Wealth Check: 'I've just started my own company – how can I build up a savings buffer?'

The Patient

Camilla Turner is keen to build a savings buffer after setting up her own business. The 25-year-old from Fulham, south-west London, set up Mode Moo, an image consultancy, in January this year. "I have not yet completed a full year," she says. "However, I anticipate that by the end of this I will probably pay myself a salary of about £10,000."

But she is in no rush to grow the business, and works for a catering company to cover day-to-day living expenses. "I want to ensure I am financially secure before growing the company so that I can support myself in the future," she says. "I don't feel I am maximising my position at present."

Fortunately, Camilla has managed to avoid saddling herself with debt. "When I set up Mode Moo a private investor contributed £5,000 which I used for registering the company, building the website, insurance and other costs that come with starting up a business," she says.

She already has some substantial assets behind her, as she owns a two-bed flat in Fulham outright, worth around £500,000. "Of course, this relieves a lot of the financial pressure," she says.

For short-term savings, she has a business bank account with NatWest, and makes sure to keep £1,000 in this for a rainy day.

"I also have a separate savings account which was set up by my parents when I was born," she says. "But I am not aware of how much is in this – it has been kept a surprise for when I am allowed to access it in a few years' time."

When Camilla is able to, she is keen to invest the sum wisely towards long-term goals such as investing in the business and pension planning.

At present she is not paying into a personal pension. "I feel that this is an area that I would like more help with as I am aware that at the age of 25, I should be putting some money aside for this," she says.

For protection purposes, she pays £90 a year for public liability insurance with Axa, with a £1m limit.

The Cure

Camilla is fortunate to be in an extremely strong financial position with no debt, a mortgage-free property and a savings pot coming her way, say our panel of independent financial advisers (IFAs).

However, building up an "emergency" savings buffer in the meantime is an essential step to safeguard her position, they stress – then she can consider investing towards long-term goals later down the line.

Building up savings

Camilla should aim to build a bigger emergency fund to avoid simply relying on the business bank account.

At present her personal income is unknown and is likely to fluctuate over the next few years, so she needs to keep her personal finances as flexible as possible. "This means keeping cash available to cater for any income shortfalls or short-term emergencies," stresses Patrick Connolly from IFA Chase de Vere.

If she has any cash to spare, she should opt for an easy-access account paying as high a rate of interest as possible. Ideally, it should be held in an individual savings account (ISA) paying an attractive rate. A selection of the best buys can be found on moneyfacts.co.uk.

It is also vital that Camilla sets aside enough to cover her income-tax bill and, as she knows the dates on which the tax is due, she may decide to use an account with a specific term for this. There are a number of one-year accounts paying 3.5 per cent, including one from Yorkshire Building Society.

Investment strategy

Long-term financial planning is not a priority. But this should become important once her business is more established and produces a reliable income stream.

Depending on how much her parents have set aside for her, Camilla will need to decide whether to put this money towards her personal or professional financial objectives – or divide it between them.

For longer-term savings, holding assets within a stocks-and-shares ISA is considered the most tax-efficient method of investing, say the advisers. "Although Camilla's parents may wish for the exact amount to remain a surprise, they may allow her to participate in the investment strategy," adds Steven Poulton, of IFA Brunning Newman Houghton.

"It is important that Camilla holds the account in her name or that the account is held in trust for her," he adds. "If the account is in one of her parents' names it will form part of their estate for inheritance tax purposes which could lead to an unnecessary and avoidable tax charges."

Danny Cox, from IFA Hargreaves Lansdown, says: "In terms of where she invests money in the business, this will depend upon which services provide the best profits and she can focus on those. In the early days marketing is likely to be a good place to invest, to build her client base and her revenue streams."

Retirement planning

Without access to an employer pension scheme, Camilla should consider how she will save for retirement.

"Many people put off long-term savings for too long," warns Mr Cox. "However, with her business less than a year old and with a low income, she probably shouldn't be committing money to longer-term requirements."

The advisers recommend Camilla review her financial situation when her business is a year old, and perhaps consider pension provision then. She can think about establishing pension contributions through her business, which has tax advantages, they say.

Yet Mr Connolly stresses that while pensions have the benefit of initial income tax relief, they are inflexible.

In contrast, ISAs can also be tax efficient and will allow Camilla to access her money whenever she wants. This flexibility could be very important.

Turning to state provision, Camilla's retirement age will be 68 and the full basic state pension is currently £102.15 per week, assuming 30 qualifying years of national insurance contributions. Camilla is likely to be self-employed and should ensure she is paying sufficient NICs to qualify.

Protection

With a low income and no dependants, further protection isn't a priority. But as her firm grows she should look at income protection and consider other business protection, said Mr Connolly.

"Camilla may consider her parents' savings account and her property as adequate cover, but realising funds from these may be far from easy," stresses Mr Poulton. "She may wish to consider a short-term protection contract running until the savings account becomes available, to safeguard her income."

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Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF

j.knight@independent.co.uk