Wealth Check: 'How can I save but still afford
to go on holiday?'
Published: 19 June 2004
This article appeared in The Independent
Save and Spend Supplement.
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.
