Personal Finance: Financial Makeover: A woman with six appeal

Rosie is a mature student who is set to finish college in June this year, when she will return to work. Aside from the challenges of taking up the reins of full-time employment again, she has six immediate financial problems which need to be resolved.

Among them is the fact that while studying she has not paid national insurance contributions for the past year. Should she start paying now?

Her endowment provider, Eagle Star, has warned her that her policy may not be worth enough at maturity to pay off her mortgage. Should she top up her endowment or take out a new mortgage to reduce other payments? Finally, Rosie had a pension in the past, but she has none at present. Should she start one now?

The adviser: Philippa Gee, the managing director of Gee & Company, a fee-based independent financial advisers, at Foresters Hall, 1a Wyle Cop, Shrewsbury SY1 1UT (01743 236982)

The advice: With a few months of studying left, you have time to move your financial affairs on to a firmer foundation. However, you need a financial plan.

The first of six objectives is to organise your banking arrangements. Being self-employed, it is easy to get into the habit of operating one account for all expenses, yet it makes it hard to differentiate between what money should be reserved for business and what can be withdrawn for personal expenses.

You need to set up two accounts, one for business that will hold the majority of money and will transfer a fixed sum each month into a second, personal account.

The second objective again concerns cash, as you need to build up a float fund in case of emergencies. This should be done by taking sums occasionally out of the first account, as the business improves.

I would recommend you open a new "mini-ISA" account for the cash element to take these one-off sums. Basically, the mini-ISA allows you to invest up to pounds 3,000 in this tax year (and pounds 1,000 each year thereafter) into a cash account, with no tax payable on the interest.

Rates available from the Halifax and Abbey National are currently 6.5 per cent (variable) and appear the most competitive. Not only will you be benefiting from a decent interest rate, but with no tax liability, your money remains accessible.

The third objective is to sort out your borrowings.

Presently your mortgage amounts to around pounds 300 a month. Rather than remortgage, which can be costly, I would suggest making use of a deal, through your current lender, for existing borrowers who are on variable rates and who face no penalties for switching.

One scheme is a capped rate of 6.4 per cent, which puts a ceiling on your costs until April 2004. This has no arrangement fee and will currently save you around pounds 30 a month. Another scheme offers a capped rate of 4.25 per cent until January 2001, saving around pounds 110 a month. However, this costs pounds 295 and will keep you locked into the variable scheme for five years. Consider how long you will keep the property before deciding which scheme to opt for.

You are concerned that the endowment policy might not repay the mortgage on maturity. Profit bonus rates have reduced considerably and the recent performance of your contract has not been competitive. However, with your income limited at present and the policy having 17 years left I would say sit tight.

Invest a monthly amount separately as a back-up to the endowment only when your income improves.

For this purpose, you could consider an equity-linked mini-ISA, although you need to remember that equities are not short-term investments and will fluctuate. The best starting point for you could be a large tracker fund, which follows movements in UK share prices and which has consistent past performance, such as that offered by Gartmore.

The fourth objective is to ensure you have adequate personal insurance. You have do not appear to have adequate life cover for the mortgage and although you have no dependents, you should still plug this gap.

Monthly costs for pounds 7,000 term assurance over a 19-year period start at pounds 5 per month. You already have income replacement cover in place for up to pounds 500 per month, but will soon need higher levels of cover.

Your fourth objective is to contact the existing company to see if it will offer you "preferred rates" as a loyal customer, as to go elsewhere would cost approximately pounds 50 per month. Critical illness cover, which would only pay out a lump sum in the event of a major illness, subject to policy conditions, should be considered. One such policy offered by Marks & Spencers would cost around pounds 35 per month for pounds 100,000 cover over a 20 year term.

Protection policies can be costly. However the business relies on you, and just as you would insure your car, you need to insure yourself. I would defer decisions until you finish studying, to identify better the level of income the business produces. I would suggest you build up the income replacement cover first and then consider other options.

The fifth objective is pension planning. You already have pension provision from previous employment. You want to give the business at least 12 months to see how it develops. If during the year you have saved well, you could use part of the savings to invest into a pension as a single sum to make up for the time you have not been paying in. If your business develops, it could itself be viewed as part of your retirement funds for you to sell on at a later date.

The sixth and final objective involves working closely with others advising you: talk to your accountant about your concerns over National Insurance, appoint an IFA and discuss business contracts with a solicitor, and write a will. With a sound financial plan, professional advisers, and an MA qualification, you can concentrate on your career.