Bundle of joy, oodles of cash

Blairs do it, bees do it. But beware - the patter of tiny feet can milk you of a small fortune. By Paul Slade

Tony and Cherie Blair may lose a few nights' sleep when their new baby arrives, but they are unlikely to face financial hardship from the birth. Less exalted couples, though, find that pregnancy turns the family finances upside down.

Steve and Jane Gilroy's son Max is just over a year old. Steve, a scientific researcher at Astra Zeneca Pharmaceuticals in Manchester, says: "There's quite a lot of capital expenditure when you have your first child. I totted up that we spent just over pounds 1,000 on things like a pram, a pushchair, car seats, a cot, sterilisers and all that sort of stuff."

But the cost of all this baby paraphernalia is just the start. The real expense begins when you consider items such as the larger house you may need, extra life insurance in case the worst happens and (perhaps) the need to save for junior's private education.

The Gilroys are just about to move to a larger house, a change of lifestyle which will will more or less double their mortgage repayments. The couple have been careful to select a five-year fixed rate loan to ensure they know just what their mortgage payments will be for the foreseeable future. "It's not too much of a financial strain bearing in mind we're both working," says Steve.

James Dalby of Leeds-based independent financial advisers Bates Investment Services says: "A five-year fix is a good bet. New parents like the Gilroys need certainty for budgeting purposes, because things are bound to be a bit stretched."

Ian Muscat of Millfield Partnership, another firm of IFAs, agrees. He says: "I would look at their mortgage first of all. If they were on a variable rate, and there were no redemption penalties on their current mortgage, I'd be looking to get them a fixed or a discounted rate."

The Gilroys are luckier than most when it comes to childcare. Jane's job as a nursing sister at Liverpool's Alder Hey Children's Hospital means Max qualifies to use a subsidised creche there. The nature of Jane's job means that she can cram her whole week's work into three lengthy shifts, leaving two days a week clear to look after Max herself. Steve Gilroy says: " The subsidised creche helps us out financially quite a lot. Normal creche fees for a child can be pounds 500 a month, but in our situation, it's only about half that. Some people have to pay creche fees five days a week every working day of the month. If it's not subsidised, it works out a lot more expensive."

It is the likely cost of Max's education which may give the Gilroys a shock in a few years' time. "If we end up staying in Liverpool, we'd be thinking seriously about the option of private education," Steve says. "But my job could lead us to move over to Manchester, in which case I'd hope we could go for a state school."

While they decide between these two options, the Gilroys are saving pounds 13 a week for Max's education fund. "That will go to either higher education, or perhaps helping out with school fees earlier in his education," Steve explains. The brutal fact is that saving pounds 13 a week will barely scratch the surface in providing school fees when Max might need them. As the table below shows, the Gilroys would have to be saving pounds 577 a week now to pay for Max's private school fees to the age of 18. If they wanted to include provision for university as well, the figure rises to pounds 640 a week.

Mr Dalby says: "People should not underestimate the cost of private education. The Independent Schools Information Service is quoting an average fee of pounds 1,821 per term for a day school. Saving a small sum is better than nothing, but don't kid yourself. It would be very difficult to meet the target for most people within a monthly budget."

It's a similar story when it comes to the Gilroys' life insurance arrangements. The new mortgage is covered by a joint life policy which will ensure the loan is paid off if either Steve or Jane die. They both also have life insurance as part of their salary packages at work, which will pay out up to three times their annual income. As with all these needs, the amount of life insurance you buy will almost certainly be a compromise between the amount you would ideally need and what you can actually afford.

But Dalby warns that three times income is unlikely to be enough. He says: "Life insurance should ideally be ten times your annual income, and you're not going to get that through your salary package. The most they ever give is about four times income.

"I would strongly suggest they consider topping up their life insurance with a separate policy if their monthly budget allows." One thing to remember when assessing your life insurance needs is how much it would cost to commercially replace the childcare and household cleaning duties your partner carries out. Hiring a nanny can add pounds 20,000 a year to the household budget, and it may be your partner's life insurance that has to provide that sum.

Even when all these aspects of your new life have been sorted out, there remains the matter of waving goodbye to all the little treats you can now no longer afford. Muscat says: "It"s a question of lifestyle for some people. It's a question of tightening your belt and totally adjusting the way you live."

The Gilroys now seem to be safely through this pain barrier. Steve says: "We had to pull in the reins a bit. We spend a little bit less on ourselves in terms of the food we buy. We drink a bit less wine. It wasn't too much of a shock to adjust to it, really."