Wealth Check: 'Help me build my business and tighten our family finances'

A self-employed mother wants to know how she can make the most of her cash for her children's futures

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The Patient

Bringing up children has prompted Lara Milanova to reassess her family's finances. "We don't think we are very good with money, and providing for a family makes it important to address this," says Lara, 40.

"Although we don't have major luxury holidays or the latest technology, our outgoings seem pretty high. Our savings are just in a basic savings account, earning very little."

Lara and her partner, who is 43, live in Brockley, south London, with their daughter Talya, six, and son Sasha, eight. They earn a combined salary of about £85,000. He works as a director for a London university, while she has set up her own business, manufacturing and promoting Hamster Buggy Bags, which help to keep baby buggies steady and are for sale in Mothercare and Kiddicare.

"The business has been trading for nearly a year, and has so far turned over about £15,000," she says. "My goal is to make a net profit of at least £50,000 a year, to match the salary I would've had if I had not given up full-time work to look after children."

Lara also receives a salary from her hobby of making masks for special occasions. "The income from this helps with our family expenses and financing my start-up, as I make between £12,000 to £20,000 a year."

They have several savings accounts, all with Barclays. These include £20,000 in an instant access account paying 0.65 per cent, and £1,500 in a cash individual savings account (ISA) paying 0.1 per cent. Towards Talya and Sasha's futures, they pay into child trust funds (CTFs) with Barclays, contributing £10 a month with each fund holding about £950.

They pay about £725 a month for a 20-year £150,000 repayment mortgage on their three-bedroom house with the Woolwich, on a variable rate of 1.45 per cent. "We bought the property nine years ago for £169,000, and similar properties in the area are valued at about £295,000," says Lara.

One issue she wishes to tackle is retirement needs, as Lara doesn't contribute to a pension. "Although I think I have a pension from previous employment, before I had my children," she says. Her partner pays into the university's final salary scheme.

For protection purposes, she pays £79 a year for public liability insurance with First Direct, with a £1m limit. They have no life cover.

The Cure

Building a portfolio of different assets to tackle short and long-term goals should be the focus of the family's financial planning. Their high joint income and low level of debt make it easier for them to maximise their money, agree our panel of independent financial advisers (IFAs).

"However, as Lara describes them as not being very good with money, their initial task is to draw up a budget to work out where money can be saved each month," says Minesh Patel from IFA EA Financial Solutions.

Savings

The couple should use cash ISAs rather than the Barclays savings account, as they can put £5,340 each into these accounts this tax year, says Danny Cox from IFA Hargreaves Lansdown. "Holding a healthy cash balance in reserve is a good plan. However, over the longer term cash is unlikely to retain its buying power."

They should also consider monthly savings into a stocks and shares ISA through a fund supermarket such as Fidelity Funds Network with low charges, and a wide range of funds. "The risk of investing in equities is higher than cash, but long-term investors are rewarded," says Ms Patel.

By squirrelling away money into stocks and shares they would benefit from "pound cost averaging" by buying units at different prices. "If £200 each month has been saved this year then during August, September and October when stock markets fell, the money would have bought more units than earlier this year when markets were steadier," explains Ms Patel.

However, it may be wise for Lara to focus on funds for the business before making decisions to switch or add accounts, says Ian Hudson, from IFA Hudson Green & Associates.

Business plan

Lara says she would like to get £50,000 net profit from her businesses, and drawing up a business plan will help define the timescale for this, says Ms Patel. "Her hobby business is generating more revenue than her main business, so she could try to earn more from this in the short term while the main business is building." It may be worthwhile concentrating on just one of the businesses and defining a plan for this, adds Mr Hudson.

Child trust funds

The contributions made to the CTFs are paltry and will fail to build sufficient funds for their children's future, warn the advisers. They should consider switching to a stocks and shares account. Contribution limits will increase to £3,600 a year in line with junior ISAs, but these accounts will not be available to Talya and Sasha because they benefited from the tax-free gift of £250 from the Government for children born between 1 September 2002 and 2 January 2011. "An increase in contributions to the current maximum of £100 a month would provide a decent basis for university or their first home," says Ms Patel.

The F&C Stakeholder account is low cost and contains a lifestyling facility where the exposure to shares begins to reduce once the child reaches 13, add the advisers.

Property

The real value of savings is falling, making debt repayment the wisest route to financial stability. The repayments on their mortgage are easily manageable on a low rate of interest, says Mr Cox. "However, they should keep an eye on the market and fix the rate should there be signs of a sudden rise in coming years."

Retirement planning

Pension planning can wait, says Mr Hudson. However, at 40, Lara should aim to contribute £300 per month to a personal pension, adds Ms Patel. "As a basic rate taxpayer she will receive immediate tax relief of 20 per cent, and when she becomes a higher rate taxpayer and she would benefit from higher-rate tax relief," she says.

Mr Cox adds: "If Lara's business has incorporated, her pension contributions should be made as employer payments, since this saves both employer and employee national insurance contributions."

Lara should also consider transferring her old pension into the new scheme. But before doing so, she should check its value and that she will not lose benefits or pay costs.

Making a will

As the couple are not married they should draw up wills as a priority, stresses Mr Cox. They should appoint guardians for their children should Lara and her partner die together.

Protection

At present they have inadequate protection arrangements in the event of death, say the advisers. He has life cover of four times salary from membership of the superannuation scheme, but this is insufficient. "One option is low-cost term assurance that would provide a lump sum if death occurs within the term selected," says Ms Patel.

Do you need a financial makeover?

Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF / j.knight@independent.co.uk

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