Wealth Check: A business started, a baby on the way – but no safety blanket

The patients

Catherine Warrilow, 28, is keeping a tight rein on her finances with a baby on the way. She and her husband, Tony, from Oxford, are expecting their first child in August. And as Catherine recently started her own public relations company, getting it established before she becomes a mother is a priority.

"We want to ensure that when our baby arrives, we are financially secure," says Catherine.

Tom, 28, is a police officer, and once Catherine's income is regular, they expect to have a combined salary of £65,000. Yet after celebrating their marriage last year by travelling the world for four months, they have little in the way of savings to fall back on.

"We want to put money aside for our future, holidays, home improvements and a fund for our baby," adds Catherine.

Tom has a total of £6,000 in six savings plans with the Policy Mutual Assurance Society (PMAS), and contributes £12 a month to each. These mature after 10 years, with the first one set to provide a tax-free lump sum in 2011, although its performance relies on the underlying fund and bonus payments.

They pay £300 a month for a personal loan of £12,500 with Alliance & Leicester, at 7.1 per cent over five years.

Their mortgage repayments are £600 a month for a 25-year £130,000 interest-only deal with Abbey. This is on a two-year discount at 1.94 per cent off the standard variable rate, giving a rate of 5.37 per cent. They bought their two-bed flat for £130,000 four years ago; it is now worth £170,000.

"In the next few years we would like to move to a larger family home," says Catherine, "and be able to secure a mortgage of around £250,000."

She pays £50 per month into a personal pension with Scottish Widows. Tom is a member of the lucrative police scheme. The couple have no protection policies.

The cure

With a baby on the way, a savings buffer to build and debt to tackle, the couple face an uphill struggle.

Debt

Before increasing their savings, the couple should tackle their borrowings. The personal loan's 7.1 per cent interest rate is high.

One option is to remortgage to add the £12,500 to the home loan and pay it off at a lower rate over a longer term. However, whether this makes financial sense depends on any fees they might incur, says Darius McDermott at independent financial adviser (IFA) Chelsea Financial Services.

Savings/investments

Their baby will be eligible for a £250 child trust fund (CTF) voucher from the Government, which can be put in one of a range of long-term savings accounts. They can contribute up to £1,200 a year to this. Mr McDermott recommends the CTF from The Children's Mutual.

The PMAS savings plans incur hefty charges and give "poor value for money", says Dennis Hall at IFA Yellowtail Financial Planning. Tom would be better off putting the cash in another account or using it to repay debt.

Ajmer Somal of IFA Positive Solutions adds that the couple should use their individual savings account (ISA) allowances each tax year. Kent Reliance currently has an ISA paying 6.05 per cent.

Property

With an interest-only mortgage, they aren't tackling the capital debt. As soon as possible, they should switch to a repayment mortgage to ensure they pay off the balance by the end of term, stresses Mr Somal.

As for moving to a bigger home, this plan should be shelved until the business is running successfully.

Retirement/insurance

Tom is lucky to belong to a gold-plated final salary scheme. But the couple should still aim to increase their pension payments.

Taking out life cover to protect their family in the event of either Catherine or Tom's death is vital. Ideally they should take separate policies, which may be combined with critical illness cover to pay out on diagnosis of a specified range of diseases, says Mr Somal.