Freelance, single, young: a good start

Rachelle Thackray is a 24-year-old journalist who has recently become freelance in London. She expects to earn around pounds 16,000 in her first year. Her main costs include pounds 300 rent (before bills) and pounds 40 a month on phone bills, including her mobile. She lives quite frugally and usually has a few hundred pounds over each month. She has savings of pounds 5,000.

Now self-employed, Rachelle wonders how she should save, bearing in mind that her income is likely to fluctuate, so financial commitments may be hard to sustain.

What a financial adviser says:

Rachelle's financial position is pretty much a clean sheet - a financial adviser's dream!

Her pounds 5,000 of savings are in a National Savings Investment Account paying of 5.5 per cent gross. Rachelle needs to keep much of this to hand as, having gone freelance, she may experience payment delays and earnings gaps, especially at first. The new Sainsbury's and Tesco banks will pay 6.5 per cent on balances of as little as pounds 1 on instant access, and both allow cashpoint withdrawals. She might consider putting some savings in a notice account to further improve her return; Legal & General is now paying 7.5 per cent for balances of pounds 2,500-plus on 60 days notice.

Rachelle is considering a mortgage in the next three years. She will need this long to have a track record of earnings to get a reasonably- priced loan. Lenders usually want two or three years of audited accounts for the self-employed.

Rachelle should not ignore pensions - the longer she waits, the higher the cost. She also faces the dilemma of whether to make her own pension provision or wait until she has an opportunity to join an occupational pension scheme with a future employer.

There are two real choices for now. She could start saving regularly into a personal pension. Then, if she later joins an occupational scheme she can convert her personal pension into a 'Free Standing Additional Voluntary Contribution' plan (FSAVC), which she can then continue to fund and so avoid charges for ceasing contributions.

An alternative is for Rachelle to save some money in a building society account and then put a lump sum into the pension at the end of the tax year. This has advantages; Rachelle does not know exactly how much she will earn and how much she will be eligible to put into a pension plan, or how much she can afford. An ideal combination is to save something each month just for the discipline of saving for a pension, and top up with variable lump sums each year.

Rachelle should consider a pension that offers her flexibility, looking at contracts that charge on a 'single premium' basis. Standard Life and Legal & General are worth considering. Rachelle should also ensure she takes up the 'waiver of premium' insurance on offer with her pension plan, so that contributions are maintained if she cannot work because of long- term ill health. This usually costs only pounds 2.50 per month for pounds 100 per month saved.

It would be sensible if Rachelle used some of her spare money for medium- term savings, in particular tax-free Tessas and PEPs. She should be aware, however, that both PEPs and Tessas may need to be converted into new-style Individual Savings Accounts (ISAs) from 1999.

Rachelle would like to look at the option of investing ethically. She could consider PEPs with companies such as NPI and Jupiter, which offer ethical funds. Otherwise, Fidelity, Schroders and Perpetual offer good ranges of standard PEPs.

She should also consider insurance, in particular a critical illness policy. Because she is young and healthy, such cover is more affordable. Because Rachelle is young, it will cost her around pounds 15 per month for pounds 100,000 of cover. She could look to draw an income of pounds 5,000 per year from her pounds 100,000 payout.

Income protection cover (permanent health insurance or PHI) might seem a good idea, but permissible levels of cover are based on income, with a typical maximum insurance benefit of 50 per cent of net income. But with no earnings record, and initial net earnings likely to be reduced by set-up costs, she will have problems getting decent cover.

It is unlikely that Rachelle will be able to put all of this in place to start with. She needs to tread cautiously with saving and insurance commitments, but her priorities should be setting aside some money for a pension, and effecting the Critical Illness policy.

What Rachelle thought:

"Useful. Amanda was very clear and balanced in her advice. She wasn't pushy." The makeover has got Rachelle thinking about things she wouldn't have otherwise, although she has no plans to rush out and buy a pension straight away. But if she was, she would have no problem going back to Amanda, and would also recommend her.

Rachelle was talking to Amanda Davidson, partner at Holden Meehan, a firm of independent financial advisers in London (0171-692 1700).

If you want to be considered for a financial makeover for publication, which will include a photograph, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, or fax: 0171-293 2096 or 2098; or e-mail: S.Lodge@independent.co.uk. Include details of your financial position, a daytime telephone number, and say why you think you need a makeover.