Parenthood is a real education

If you want to give your child the best start in life, do so before you have the child

Babies are expensive: older children are a financial nightmare. A typical family spends £132,700 on its children by the time they reach 18. To put it another way, nearly one in three parents find having less money is the most noticeable effect of having children, according to a survey by Legal & General insurers.

Babies are expensive: older children are a financial nightmare. A typical family spends £132,700 on its children by the time they reach 18. To put it another way, nearly one in three parents find having less money is the most noticeable effect of having children, according to a survey by Legal & General insurers.

In that same survey, nearly half the parents said the main way they saved money to pay for children was by going out less. Clothes, holidays and other treats all had to be cut back. The lesson is clear: if you want to have children and relax, you need to start saving before the first baby is born.

The biggest cost for some parents is school fees. About 600,000 children are currently educated in the private sector, attracted by smaller class sizes and examination success, but fees are not cheap. The Independent Schools Information Service (ISIS) says the cheapest fees charged by member schools are about £700 for each of the three terms in the school year for a non-boarding pre-preparatory school for children aged two to seven.

Once a child is older fees go up. A typical senior day school will charge between £1,600 and £2,500 per term, rising to £2,900 to £5,000 for a boarding school. The highest fees are for the top of the range schools such as Eton, Harrow, Cheltenham girls and Westminster. Some independent schools offer reduced fees to parents who begin paying in the years prior to their child starting school, under "composition fee" arrangements.

"An increasing number of schools are going over to payment by direct debit," says Dick Davison, joint director of ISIS. "A lot of schools offer composition fees where parents deposit a lump sum with the school, then the schools discount future fees."

A number of financial services providers offer products that aim to even out the costs of parenthood. Top of the list are the friendly societies, which provide tax-free savings plans in children's own names. Several building societies also offer children's accounts.

The Homeowners Friendly Society has a Children's Cash Builder Plan for deposits of £10 to £25 per month. Tunbridge Wells Equitable Friendly Society provides a Baby Bond and a University Bond, investing up to £25 a month tax-free, though the University Bond requires a commitment of at least £40 per month or £480 annually. Savings above the tax-free limit are invested in a standard taxable fund.

Tunbridge Wells recommends using the state Child Benefit, of £15 for the first child and £10 for subsequent children, to save for future expenses. The friendly societies' plans run for a minimum of 10 years, are unit-linked stock based investments open to any UK resident child under 16 and can be opened on behalf of the child by anyone. At maturity they provide a lump sum, which will probably be too late for school fees, but could come in handy for university.

At present, building societies and banks offer interest rates not far below mid-range projections of the friendly societies, but the Tunbridge Wells says that over the last 10 years its return has been double that of building societies' accounts. But, the view among independent financial advisors is parents, are better off with general investment products. For one thing, parents need to put away an awful lot more in savings for their children's future needs than is allowed for under a friendly society's tax-free limits.

"I would advise using ISAs and make sure clients are using their allowance," says Richard Hunter, a director of Holden Meehan, an IFA. "They should probably use some sophisticated investment plans alongside it. Parents have to start very early if they are going to send their children to a private school if they are unable to meet the costs out of their income. They should start by working out how much they are going to need and how much that means they are going to have to save per month."

Mr Hunter suggests putting £200 to £300 a month into a stock market based ISA, and the same into a with-profits product that is still stock market based but less vulnerable to market fluctuations. He warns against putting all the investment into a product which is vulnerable to market conditions in case a parent needs to make withdrawals to meet regular costs at times of poor performance. As Mr Hunter recognises, though, many parents may find investing in a dedicated children's savings product simpler. It also creates the necessary discipline for making regular payments.

Similar advice comes from Donna Bradshaw, a director of another IFA, Fiona Price and Partners. "I would look at the individual circumstances before giving advice," she says. "It is all about timing. If you have left it very late [to pay for school fees] it is a case either of funding it out of income or remortgaging."

Ms Bradshaw would mostly advise clients to invest in an ISA or, if someone has used up their ISA allowance, a unit trust. "Go for a good, solid UK growth fund," she suggests. "One fund we recommend a lot is the Fidelity Wealth Builder, which is a unit trust and a fund of funds." She would also consider a tracker fund, but going for an all share tracker rather than one which just tracks the FTSE 100. She would also advise against a baby bond or similar product. "We have looked a lot at these," she says. "The charges are higher. I would only recommend them if someone has very little money to save and over a long term."

Paul Wright, investment marketing director of Allied Dunbar, suggests that parents should consider what would happen if there was a tragedy and they could no longer save. "For some people it is the most important thing in their life that their son or daughter goes to a certain sort of school. I would ask them, is it important to them even if they are not there to see them through? - if so you are then looking at life cover. They need to address some of the issues that none of us likes to think about."

This may also be a time of life when the children themselves need to be educated in how to handle money. Just how much pocket money to give a child is a difficult decision - too much and they, perhaps, become spoilt and undervalue money; too little and they will, in any case, ask the parents to buy everything and fail to learn how to save. The average payment, according to the 1999 Pocket Money Monitor, is £2.40 a week.

The offspring will certainly need to be disciplined in their management of money by the time they go to university. Figures calculated by Clerical Medical show that it costs £5,282 per year to study at university (see above). Currently the maximum tuition fee at university is £1,050, but there has been speculation that it could rise to as much as £6,000 a year. An opinion poll conducted last year for the Tunbridge Wells Equitable Friendly Society found that 82 per cent of parents expect their children to go on to university, but only 28 per cent have made financial provision for this - even at the current rate of tuition fees.

Parents would wish their children to enter the world of work without the burden of a student loan hanging over them. In reality very few parents will be able to afford seeing their offspring through university without support from student loans. Figures, again supplied by Tunbridge Wells Equitable Friendly Society, show that parents will have to invest £120 every month from birth until the age of 18 to support their children through university without using student loans (see page 2).

It is important for students when accepted on a university course to quickly apply to their local education authority (LEA) for a grant towards tuition fees. The student is expected to pay the first £1,050, but without an LEA grant the contribution could be much higher - as it could be if parental income is high. LEAs may also give higher levels of grant in special circumstances, such as for students with a disability, extra travel costs, those leaving local authority care or children of single parents.

Most students will find themselves forced to rely on student loans to get through university and applications should be made to the Student Loan Company (www.slc.co.uk or 0800 405010). Currently loans vary between £1,935 and £4,590 per year - depending on whether the course is in or out of London; students are living with their parents; it is an initial or final year of study and the amount the parents earn. Repayments are collected from income after the course is completed and interest charged at the rate of inflation. This can be as much as £75 a month for someone earning £20,000 after leaving university. There are other possible sources of support. Many colleges provide access funds either as grants or loans to help students who could not otherwise afford to study. Hardship loans from the Student Loan Company of up to £500 are separately available for repayment alongside student loans. "There are huge amounts of access and hardship funds going begging," says a National Union of Students' spokesman. There are also bursaries available from the NHS for students on some healthcare courses.

Increasing numbers of students, though, are forced to rely on working alongside study simply to survive. Surveys conducted by the NUS have found that 40 to 50 per cent of university students supplement their grants, loans and parental support by working part-time. Of these jobs, 90 per cent have no relationship with students' future careers. Two thirds of those students who are working do so to pay for basic living costs, an NUS study found last year. Typically students work 20 hours a week and the average pay is just £4.37 per hour, working in supermarkets, bars and fast-food outlets.

By the time they finish their university careers students, according to last year's Barclays Student Debt Survey, usually owe £5,285 in debts - mostly to the Student Loan Company, but also for bank loans, overdrafts and credit cards. The NUS believes that the student drop-out rate of nearly one in five is largely caused by this high level of debt.

Which proves that the salad days of university can be destroyed by lack of finance, while still creating a millstone of debt for the future. With the burden of higher education constantly shifting away from the state and towards the student, it has never before been so important for parents and children to plan ahead for university and get savings schemes in place - the earlier, the better.