Undoubtedly having a baby can put a strain on your finances, but planning ahead can make life easier. Follow these simple steps to ensure your finances are in shape, allowing you to relax and enjoy your new arrival.
1. Prepare a budget.
Writing down a realistic budget is one of the best investments of time you can make. The result will be that you feel in control of your finances, with any issues clearly identified.
Start by listing all of your income, remembering that some items will be received weekly, fortnightly, four weekly and monthly. Your income is likely to change over time, particularly if you receive maternity pay, so it might be worthwhile preparing a budget for each month over the forthcoming year.
It is often difficult to list all of your outgoings, as with a newborn baby you are bound to face some unexpected expenses. You are likely to have higher utility bills owing to the washing machine being near-constantly on, however may find that you spend less on socialising and eating out. Good budgeting involves thinking about all expenses, including those that occur less frequently than monthly including Christmas and birthdays. Therefore it is a good idea to consider annual, monthly and weekly expenditure so that you have a clear picture of your finances.
The mistake most people make is to create a budget but not stick to it. The secret to successful budgeting is to adapt it over time and constantly monitor income and expenditure each month. If you end up overspending one month, try to underspend the next. If nothing else it will stop you from overspending for a second month!
2. Understand your maternity pay.
Maternity pay is a valuable benefit, but can be confusing as different employers may provide a different level of benefit.
The statutory minimum is 90% of your average pay for the first six weeks, followed by the lower of £136.78 per week or 90% of your average pay for a further 33 weeks. To receive Statutory Maternity Pay (SMP) you must have earned £109 per week working for your employer for at least 26 weeks. Some employers pay more than the statutory minimum, so it is worth checking out your entitlement with your employer.
If you do not qualify for SMP you are entitled to Maternity Allowance (MA). This is paid at the lower of £136.78 per week or 90% of your average pay for 39 weeks and is claimed through the Jobcentre.
3. Discover which state benefits you can claim.
Child Benefit is the main state benefit payable to families with children. At £20.30 a week for the first child and £13.40 a week for each subsequent child, Child Benefit is available to every family except if one person in the household has an annual income of £50,000. For each additional £100 of income over £50,000 the amount of Child Benefit is reduced by 1%, meaning no Child Benefit is available where an income in the household exceeds £60,000. Child Benefit needs to be claimed via form CH2 (www.hmrc.gov.uk/childbenefit).
Child Tax Credit and Working Tax credits are available for those on lower incomes. The amount of Child Tax Credit you receive will depend on your individual circumstances, but families with one child and a household income above £26,000 are unlikely to receive it. Working Tax Credit is made up of various elements, which affects the total amount you will receive. Broadly speaking one person in your household needs to be working at least 24 hours a week and additional amounts are available to help with child care costs. A calculator is available at http://www.hmrc.gov.uk/taxcredits/payments-entitlement/entitlement/question-how-much.htm#6
You may also be entitled to other state benefits, such as Housing Benefit, Council Tax Benefit or Disability Living Allowance.
4. Plan for the unexpected.
Now is the time to review your life insurance and write a will. It’s never nice to think about dying, but the fact remains that your family could find themselves in a very difficult situation financially if something happens to you.
Life Insurance typically pays out a lump sum in the event of your death or terminal illness. It is available for less than £10pm, however you may wish to add additional benefits such as Critical Illness Cover which provides financial protection if a member of your family is diagnosed with a serious illness, such as cancer, heart attack or stroke. Life Insurance policies should be written under trust so that you can be sure that the money goes directly to your intended beneficiaries.
Writing a will is equally important. One key aspect is that you can nominate legal guardians to your children if something happened to both you and your partner, ensuring that your wishes are known and avoiding the potential for confusion or disagreements.
5. Prepare a list of baby items you need.
Family and friends are often generous, but a bit of co-ordination can make a big difference. Start by preparing a list of all the baby items that you need. This can be referred to when someone asks what they can buy (at birth, Christmas and 1st birthday etc). It also gives you a clear idea of what you need and makes budgeting easier. Start putting aside a bit of money for future items – it won’t be long before a high chair is needed and the car seat needs replacing!
By David Vaughan, Chartered Financial Planner, at Plan Money (www.plan-money.co.uk)