Reader Case Study: English Rose with Flaming Hair. What To Pay Off First?

[PowerOfMe]

Topic Title: Reader Case Study - English Rose With Flaming Hair - What To Pay Off First?

Life Situation: Single girl, late 30s, no dependants, English and living in England.

Gross Salary/Wages: £0. Self-employed. (Lack of income due to chronic illness.)

Pre-tax deductions: £0

Other Ordinary Income: £10,028 Student grants and loans. Studying Bachelors of Science degree in Human Nutrition. Course ends July 2019.

Taxes: £0

Net Income: £10,028

Current expenses:
Car £0 (do not drive)
Electric £0 (paid for by family)
Home insurance/life insurance £0 (choose not have them)
TV licence/cable etc £0 (I don't own a TV)
Government loan £1
Mobile phone £9
Credit card £10
Food, household, toiletries £60
Home phone and internet £20.49 (£17.99 phone line rental plus free evening and weekend calls, £2.50 unlimited broadband)
Water rates £24
Unsecured loan £71.31
Secured loan £84.55
Buildings insurance, service charges, ground rent £124.08 (leasehold property, rates set by property management company)
Mortgage (interest only) £259.20
Monthly total: £663.63
Per annum: £7,963.56

Monthly surplus £172.03
Annual surplus £2,064.44

Assets:
Current account £0.02
Savings account £9.79
Home £70,000 (1 bed flat)
Total assets £70,009.81

Liabilities:
Overdraft. Original loan £250. Zero % interest til 2019. Current balance £249.98
Credit card. Original loan £1,522. Zero % interest til paid off as a/c in default. Monthly payment £10. Current balance £653.
Secured loan. Original loan £16,916. 2.98% interest. Monthly payment £84.55. Current balance £12,859. Time remaining 16 years.
Unsecured loan. Original loan £12,099. 4.63% interest. Monthly payment £71.31. Current balance £9,202. Time remaining 15 years.
Mortgage interest only. Original loan £64,249. 4.63% interest. Monthly payment £259.20. Current balance £67,182. Time remaining 19 years. (Yes, it is correct that the balance of the mortgage has increased)
Government loan. Original loan amount £487. Zero % interest. Monthly payment £1. Current balance £335
Scholarship £1189 (needs to be repaid)
Grant £200 (needs to be repaid)
Total Liabilities:  £91,534.98

Net assets: Minus £21,525.17

A bit about me:
Thought it be be useful for you good folks of the forum to understand a little about the whats, whys and hows that led to me being neatly in the midst of this eye rolling, baby I'm burnin', flaming debt emergency. In all honestly, I'm super private, so I've really been unsure about whether to share or not, but since it's all stuff that's pertinant to my current situ, this is essentially anonymous and I'm asking for all of your help then here goes..................
I grew up in poverty with 2 super smart parents who chose not to work and live on benefits. The household was one of fear and anger and addiction (one parent with alcohol issues).
My homelife led me to a lifelong belief that I was worthless. I left home at 15 to move in with a violent boyfriend and was already addicted to alcohol myself. This was also the start of a pattern of crazy (grim) relationships. There were some nice guys in the mix, but I would inevitably treat them badly or walk away (because I believed I wasn't worth caring about).
As soon as I reached 18 I started getting numerous store cards, then credit cards then loans and then loans to pay off other loans etc. No matter how much money I earned, I always had nothing to show for it and always spent more than I earned.
I stopped drinking, smoking and taking drugs about 7 years ago. I was attacked on the way to work and didn't want this to be another thing I dealt with (or didn't deal with!) by masking it with booze, so I quit everything cold turkey.
Didn't realise at the time, but I swapped the alcohol addiction for food addiction. Love eating healthy food and cooking is one of my passions, but would waste endless amounts of money I didn't have on junk food (to numb, comfort and to punish for being worthless). Issue now resolved.
Couple of years ago the immense amount of emotional and physical stress I had put my body and mind under for most of my life (addiction, anxiety, depression, trauma) finally came to a head and I was diagnosed with 2 chronic illnesses (neurological and physiological) which literally stopped me in my tracks (pretty much housebound, even standing up to get a cup of tea was challenging to say the least). However, it proved to be a real life changing experience as I received occupational therapy (which helped me on the road to physical and mental recovery) and cognitive behavioural therapy which really helped me to understand my core beliefs about myself and to help change them.
So, I now understand that my belief of 'I'm worthless' led to my awful financial choices. I literally could not keep money in my bank account because that would have meant I was worthwhile, and by spending more than I earned I could keep proving my belief that I was worthless. I now operate from a place of 'I'm worthwhile' which is why I'm working hard on improving finances and feel like asking for help here is the next step.
Other points I'd like to mention - my parent stopped drinking many years ago, they are still together and their relationship is much better and more balanced. They both used to work full time, so they weren't always unemployed. I have talked to them both individually about the issues my childhood experiences left me with etc and am happy that I have made my peace with my parents. Our relationship is now massively improved - it's calmer and enjoyable. We even took a fab holiday together recently for the first time since I was a kid.
Throughout the madness of my life (violence, addiction, lots of arrests, my financee dying), I have created lots of amazing experiences for myself - travellng and living in other countries for example, festivals, dancing til dawn etc, so it's not all some deep dark tragic soap opera!!!
Also, I have worked really hard to overcome various things in my life and to choose to change my beliefs and mindset to ones that empower me rather than limit me. So, I know that my financial situ is pretty dire, but I'm constantly improving it (nothing bought on credit for years, wasteful spending decreased totally, utilities frequently renegotiated etc) and I feel that if I can get a solid structure in place now when I have very little surplus money to throw at debt, it will give me an excellent foundation for as and when I have additional income to do so.
Edit: Also, also I really want to be clear on this - me and my Mum and Dad have always been close despite the 'issues', but we always had a pretty volatile relationship. We now enjoy a really mutually supportive, loving, caring, enjoyable relationship and I completely love and respect them and understand their past choices - ultimately we all have a past and I think we all make choices that could have been better sometimes.

