Personal Finance: Money Makeover; Young and single and no cash to waste

Name: Emma Drinkwater

Age: 24

Occupation: Personal assistant

The financial problem: Emma works for a film production company and earns approximately pounds 10,000 per annum. She lives rent-free in her parents' house and has monthly outgoings of pounds 175 council tax and pounds 60 gym membership.

She has savings of pounds 6,300 in an Abbey National Investor 30 Account and pounds 2,500 in Premium Bonds.

Emma is concerned that this money is not working hard enough for her and she is happy to invest this with a five-year view and balanced attitude to risk and in an ethical investment style. Emma also wants to consider her protection and pension needs although, with very little free income, feels it is important to keep her outgoings to a minimum.

The adviser: Ian Millward, investment marketing manager, Chase de Vere Investments, 2 Queen Square, Bath BA1 2HD (01225 469 371).

The advice: Life cover and critical illness insurance, while important, are probably beyond her means, bearing in mind her low income.

Emma is young and has no liabilities. Therefore, with her limited budget, her funds would be better directed elsewhere at present. This is not to say that these are not important issues, and she should consider critical illness and life cover as soon as she can afford it.

However, her employer makes no provision for permanent health insurance and this area does need looking into. If Emma were unable to work due to illness or sickness for a prolonged period, she would have to survive on state benefits of pounds 62.45 per week. This is just one-third of her existing income. The maximum benefit Emma is entitled to claim, including state benefits, is 75 per cent of her salary. This would be pounds 144.23 a week, less pounds 62.45, leaving a shortfall of pounds 81.78. For a pounds 10 monthly premium, Friends Provident will provide cover of pounds 75 per week, making up the majority of the shortfall.

On the investment side, Emma's money is very secure. But lower returns reflect this level of security. First, it is important that Emma retains a certain level of liquidity in case of emergencies.

She should keep at least pounds 1,000 in an instant access building society or bank account. Postal accounts generally pay a higher rate, with the best at present being Cheltenham & Gloucester, which offers 7 per cent gross on its Instant Transfer Account.

Emma should also retain pounds 1,000 in Premium Bonds, giving a capital-secure and accessible fund with all prize money being tax-free. The current prize draw rate is 4.75 per cent net.

In addition, Emma should open a Tessa with pounds 2,000. Tessas will provide tax-free returns over five years. The Yorkshire Building Society pays 7.65 per cent, making it the best on offer at present and there is the added opportunity of a windfall should it convert from its mutual status.

At Emma's age, her financial position can change rapidly. A Tessa has the added benefit of being able to act as an extra source of liquidity in an emergency, as the only penalty for early withdrawal is the loss of its tax-free status.

Given her views on ethical investment, Emma should put approximately pounds 4,800 of her savings into the Friends Provident Stewardship Unit Trust PEP. This is an ethical investing unit trust that has provided good returns with a track record going back over 10 years.

The PEP will provide a tax-free return linked to equities and, with this fund, the manager would avoid investing in companies involved in environmental destruction, unnecessary exploitation of animals, trade with oppressive regimes, pornography and weapons manufacture.

As for pensions, Emma's employer makes no pension provision for her and she has very little free cash. It is important, though, to start as early as possible. By making small contributions now, the fund will grow more quickly later. Hopefully, in time she can increase premiums. Emma's key considerations here should be minimum premiums, low charges and the flexibility to stop and start and alter contributions as necessary.

Standard Life has a flexible personal pension with a flat monthly administration fee of pounds 2.95. But minimum premiums are pounds 40 a month, which may be too much. A Norwich Union personal pension can start from as little as pounds 20 a month. Charges are paid for by reduced allocation of premium to investment and this has the flexibility to stop and start premium payments without penalty.

The verdict: I needed some guidance and this sounds great. I did ask Ian about a pension and he's answered that point. On the ethical investment side, his advice solves most of my questions. I am not too worried about permanent health insurance, but at least I know that option is there if I need it. I seem to have done OK on the Premium Bonds, winning pounds 50 here and there. It is a good idea to have some money set aside for a rainy day, plus some money in a Tessa.

If you want a free makeover, please write to: Nic Cicutti, Free Financial Makeover, The Independent, One Canada Square, Canary Wharf, London E14 5DL. You must be willing for your name and photograph to appear in the paper.