Financing your Family
There’s no getting away from the fact that it’s expensive to raise a family. Although some people find money matters confusing or off-putting, a little sound financial thinking amidst the joys of discovering you’re pregnant will pay dividends in the months and years to come.
The financial cost of a baby has been estimated to range from between 15 per cent to 25 per cent of a family’s total income. That might sound like a lot of money, but if you think not just about all the equipment you’ll need now – the prams, pushchairs, clothes and car seats – but also about the lifestyle changes that may be necessary over time, then that figure starts to sound quite reasonable.
Indeed, think further ahead and the costs of becoming parents really start to mount up. After maternity leave is over, parents may have to factor in childcare costs, which can make such a significant dent in a family’s income that it might not be worthwhile for Mum to go back to work. As your family grows you’ll probably need to move to a bigger house, you’ll almost certainly need a bigger family car (or one with four doors instead of two), and even further down the track there might be education costs and university costs to consider.
Get out of debt
This is the single best thing you can do to immediately improve your financial position. Getting into the black may be difficult but if you ignore the problem it won’t go away and is likely to get much worse. If you’re newly pregnant then you should aim to get out of debt over the next nine months. If your baby’s already arrived then you should start paying off those debts today!
There are certain sensible strategies that’ll really help. First, don’t take out any more credit – it’ll only make your debt bigger. Second, get all your paperwork together regarding your current credit cards, who you owe money to, and all your bills and repayment plans. Make a list of all your income and outgoings over a typical week or month. Prioritise those bills that really need to be paid – all the ones where the creditor can cut off your supply (electricity, gas) or threaten you with court action (mortgage, council tax). For now, ignore the credit card bills – we’ll come to those. Just concentrate on the essential ones. Many utility companies offer payment plans allowing you to stagger your bill payments over a year instead of having to pay them all at once. Contact each in turn and ask them for more details of payment plans.
It’s a good idea to check your rights to alternative sources of income such as child benefits (ask your local Citizens’ Advice Bureau for advice on what entitlements you may have, and see below regarding Child Benefit and Tax Credits) and check that you haven’t paid too much tax (contact your Inland Revenue office if you think you’re owed a rebate).
Having paid off all the essential weekly or monthly bills you should now know how much you’ve got left over to make a start paying off the rest of the credit. Ideally you should pay off your credit card bills IN FULL at the end of each month, so you don’t get stung with a huge interest payment on top. However, many people’s credit debt is too big for them to manage this. The best way to move forward is to consolidate all your credit card bills, transferring all the outstanding balances onto one single credit card – it’ll help you know where you stand and you might make a small saving on your interest rate if you shop around for a good deal. Then, work out a staged repayment – and stick to it.
If you don’t have enough money to pay your bills, contact the Citizens’ Advice Bureau for advice on what you can do next.
Whilst you’re trying to reduce your debt, try and alter your buying habits. A dose of retail therapy can be very tempting, but you don’t always have to buy new things for your baby. Friends or other family members may be prepared to lend clothes and equipment that their little ones have outgrown, so ask around. There are two important exceptions to this: you should never buy a second-hand car seat, and you should always buy a new cot mattress if you have a second-hand cot.
Of all types of credit card, store cards are particularly dangerous for the unwary. They’re usually promoted via attractive-sounding special deals offering large discounts off your first purchase, but their interest rates can be swingeing. It’s best
to avoid store cards altogether.
Make your money work harder
With your debts in better shape, it’s time to start thinking about the rest of your finances. In these days of very low interest rates, your current account probably pays you next to no interest, and even high-interest savings accounts aren’t adding up to much. Nonetheless, it’s worth shopping around for a good deal. Read the Money section of your weekend papers and find out which banks are offering the best rates. Open an account with the best one and swap your money over straightaway. Don’t be afraid to close a bank account – it’s your money and you have the right to choose a better deal.
Saving for your child
Traditionally parents who wanted to put aside some money in their child’s name opened a National Savings account for them or bought some Premium Bonds. National Savings and Premium Bonds are still going strong but many more High Street banks are now also offering accounts for children. To avoid your child paying tax on the interest earned in a bank account (up to the current personal limit of £4,745 earnings per year) you’ll need to ask the bank or the Inland Revenue for form R85 to declare your child’s status as a non-taxpayer. If you pay money into your child’s account you may have to pay tax on the interest if the interest exceeds £100 per parent.
Child Benefit is available to anyone who is bringing up a child under the age of 16. At the time of writing, child benefit amounts to £16.50 per week for the eldest child who qualifies, and £11.05 per week for each other child who qualifies. If your child has just been born, you may find there’s a claim form with your Bounty Pack from the hospital.
Child Tax Credit
As of April 2003 the government launched a new Child Tax Credit, paid directly to the person mainly responsible for looking after the children in a household. Tax credits are available if your income (or you and your partner’s joint income) is less than £66,000 a year. Families with lower incomes benefit proportionally more under the scheme.
Child Trust Fund
To encourage families to save money specifically for their children, the government launched their Child Trust Fund scheme in 2003, also known as Baby Bonds. Under the scheme, children are eligible for a one-off payment of between £250 and £500 depending on their parents’ income. The scheme hasn’t started at the time of writing but is intended to begin in April 2005 and will be backdated to include babies born on or after September 1, 2002. The government will make a further payment when the child reaches seven years old. Payments will be made via the Child Benefit system. For more information, see www.inlandrevenue.gov.uk
Responsible financial planning
Your child depends on you for financial security, so you need to think carefully about how you’d all manage if something happened to you or your partner to affect your family’s income. Now might well be the time to take out life insurance, for example. An independent financial adviser can help you plan for all eventualities and his or her advice is a worthwhile investment.
Citizens’ Advice Bureau: To find your nearest office visit their website at www.nacab.org.uk or check your local telephone directory. Don’t forget that your local library will have an information section to help you, and most libraries also have an internet connection you can use.
Inland Revenue: To find your tax office visit www.inlandrevenue.govt.uk or check your telephone directory for your nearest office. When you call, have your National Insurance number at the ready. For information on Child Tax Credits call 0845 300 3900 (0845 603 2000 in Northern Ireland) or visit www.inlandrevenue.gov.uk/taxcredits.
To find out more about Child Benefit, call 0845 302 1444 (0845 603 2000 in Northern Ireland).
National Savings: For more information on all National Savings’ savings and investments, visit www.nsandi.org.uk or call 0845 964 5000.
Consumer Credit Counselling Service: offers free advice to people affected by debt, call 0800 138 1111.
The opinions above are for general information only and are not investment, tax, legal or any other form of advice. When making decisions about your family’s finances, always obtain independent, professional advice appropriate to your own particular situation.