Specific Question(s):
My first goal is to continue to work on my health so that I can get back to earning money. My other goals are to improve my credit rating, so that I can refinance for better interest rates and pay off my mortage, so that I can sell and buy the next place for cash as I do not like where I live (understatement). I was going to split my surplus income between the 2 loans and the mortgage, but would it be better to throw it all at one of these items instead?

Acheivements this year re finance:
Can't remember when I first saw MMM (maybe within the last year), but it really opened my eyes up to the fact I was living in a flaming full on emergency, and it gave me the realisation that I could get control over my finances. I had been really struggling to see a way out of it previously and was totally overwhelmed. I then set myelf a goal to pay of my old credit card by the end of this year. I made extra payments and negotiated with the credit card company (so far they've written off £450 and I'm negotiating further with them at the mo - this was for charges they made on the account after I had advised them I was in financial difficulties).
I don't pay for gym memberships (never have) - use the great outdoors for exercise and yoga (for free) at home.
I am a girly girl, but I do my own manicures and pedicures (always have)
You know what - the list goes on, so I think it's time to post and be brave.
Really looking forward to hearing from you!

[etselec]

Wow. First of all, I want to congratulate you on all of the (non-financial) work you've done already to deal with problems from your past and get back on the right track. That's absolutely wonderful.

I think you're absolutely right that Priority #1 is maintaining your health and Priority #2 is increasing your income, as long as it's not at the expense of #1. I'll leave it to others to give specific advice on which accounts to pay off first — for you at this point, increasing your income is by far the most important thing you can do for your financial health.

[PowerOfMe]

Thank you etselec for such a warm response - much appreciated. It really does feel wonderful to have worked on and resolved so many past problems! And, if anyone happens to read my post that is dealing with similar issues, I thought it might give them a little hope, as well as giving you guys an insight in to why my finances are where they're at.

I totally agree with your comments re health and financial health and prioritising, so thank you. It's definitely all about balance now.

[former player]

Hi, there, and welcome.  Also, congratulations for the turnarounds in your life.

I'm not seeing room for improvement in your expenses: with the student exemption from council tax and family paying energy bills they are looking as low as they can go.  I notice that you have nothing for transport -are you walking everywhere?  You also have no budget for replacing clothes/shoes/electronics: you need to take care with what you've got to make it last.

You have less than £10 in assets apart from your property and an absolute maximum monthly surplus of £172.03.  That is beyond tight.  Is there anything you can do to make money out of your home?  I'm suspecting given its value that it's small, but might AirBnB work for you?  The occasional guest on an airbed or the sofa would be potential income for not much outlay.  The alternative might be to sell it, if you can keep the costs (estate agent/website fees, conveyancing, removals, mortgage repayment) under the price you will get for it.   But only do this if you can then find somewhere suitable to live for less than your current mortgage payments, property charges and bills, which add up to £427.77 per month.

You've done a good job for someone of limited financial means in keeping the loan rates relatively low, so don't worry about paying those off at the moment.  The amount you can save in a year on your current income will cover the scholarship and grant you need to repay and give you a few hundred for emergencies, so I would do that with it.  If you can get a side-hustle going, such as AirBnB then I'd put that into your unsecured loan, as along with the mortgage that has the highest interest rate and it also includes principle repayment which the mortgage does not.

[PowerOfMe]

Hi former player. Thank you for the life turnaround congrats - much appreciated.

