savings accounts (ISAs) are the most tax-efficient way to do this, and she is able to search for the most attractive rates on sites such as moneyfacts.co.uk.

Benefits

Karen also needs to visit her Citizens Advice Bureau to make sure that she is claiming everything that she is due, says Mr Hair. "As her daughters are still in full-time education, she may be eligible for family tax credit, although she would need to check the details for this." Millions miss out on benefits they are entitled to every year, so it's important to find out what you're able to claim.

Budgeting

Once Karen's priorities have been dealt with, she needs to set a monthly budget which will help her to work out how much she can put towards paying off her debt each month.

Danny Cox from IFA Hargreaves Lansdown says: "Budgeting to keep your financial affairs under control is easy in theory: spend less than you earn and then save the difference. This clearly isn't happening and Karen needs to make some difficult decisions to get back on track. Karen is talking home about £1,950 a month after tax, and after rent she is left with about £1,475 to meet debt repayments and other living costs."

He recommends keeping a spending diary to focus the mind on how and when she spends money, and also help her stick to a budget.

She already does what she can to keep her bills down and she should continue to do that: shopping around for the best deals; ideally fixing her utility prices; moving her credit cards around to avoid paying interest; and looking for coupons and deals on her shopping, says Mr Hair.

Retirement

Karen is risking a bleak retirement without continuing to make provision for this, warns Mr Cox. If she can find a way of affording the pension contributions, is she able to reinstate these with her employer? This is an important consideration as otherwise she is wasting her employer's contribution – and therefore effectively turning down a pay rise.

"The pension scheme she paid into for over 10 years should have built to a decent fund size," says Mr Cox. "Karen should review this scheme regularly, and if the performance falters, she has the option of transferring the value to another pension scheme – although she needs to be careful of any costs or penalties for doing do."

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