Thursday, 2 December 2010

Family money: How to manage it and how to protect it

Your children
Raising a family can be one of the most satisfying things you do in life, but it’s never easy. One of the biggest challenges you'll face is trying to keep your family finances on an even keel. Here are some key issues you should consider when preparing your children for their future, protecting your partner and your home, and taking care of your parents.
Financial planning for your children's future
Taking your children on the journey from birth to the age of 21 is going to be expensive. In fact, it’s estimated that it costs a family an average of £194,000 along the way – including an average of £53,818 spent on childcare and £50,240 on a state education and a typical three-year university degree course (source: Liverpool Victoria 2009).

So, whether it's a new computer, tuition fees for university, a wedding or even a helping hand onto the property ladder, there are going to be some big expenses along the way. However, by thinking about each stage now, you can start planning and saving on a long-term basis.
Child benefit and tax credit
First things first. Are you claiming child benefit? Most parents are entitled to tax-free payments of £20.00 a week for the eldest child and £13.20 for each additional child. Make sure you claim as soon as your child is born – there’s usually a claim form in the ‘Bounty Packs’ that are given out on maternity wards. You may also be eligible for the Child Tax Credit scheme. This is a means-tested benefit for parents and those responsible for a child under 16.
Child Trust Fund
This is a government scheme designed to give children a head start in later life by offering you a tax-efficient way to invest in their future. Anyone can contribute up to a combined maximum of £1,200 a year. Every child born on or after 1 September 2002 is eligible for a voucher of at least £250 from the Government to open an account under its Child Trust Fund scheme (this amount increases to £500 if your family income is less than £13,480 a year).

When your child is given a great start like this, you’ll naturally want to put it to good use. Soon after you register for Child Benefit, the Government will send your child’s £250 Child Trust Fund voucher. Once you've received this voucher, you can apply to open your child’s Child Trust Fund account.

As soon as your account is opened, the voucher will be invested on your child's behalf and you can start contributing to the account to help save for your child's future. Once your child reaches 18, they will be able to access the investment. However, remember that like any investment, the value of this investment is not guaranteed and can go down as well as up.
Early years
All three- and four-year-olds are currently entitled to 12.5 hours of free education a week for 38 weeks of the year with a ‘registered provider’ such as a school, nursery playgroup or child minder (this will rise to 15 hours in 2010).
Childcare options
If you go back to work, you’re probably going to need to arrange childcare – make sure you always check references and qualifications of anyone who might be responsible for your child.

Here’s a breakdown of the services available and what they may cost you:

Nursery care
Many nurseries are only open during school term times. The average weekly cost in England for a child under two is £167, amounting to £8,684 a year for full-time care (source: Daycare Trust 2009).

This is usually the most flexible type of childcare. The average weekly cost in England for a child under two is £156 a week, amounting to over £8,000 a year (source: Daycare Trust 2009).

Daily nanny
This can be an expensive option, and, as you’ll be the employer, you’re responsible for paying National Insurance contributions and holiday entitlement. Expect to pay between £334 and £449 a week, including tax, depending on where you live, amounting to around £17,000 to £23,300 a year (these figures assume you're paying over 52 weeks).

Because of the tax and other deductions that are taken out of your pay, this would be equivalent to between £22,500 and £31,200 of your salary, depending on the rate of income tax you pay (source: Nursery World Salary Survey 2008).  You could consider sharing a nanny with other parents to reduce costs.

Childcare vouchers
When you go back to work, ask your employer about Childcare Vouchers. If your employer is in the Childcare Voucher scheme, you can buy the vouchers out of your pre-tax income. So, as a basic rate taxpayer, you could buy £1,000 worth of vouchers for about £700 – but be careful, they can affect your entitlement to tax credits.
Going back to work
As working parents, mothers and fathers are entitled to parental leave – a maximum of 13 weeks for every child up to the child’s fifth birthday, although your employer isn’t obliged to pay you when you take it. But your rights don’t stop at taking leave – you could also be entitled to the following:

Flexible working
You have the right to ask for a flexible working pattern while your child is under six or, if your child is disabled, up to the age of 18. Under the law, your employer is obliged to take your request seriously.

Working Tax Credit
If you work for 16 hours or more a week, you may qualify for Working Tax Credit, which is a credit payment for low earners. What’s more, you could reclaim up to 80% of your childcare costs.
Finding more room for a growing family
As your family grows, your living space might need to grow to keep everybody happy.

Buying for the first time
With a growing family, it may make sense to get on the property ladder and buy your own place.

As a rough guide, it costs 30% more to get an extra room when you move from a one to a two bedroom house, 33% more to move from a two to a three bedroom house and 49% more to move from a three to a four bedroom house (quoted from, June 2008). You also need to take into account the costs of buying and selling – such as estate agent fees, Stamp Duty Land Tax and moving costs.