That's fantastic re your comments about no room for improvements of my expenses. After a lifetime of wasting money (on booze and buying 'stuff' (often on credit to feel better about myself)), I'm really pleased about that. I did stop using credit quite a few years ago, but was still wasting money up until last year on junk food (sadly). Cut my spending on junk food by 70% this year compared to last year - frustrating that I wasted money on that addiction, especially since I passionately love good food, cooking and healthly eating and am studying for a nutrition degree, but very gratifying that I turned it around.

Yes, I walk everywhere. Also, my Dad is always happy to give me a lift if I need one. Yes, I haven't budgeted for clothes, shoes, electronics as I haven't been able to see any way that I would require these items over the next 12 months. I have looked back over this last year and have bought nothing like that. I repair my iphone whenever it needs it (new battery, charger, cracked screen), my uni has a new ipad waiting for me to collect (they're being given to all students as part of a paperless drive) and the grant of £200 that I need to pay is towards a new laptop, printer, software etc from uni. I spent the grant towards living costs, so now need to pay that money myself to the computer company and send uni the receipt. Things like clothes I have spares of, like a pair of trainers that I bought several years ago at 70% off, I then bought a second pair for when they wear out.

I agree that my assets and surplus is beyond tight! I have considered selling my home many times as an option. However, I have never come up with a feasible way of making it work as my credit rating is poor (though improving each month), so I would struggle to pass credit checks for rental and I have not found rental that would work out cheaper than my current mortgage payment and service charges. Also, do not have cash for deposit etc. It is something I keep an open mind to though and revisit occassionally in case the situation changes and that does work out more cost effective.

Thank you for the AirBnB idea - fabulous! It hadn't crossed my mind and don't think it would have. Yes, it is small - a 1 bed flat. I have already checked for my area and for prices and property types and can see this would work in the future. In fact, I could rent the whole flat out and stay with my parents for the night (or few nights) for higher income. Unfortunately, it wouldn't work at the moment as I started renovating my property earlier this year and it's unfinished. Currently, it has no heating system and things like woodwork have been removed in prep for further work. The work on the property is being done myself with family help, so there is no cost outlay (materials previously purchased), but won't be started til next spring (longer hours of light etc and is dependant on my health). Cost of replacing heating system is not inclulded in my budget as I  wasn't going to replce until eventually sell property, but is something to consider (I already have costings for the work). Also, funnily enough, had been looking on Laurel & Wolf's website recently for home ideas (they're interior designers) and they had been working on AirBnB properties and increasing rental by up to 40%, so that's spooky that AirbnB should be brought to my attention again - fate!

Thanks for your comments re the loan rates being quite low - I was really concerned about them being high, so that's reassuring.

I do need to prioritise paying back the scholarship and grant and I was concerned about not having any emergency fund at all, so what you've said about using the surplus for paying those back and setting up an emergency fund makes sense thank you.

Thank you also for your suggestions about which debts to prioritise - much appreciated. The reason I have been unsure about how to split surplus money between the 2 loans and the mortage is becuase I really really want to sell my flat and buy somehere freehold (ie a house). With my poor credit rating and lack of income and being self employed, I'm not eligible for a mortgage. Therefore, I thought it would be best to pay off the mortgage as quickly as possible, so that I could sell once it's paid off and use the sale value towards a house. I figured if this meant I was still paying the 2 loans off, it wouldn't really matter so much as I'd be mortgage free. However, with my super tight budget and past crazy financial decisions, I'm concerned about choosing the best option, which is why I appreciate the help and ideas!!!

[former player]

I'm glad you're taking a critical look at these suggestions from an internet stranger.

One of the good things about AirBnB is that you don't have to pay tax on the income until it exceeds £7,500 each year, which makes it both easier and more profitable than income that has NI contributions and tax taken off.

Talking about National Insurance, while you are a full time student you should be getting credit for National Insurance contributions.  At some point it would be worth your checking with https://www.gov.uk/check-national-insurance-record to see what your record is like.  If it is spotty, it might be possible to make up contributions at some point in the future and that could be worth doing for future pension, etc.

For your credit record, I think it is likely that having a mortgage or secured loan is less damaging than having other loans/unauthorised overdrafts/credit card balances, so paying off the unsecured loan first will probably have the best effect on bringing your credit rating up.

[marty998]

Kudos for turning your life around. You've obviously been through a lot and have loads of guts and determination.

Is it possible to find work placements during the non-study periods? That will help gets some experience under your belt for graduate positions in 2019.

[Freedomin5]

Kudos to you for turning your life around. I have friends who were in similar positions as your itself (abusive relationship, addiction, homelessness, childhood abuse, etc.) who have turned their lives completely around with hard work, determination, and therapy, so I know your seven years of hard work has been and will continue to pay off.

In addition to agreeing with you and previous posters to take care of your health, I have just a few other comments, in no particular order...

