FOOL'S EYE VIEW
Ten Top Tips For Families

By Cliff D'Arcy
December 16, 2004

In theory, budgeting should be easiest for single people. After all, there's only one person doing all the earning and spending!

Things get more complicated when you start living with someone. At this point, you need to decide who pays which bills, and how you share your living expenses. Do you both pay half, or do you each contribute based on your respective incomes?

Life gets yet more complex when children arrive on the scene. You wouldn't believe how much these little people cost to bring up, as any parent will confirm! If you want to meet a budgeting expert, don't talk to an accountant or financial adviser – just speak to a typical working mum (or visit our Living Below Your Means discussion board)!

Anyway, without further ado, here are ten tips to help working families who aim to thrive as well as survive:

1. Become a member of The Motley Fool

Signing up to become a member of the Fool is your first smart move, not least because it won't cost you a penny! Members can choose to receive our daily, weekly or monthly emails, which provide our no-nonsense opinions on all aspects of personal finance. And we promise not to talk gibberish or use any complicated jargon, too!

Also, you can visit our Discussion boards to get help from the massive Fool community. For example, how about visiting our Family Fools board?

2. Claim Child Benefit

Child Benefit is a tax-free benefit paid to parents whose children are under sixteen (under nineteen, if they are studying full time up to A-level standard, or equivalent). For your first child, it comes to £16.50 a week. For other children, it is £11.05 a week. For example, I have two children, so my wife gets £110.20 every four weeks, paid directly into her bank account. Mrs D doesn't have to declare this income on her tax return, as it is tax free, which is a bonus.

Many parents use the monthly income from Child Benefit to support their overall household budget. However, investing this money for the long term can produce surprisingly large sums. £110 a month invested for eighteen years with annual growth of 9% would produce a whopping £57,141 to pay for university or a head start to adult life!

Learn more about Child Benefit.

3. Apply for the Child Tax Credit (CTC)

This is another government benefit that is paid to families with children. Unlike Child Benefit, it's not universal, so your entitlement is affected by your household income. The maximum benefit is £2,170, which is paid to families with a household income under £13,480. CTC decreases on a sliding scale up to an income of £58,000, after which you'll get nothing (this upper limit rises to £66,000 if you have a child under one).

Nine out of ten families are entitled to tax credits, yet up to two million families have failed to claim Child Tax Credit. Don't be one of them - claim your Child Tax Credit today!

4. Apply for the Working Tax Credit (WTC)

This is another means-tested benefit that is paid to working people; what you receive will be based on your household income. If you're over sixteen, working and have at least one child, you may receive a basic award, plus extra help towards your childcare costs. Again, only the highest earning households cannot claim any WTC - fnd out your entitlement here.

5. Set up a Child Trust Fund (CTF)

Apparently, fewer than two out of five parents and grandparents (38%) have heard of the Child Trust Fund that is to be introduced next April. The government will give a free gift of £250 to every child born after 31 August 2002; this sum is doubled to £500 for families on very low incomes. What's more, the CTF also acts as a tax-free saving vehicle for kids, into which parents, other relatives and friends can pay up to £1,200 a year. This is great news for mums and dads – read more here.

6. Talk your employer into providing childcare vouchers

Childcare costs in Britain are the highest in Europe, with the average annual cost of a private day nursery weighing in at around £7,000. My wife and I fork out a massive £15,600 a year in childcare costs for just three days a week for our two children. Ouch!

However, from next April, the government is set to improve the tax treatment of childcare vouchers. It will provide National Insurance and income tax relief on the first £50 of childcare vouchers paid to a working parent. This calculator (which requires the Shockwave Flash plug-in) will show you how much you could save each year by taking £50 of vouchers per week. My wife and I would each be £1,066 a year better off if we both took £50 of vouchers each week – that's an annual saving of £2,132!

Learn more about childcare vouchers here.

7. Find a good children's savings account

Even if you're hopeless at saving for your future, it's really easy to start saving small sums for your children. Many children's savings accounts can be opened with an initial deposit of just £1, with Best Buy accounts paying annual interest of 5%+. Even better, a regular-savings account gets you in the habit of paying monthly contributions into a savings account, making the process entirely automatic. Another bonus is that most kids don't have to pay tax on the interest they earn.

You can read more about saving for children in Build A Better Future For Your Kids.

8. Make use of your child's tax allowances and "trusts"

Children can enjoy several of the tax allowances that adults receive. For example, your child can earn up to £4,745 during the 2004/05 tax year without paying tax. Unfortunately, this income can't originate from parents or from capital given to children by parents, so few children can make use of their tax-free allowance.

However, children do have a capital gains tax (CGT) allowance, which can be used to reduce any tax due on their investments. For the 2004/05 tax year, this allowance is £8,200. Here's an example of how to use a "bare trust" to build up a lump sum for a child and then avoid paying tax when the money's withdrawn.

9. Baby Bonds®

These are tax-free savings plans sold by The Children's Mutual, which is a friendly society. Despite their tax-free status, we Fools aren't at all keen on friendly society savings schemes. That's mainly because they are endowments, which means that part of your monthly premiums are invested (usually in a with-profits fund), with the remainder going towards paying for life cover. Why on earth would you need life cover when saving for a child? Also, these plans have pretty steep fees, so a large chunk of your money is gobbled up in charges.

If you want a cheap and cheerful investment vehicle to save for your children, go for a low-cost index tracker every time. It has low charges, is infinitely more flexible and should produce better long-term returns than a friendly society's with-profits products. Learn more about Baby Bonds here.

10. Don't automatically buy new – and if you must, shop around!

Becoming a parent means thousands of pounds of extra expenses every year, doesn't it? Not necessarily! Although you may prefer to give your children nothing but the best, it's not essential to buy brand-new goods every time. My wife and I have done very nicely out of hand-me-downs from relatives and friends, including clothes, baby bath, travel cot, crib, beds and other goodies. Buggies and prams can be bought second hand, too, although experts recommend that parents buy new mattresses and car seats.

And if you must buy new goods, don't just dash off to Mothercare or Marks & Spencer. Price-comparison websites allow you to compare the cost of thousands of different products, with typical savings of between a fifth (20% off) and three-fifths (a mighty 60% off).

For example, I recently bought Shrek 2 on DVD for £9.88, a terrific 57% saving on the recommended retail price (RRP) of £22.99 . Also, I found my son's new car seat for £65, saving £25 on its RRP. Great websites for baby gear and children's stuff include Kiddicare, Nursery Direct, Two Left Feet and family firm Pramworld.

Finally, I'll leave you with a scary quote!

"Parents are the bones on which children sharpen their teeth." (Peter Ustinov)

More: Visit our Savings, Investing and Saving for Children centres.