Staying put
Instead of moving, you could extend your home or make some home improvements. Adding an extra room can increase the value of your property by £25,590. A new kitchen can add £7,666 and a loft conversion can add as much as £24,981 (source: Halifax, 2009). A further advance on your existing mortgage or a personal loan could fund this, which might be more affordable than moving home.

Saving for a move or extension
If you’re thinking of moving or building an extension, the sooner you start saving, the better.

If you’re saving for the shorter term, think about opening a Cash ISA. It’s a good idea to set up a standing order that automatically transfers money between your accounts. That way, you won't have to remember to make a transfer every month. By setting aside money every month, you’ll soon start to see a lump sum building up.

If you’re saving to move in more than a few years’ time, a Stocks and Shares ISA could be more suitable. It can be a tax-efficient investment, and, in the long term, stocks and shares usually produce a better return than a savings account.

If you choose a stocks and shares ISA, remember the value of your investment is not guaranteed and can go up and down depending on investment performance and currency exchange rates where a fund invests overseas. You might get back less than you’ve invested and there may be charges for early encashment. The information is based on current tax law and regulation and the value of any tax advantages will depend on your personal circumstances that may change. Tax rules can also change.
Beyond school
If you’re thinking about further education for your children, it’s best to start planning for it well in advance. Even with the most careful budgeting, students who started university in 2008 can expect to accumulate an average debt of over £17,500 by the time they graduate (source: Creditaction 2009).

Funding a student through a three-year university course costs over £34,000 (source: Liverpool Victoria, 2009).  But the good news is that graduates can earn substantially more than people without a degree. Over a working lifetime, the difference is estimated at around £100,000 (source: Directgov 2009). So, by saving for your children’s education as early as possible, you’ll help to ensure they get the best possible start in life.
More ways to save
Most banks offer a young savers account that you can open for young children in their name. It’s a great gift for your children, since it not only shows them the value of saving money but also gives them a head start on the road to financial security. You could even use it to set aside a regular amount for your children each month.
Teaching children money sense
Your child's education doesn't stop with what they learn in school. You need to help them learn how to cope with real-world problems, the main one being how to manage money. By showing them the value of good money habits while they're still under your care, you'll prepare them for the challenges and responsibilities they'll face along the way to independence.

Managing a budget
Getting pocket money can start children on the road to understanding the value of money. It teaches them whether to spend it all right away or save up for something special.

Pocketing the right amount
How much pocket money should you give them? According to research, the pocket money average in 2008 was £6.13 a week for 8 to 15-year-olds (source: Halifax 2009).

Encouraging children to earn their money
Earning some money from an early age can help build self-esteem and develop a sense of value. Think about asking your children to help with chores in return for pocket money – or suggest they get a paper round (it will keep them fit, as well!).

Sticking to the rules
Most children have a strong sense of what’s fair, so make sure you’re clear about what the pocket money is supposed to cover – it will also teach them something about budgeting. If you expect them to pay their way when they go out with friends, then say so upfront.

Paying their way
As children get older, the things they want, like new trainers or jeans, tend to get more expensive. By asking them for a contribution towards the cost of the things they want, you'll teach them about the cost of living and help them appreciate what they buy.

You should also get young drivers to pay their own motor insurance. Yes, it's expensive, but it’s better in the long run for your children to insure themselves and start building up their own no-claims bonus.

Spending their own money
For older children, part of growing up is the sense of achievement from being able to buy the rest of the family presents and shopping for themselves.

Making sure there’s payback time
If your children need to borrow money from you, make sure they pay it back. It helps them to learn about what they can and can’t afford. It can also teach them to control debt when they're out in the real world, managing their own money.
Encouraging children to have financial responsibility
Teaching children to save early on helps them understand the importance of taking personal responsibility. It can be as simple as starting them off with a piggy bank or a money box and encouraging them to put something away on a regular basis. Here are a few ways you can instill good financial habits in your children:

Saving for small savers
Many banks offer children under 16 their own savings account. These usually come with a competitive rate of interest that can be paid tax-free.

Bank accounts for children and young adults
As children grow up, there are bank accounts specifically designed for them. These accounts usually come with cash machine and debit cards, but don’t allow children to go overdrawn so they can learn about handling a current account without the risk of running up debt.

Planning for university
Once they’ve got that university place, it’s time to open a student account. Most student accounts offer an overdraft facility, a debit card and, subject to circumstances, a credit card to help them balance their finances.

Investment in a Child Trust Fund
A Child Trust Fund (CTF) is a way to invest for your child’s future. There are different types of Child Trust Funds, including a cash deposit account and one that invests in stocks and shares. If you can afford to, keep topping it up – you, your family and friends can add a maximum of £1,200 a year between you (see 'Your children' in this guide for more details on Child Trust Funds).
Promoting good online habits
Make sure your children follow good online security practices. When they create a password for an email account or other online activities, make sure they choose one with a minimum of eight characters, in a combination of letters and numbers. And don't let them use a login name or obvious names or words such as 'Password' or 'Secret'.

Also, encourage them to shop around for the best deals by pointing them towards price comparison sites.
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