Money Makeover: 'How do I clear my debts so I can look after children?'

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Almost a decade ago, Carrie Lloyd, 41, left a high-flying marketing career in London and moved to follow a more spiritual path.

She emigrated to America, where she studied to be ordained as a pastor. For the past six years she has made a living freelancing as a public speaker through the Bethel megachurch, a religious group in Redding, California known for its large gatherings and contemporary Christian “music worship”.

Ms Lloyd now wants to become a foster mother. But as the pandemic struck, she found her main source of income had been cut off.

“After some poor advice from an accountant, who told me I wouldn’t need to pay back any student loan, repairs to two little houses in northern California that I bought three years ago and some minor surgery, I’m about $20,000 (£14,700) in debt,” she said. “I’m currently in Britain to keep my widowed mother company. I’m renting out the houses to keep money coming in.”

Ms Lloyd currently lets both her properties, although she will be moving back into one of them in January, when she plans to return to America.

Her income varies because she is self-employed and her properties are let for short periods.

After taxes, mortgage payments and business costs, she has a monthly income that ranges anywhere between $1,500 and $7,500. 

She has $13,000 in debt on an American Express credit card with an interest rate of 22.7pc, $2,600 on an Apple card that charges 16pc and $5,000 in outstanding medical bills, which have attracted $440 in interest so far this year. She also has £1,600 in low-interest student loan debt yet to be repaid from her time at university in Britain.

She has no investments or pensions other than her property. “I need some guidance and advice on how to clear the debt before I take foster children into my home,” she said.

Ms Lloyd has struggled to get financial advice in Britain because she has been living abroad, so she turned to Telegraph Money for salvation.

Kath Derisson Financial planner at Fyvie Financial

Ms Lloyd’s income is going to reduce significantly if one of the properties is no longer rentable because she lives there. And there will be an additional reduction in her capacity to work when she has two foster children.

The housing market in America remains quite buoyant, so I would ask her to obtain a new valuation of her homes with her estate agents’ assistance. The reason for this is twofold: refinancing could improve her interest rate and free up some much-needed cash.

With income from one property covering the mortgage and bills, further consideration about where the remaining income from her work should go would be worthwhile. She should have an emergency fund that holds the equivalent of six to 12 months of expenses. She needs to be aware of childcare costs and how they could significantly increase her expenses.

When it comes to her debts, I suggest a plan whose main goal is to pay off both cards within a year. Dedicating $1,465 a month, split between $1,225 on her Amex and $240 on her Apple card each month, will clear the debts in that period.

Carrie Lloyd would like to start fostering children but must sort out her finances first Credit: David Rose

Any additional cash available each month should be put towards Amex first, then Apple – you repay the debts with the highest interest rates first.

Speaking to the finance department of her medical provider regarding the bills would be worthwhile to see if there are any options for her to arrange a payment plan or stop interest building up.

The UK student loan is far smaller than the other debts so it is the last concern for her.

I’m a little worried about the lack of retirement planning thus far and would encourage her to obtain a US Social Security and a UK National Insurance contribution statement so she is aware of what may be available to her in later life from both countries. I also would suggest she starts saving via a Roth IRA (the American equivalent of a self-invested pension), which has a $6,000 annual contribution allowance.

I suggest starting with contributions of $100 a month until the credit cards are repaid, to start building up a fund. A Roth IRA provides tax-free withdrawals in her retirement years (after 59 and a half). She is also extremely exposed to real estate, which won’t be suitable if she ever needs to raise money quickly, so a retirement fund can help her diversify some of that risk.

Andrea Solana Head of Advanced Planning at Maseco

Ms Lloyd’s income and expenditure are somewhat variable because of her freelance earnings and the fact that there is no consistent tenant in the rental properties. Based on the income and expenditure ranges Ms Lloyd gave us, it would seem as though her surplus monthly income could be anywhere from $1,500 to $7,500. The level of surplus monthly income will have a very big impact on how long it takes her to get the debt paid off.

In principle, when anyone wants to reduce their debts they should first tackle the debt that attracts the highest interest rate. If there are four different outstanding debts, as Ms Lloyd outlines, one strategy could be that she makes the minimum payment required on three of them and focuses the remaining surplus cash on the balance that attracts the highest interest rate. In her case this would be the Amex card.

Once that card is paid off, she should turn her attention to the Apple card and medical bills. Once those are paid off, the focus should turn to the student loan.

I would encourage Ms Lloyd to explore the possibility of consolidating these debts on to one card with a lower interest rate. Providers often offer the possibility of switching to a 0pc balance transfer credit card where interest will be zero for the first six months to one year. However, these arrangements sometimes involve a percentage fee on the transfer, such as 2pc of the amount to be transferred, which would need to be taken into consideration if she adopted this approach. 

If this is possible, it would be an easy way to attack the debt repayment. It will ensure that all surplus income each month can go towards debt repayment as opposed to purely or partially meeting the interest payment requirements. Once the debt has been repaid, she should look at building a bit of a cash buffer to account for future unexpected expenses.

Allocating a small amount towards retirement savings can go a long way over time and should certainly become a focus as well.