Typically, it is suggested to pay off loans in order from highest to lowest interest rate. Watch your current zero interest loan payments to ensure that they are paid off before 2019, when interest kicks in. Once one loan is paid off, snowball it by applying the payment that was going towards that first loan to the loan with the next highest interest rate. However, from a psychological perspective, some people prefer to pay off the loan with the lowest balance first, because it goes away more quickly and there is a sense of satisfaction over having one less loan. You know yourself best in terms of what would work for you.

I'm not sure how the UK system works as I went to school in the US, but can you apply for external scholarships (that do not need to be repaid)? My friends got through graduate school partly because there were many scholarships aimed towards rewarding/supporting people who have survived trauma/addiction/single parenthood or other Difficult.Life.Circumstance. These are monies offered to only a limited group of people - for example, the selection criteria might be something like "is a visible minority" or "had one parent with addiction" or "has a diagnosed mental illness", etc.

Is there some way to generate more income through a side hustle? Someone has already mentioned AirBnB. Another possibility is teaching conversational English online. Basically, you use Skype to hold tutoring sessions for individuals. Generally, the only requirement is that you speak English with one of the "desired accents" (typically American or British). It has flexible hours, so you can decide how many/few hours you want to teach, though you are paid per hour.

Good luck! You have a whole forum of people here interested in your progress. I for one am inspired by your tenacity and all the work you have already done.

[PowerOfMe]

Hi former player. Yes, happy and appreciative of advice offered, especially from internet strangers taking the time to do so!

Yes, the government's 'Rent a Room Scheme' v beneficial for the tax breaks.

That's spooky - I just checked my NI contributions last week! All fine apart from a year I was living abroad (which is now past the 6 years cut off point to rectify with additional contributions). I do have an NI bill payable shortly for the 2015-2016 tax year (accounted for already which is why it's not in my calculations on here). I had previously decided that if my profit from self-employment falls below the qualifying amount for paying mandatory contributions in the current tax year that I would pay voluntarily (to ensure I was meeting the contributions for full state pension). However, I will certainly further investigate your notes about the contributions being met when in study. Haven't found anything as yet - perhaps being classed as self-employed and in full study is making it a little less clear.

That makes sense about what may be impacting negatively/positively on my credit rating. All acounts are up to date and have been for a while, apart from the default credit card. I will know more mid week re the credit card (I'm negotiating settlement with the cc) and will update on here once I have answer. I'm also in the process of negotiating with the unsecured loan provider re removing some previous arrears notices on my account which I think would help my credit rating and will update when I know more.

Thanks again - love the AirBnB idea and your other suggestions!

[PowerOfMe]

Hi marty998. Thanks for the kudos and yes lots of guts and determination!

Uni are great at sending emails regularly with opportunities for paid work placements, along with volunteering, internships etc, so it's definitely something I've considered - thank you for the reminder though. I'm intending to use my degree for self employment tho rather than being employed, so I'm not particulary looking for graduate positions. However, I do like to keep an open mind, so I'm going to investigate further.

I was considering doing some accounts (office) work over the summer if health ok and not busy with my business to help speed up debt repayments - just realised it would be the first time in my entire life being employed sober. Been self-employed since gave up drinking. Love how life can come full circle in the best possible ways!

Thank you for your suggestions - much appreciated.

[PowerOfMe]

Hi freedomin5. Thanks for the kudos and for your comments about having friends who have also had tricky circumstances that they turned round - so inspiring! And thank you for your comments about my hard work paying off and continuing to do - so true.

Totally agree with your notes about loans etc. This year I decided to pay off my very old default credit card. Whilst the interest is zero rated, the default status is negatively impacting my credit rating. As it was a low balance (compared to the loans and mortgage), I decided it would be good to tackle as I would be able to see the balance dropping more quickly than if I paid extra on the other accounts and I figured I would be able to see improvements on my credit report each month which I am. Also, I liked the idea of having one less account to pay as you've noted above.

The plan with the overdraft (zero interest til 2019) is to pay it off and close the account before 2019. I want to switch banks, but was refused an account last year based on a credit check, so will be doing that once rating has improved enough to switch and I have funds to pay off the overdraft. In the past I've paid it off and used it again, so waiting til ready to switch before doing so again.

Yes, there is availability for external scholarships in the UK and it is something I looked in to last year/year before. I applied for quite a few that I felt I fit the criteria for, but no joy. Great reminder to look into it again though, so thank you.

Thanks for the Skype teaching English side hustle suggestion. Again, it's not something I would have thought of doing via Skype, but will look into. When living abroad in the past, I have casually taught English and am open to your suggestion.

Thank you - it's always a privilege to be called inspiring and tenancious. And I look forward to posting my updates!