Wealth Check: 'How can I save but still afford to go on holiday?'

Zena Ambrose finds that she has money left over some months, but at other times finances are tighter. Last year, she was faced with the prospect of being unable to work for a period of time.

Zena Ambrose finds that she has money left over some months, but at other times finances are tighter. Last year, she was faced with the prospect of being unable to work for a period of time.

This made her realise that she does not have a large enough reserve fund for emergencies.

She would like to build this up. But she also wants to keep enough money aside for her annual holiday.

Ms Ambrose would like to start to save to buy a property, which would be outside London.

She also realises that her pension contributions are low, but describes pension funds as unstable.

She does not want to tie money up in a pension before she steps on the property ladder, but wonders if there is any way to build up her pension fund and deposit at the same time.

We put her case to Darius McDermott, Chelsea Financial Services, David Higgins at GFSL and Julie Hedge at Christie Scotts.

ZENA AMBROSE, 29, PUBLIC RELATIONS ACCOUNT MANAGER

Salary: About £25,500

Education: BSc in geography

Debt: £50 on credit card, £300 student loan; £350 overdraft to pay bills where flatmates have not paid their share

Property: Rents property

Savings: £2,500 in Isas with Nationwide and Smile, including cash Isas and bonds

Investments: None

Pension: £50 gross into stakeholder pension

Outgoings: Rent £500; travel to work £80, travel outside London £50 to £100; phone £45; £400 to £600 on other expenses. £1,000 for holiday

BUDGETING

Ms Ambrose needs to keep a note of her monthly budget so she knows exactly where her money is going and where she could save, says Ms Hedge.

Mr Higgins notes that the gap between Ms Ambrose's income and outgoings varies between around £250 and £500 a month. If she sets aside £83 a month for her annual holiday, this would still leave room to save a deposit for a property.

DEBT

Ms Ambrose has relatively little debt. Although she could use savings to clear her student loan, Mr McDermott says this is not too high a priority, as interest on this is low, and might even be lower than the interest on her Isas. She should pay off her credit card, even though the debt is small. She should also try to recover the money owed by her former flatmates.

SAVING AND INVESTING

Setting up a reserve fund is a good idea. Ms Hedge thinks Ms Ambrose should avoid the risk of the stock market, at least for the moment, and concentrate on cash savings. She should ensure she is making the best use of tax breaks by saving in a cash Isa. She should then set up a deposit account for her holiday savings. Holding her savings at the same bank as her current account should cut her costs if she goes overdrawn.

Mr Higgins points out that the best rates for a cash Isa are currently with Abbey, at 5.1 per cent, with no notice period for withdrawals. But he suggests she might want to review her bond fund, as these are looking less attractive with rising base rates.

Mr McDermott suggests a cash Isa with the Portman or Lambeth building societies, and a savings account with ING Direct (4.60 per cent) or, if Ms Ambrose is happy to manage her money online, with Alliance & Leicester (4.85 per cent).

Alternatively, if she is happy to take on more risk, she could consider a stocks and shares mini Isa. Mr McDermott suggests Cazenove UK Growth & Income or Liontrust First Income unit trusts. Investing through a fund supermarket - which allows mixing and matching of investments - can reduce stock market risk by diversifying.

PENSION

Ms Ambrose's scepticism about pension funds is not unusual. Ms Hedge says Ms Ambrose should concentrate on putting her finances on a more even keel before putting more aside for retirement. Mr Higgins points out that whatever she does save should be in a Stakeholder plan, for maximum flexibility.

Mr Higgins suggests she should pick a stable pension company, such as Legal & General or Prudential. He stresses that payments made at a relatively young age will add the most to her overall retirement fund. Ms Hedge says that changes to pension rules, due next year, may take some of the inflexibility out of pension savings.

SAVING FOR A PROPERTY

Based on Ms Ambrose's current salary, the maximum mortgage she could raise is likely to be around £100,000.

Ms Hedge says that the best way to put together a deposit is for Ms Ambrose to set aside a sum of money each month. Mr McDermott says that Ms Ambrose should continue to put money into cash Isas to build up a deposit. If Ms Ambrose is worried about dipping into her reserve fund, for example if she fell ill, an accident, sickness and unemployment insurance (ASU) would provide an alternative financial cushion.

* If you would like a financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk