Fear of Spiralling Debt

JJsFearOfDebt

Hi,
First ever post on here - although mine and my husbands debt may seem small in comparison to others, due to my parents always having been in serious debt I have a fear of being in that situation!!

Bit of background. Both are fortunate to have secure full time employment that has not been impacted by the pandemic and have worked throughout. We purchased our house last November with a mortgage of £193000 over 35 years. No children, so no childcare costs, however, the house needs work doing too it!

So far we have paid for (with savings only!) the bathroom, Hallway/stairs and landing, two of 3 bedrooms, and living room to be decorated, fence and immersion replaced. We’ve done a good amount of the work ourselves to save costs but still have a way to go. 

Money wise we have joint finances as I earn more than my husband, as he started a new career a couple of years ago, this works best for us as otherwise I would have to pay more as he cannot afford 50/50. 

Debt:

CC1 = £2200
CC2 = £1700

Total CC (interest free) = £3900

Mortgage = £193000 over 35 years @2.16% = £655 a month 

Other:
Sofa payments £37 a month over 4 years interest free

Car 1 finance £149.00 a month ends March 2021 with £6710 balloon payment 

Car 2 finance £208.74 a month ends September 2021 with balloon payment of £6279

We have both cut back on expenditure in that we are both now on pay as you go, and no phone contracts and pay £15 a month for 2 phones. We cancelled our tv license as we never watch it. We pay for Netflix, however, do not have sky or any other services.

I am awaiting an insurance payout from an accident a couple of years ago which should be £11000 a £12000. We hope to use this towards the balloon payments to our cars so we will no longer have to pay finance (with a little extra savings on top!). Alongside this we are paying £100 a month off each credit card to get the payments down.

At the minute we are not overpaying they mortgage at all as we have a lot of work to do in the house. We are setting aside £200 a month for anything in the house to be done. 

I am quite good with money and live reading MSE forums, however, we both work hard and want to look at how to begin working towards retirement and paying off our mortgage, whilst still continuing to work on our home. 

We want to clear our credit card debt, and next year the only plan in the house is the final bedroom and 3 upstairs internal doors to replace. We will do a lot of the work ourselves and with furniture costs looking to spend approx £1500. We have £1100 in savings towards this now.

Once credit card debt and cars paid for we will be approx £560 a month better off. How would you save/spend this?

Retirement fund / mortgage overpayment / savings towards house?

Not sure how to make the most benefit with this whilst also not having money stuck and inaccessible in case we need the funds for emergencies!

Looking for advise and tips to avoid anymore debt accruing, and to help us get where we want to be.. debt and mortgage free! 

Thanks 

enthusiasticsaver

You sound as if you are already pretty clued up about your finances and they seem to be in control. Having a healthy fear of debt is no bad thing in my book, we were the same and it has served us well. We always lived by the rule of three with spare money. One third to long term savings so mortgage or pension over payments and later stocks and shares isas. One third to medium term so usually fixed term or regular savers for things like car replacement, home improvements and the remainder to short term savings for holidays, Christmas, car and house repairs or just extra money for meals out etc. That gave us a good balance between saving and spending so in your position I would split the £560 three ways. Of course this assumes the debt is repaid and you have an emergency savings account you can access any time. We have always held £5k - £10k but whatever works for you. 

enthusiasticsaver

I am not sure how old you and your husband are but if your eventual aim is early retirement I would suggest reading up about your pension and getting in the habit of updating annually the forecasts of income you will receive. Never too early to start. We were mid twenties and although we didn't know what age we would want to retire we worked towards having that choice. It sounds like you keep on top of your outgoings so that helps a lot. 

JJsFearOfDebt

enthusiasticsaver said:

I am not sure how old you and your husband are but if your eventual aim is early retirement I would suggest reading up about your pension and getting in the habit of updating annually the forecasts of income you will receive. Never too early to start. We were mid twenties and although we didn't know what age we would want to retire we worked towards having that choice. It sounds like you keep on top of your outgoings so that helps a lot. 

I am 28 and my husband is 32. We don’t have a definite retirement age but hoping 55-60. At the minute we only have pensions via our work, and were looking at a way to save more towards this but not sure what’s best. We definitely won’t retire whilst we still have a mortgage so not sure if we should just focus on overpayments for a while before we start that or not? 

We have quite a large mortgage at the minute so unsure if a secondary pension/retirement fund would make more sense to start later on once this is down a bit more.

enthusiasticsaver

From a cost point of view you are better off overpaying into your work pension rather than setting up a new one as the costs are already accounted for.  I would up your pension gradually as you get tax incentives but also focus on the mortgage.  Are your employers paying the maximums? Sometimes you have to match so you should find out what percentage you are paying and what percentage they are paying. Just upping it 1% a year makes a difference and you hardly notice the money missing after a while because you are taxed after pension contributions so part of the increase is paid by HMRC. When is the mortgage due to be repaid? Getting rid of the mortgage asap makes sense psychologically but as interest rates are low many people advise focusing on pensions instead as a way of growing income in retirement.  I personally would aim to get rid of it by the time you aim to retire though as reducing outgoings is a big advantage just as income drops. 

The path we chose was overpaying pensions and mortgage initially then once the mortgage was gone we focused on SIPPs and stocks and shares isas.  We may well have been better off by investing earlier and letting the mortgage run its course but we wanted it gone asap.  I understand if yours is large it sounds sensible to overpay it.  If you are able to overpay I would start with maybe £100 overpayment out of your spare money once the debt is gone and see what difference that makes to the term.