Editor’s note: This is part 2 of a 3-part series. In part 1 (“Plan Your Financial Fitness,” September 1993), financial planner Nancy Abrams evaluated the situations of three typical nail care professionals and developed individualized programs to help each one reduce debts, increase savings, secure necessary insurances, and plan for a comfortable retirement.
Six months ago NAILS introduced three salon professionals who had volunteered for “Budget overhauls” with the help of Los Angeles-based financial planner Nancy Abrams. During the initial consultation they informed Abrams of their monthly net income and listed their monthly expenditures so she could determine their budget. They also revealed to her the value of what they owe so that she could establish their net worth. Most importantly, they shared with Abrams their financial goals both in the short term and for the future. Their goals ranged from obtaining medical insurance to purchasing a home to saving for retirement.
In a short time, Kathy, the salon owner, and Kris, the independent contractor, have already improved their financial situations. (Catherine, the nail technician employee featured in part 1, has left the nail industry and chosen not to participate in the remainder of the series.) The explanation for their great strides? They have gained an awareness of how they spend their money. They have learned how to evaluate their bills and determine which ones can be reduced or eliminated to free up the money they need to reach their goals. Quite simply, they’ve taken control of their finances instead of letting their finances control them.
Says Abrams, “They seem more in control and they are more focused. Both are very bright and ambitious and now understand the need to protect themselves against risk and save for their future. They are making a transition from debt financing through the use of credit card to saving their money and paying for purchase with case.”
Even amid change – Kathy decided to expand her salon; Kris engaged to be married and plans to move to another state they have kept sight of their goals. Abrams contact Kathy and Kris at three months and six months after the initial consultation to obtain a progress report and answer their questions. We’re happy to report that Kathy and Kris have already reached some their initial goals and are well on their way toward attaining the others. Their stories prove that though life is ever-changing, priorities and goals don’t have to be.
SALON OWNER EXPANDS SALON AND CUTS FAMILY EXPENSES
When we met Kathy six months ago she and her husband had recently declared bankruptcy and were still paying off medical bills from her husband’s hospitalization in 1992. Abrams was concerned about Kathy’s financial situation because the family had no savings for an emergency and no medical insurance. But through Kathy’s determination to improve her financial position, her family has reduced its debt and taken steps to increase its income.
Kathy has paid off the medical bills, remodeled and expanded her salon, and open a savings account with a credit union.
In our first installment Abrams recommended Kathy save $200 a month to pay her federal waxes and another $200 for medical insurance. While Kathy did open a savings account, she hasn’t saved much because she has used most of her disposable income each month to remodel her salon and expand the number of stations from four to six (five of which are rented). Kathy believed that expanding her salon would increase her earning potential and allow her to reach her financial goals more quickly. Kathy also found a health insurance policy that would provide coverage for herself and her two children living with her for approximately $250 a month (her husband is excluded from coverage because of his ongoing medical problems). She plans to increase her savings and obtain medical insurance when she finished remodeling the salon, probably in about a month.
Though the bankruptcy damaged the family’s credit, Kathy recently traded in her 1985 Pontiac Grand Am as a down payment on a 1993 Nissan Sentra and financed the loan through a local bank. Though the interest rate on her car loan is high, she can refinance the loan at a lower interest rate after six months if she makes her payments on time.
According to Abrams, Kathy’s opening the savings account and financing her car through a local bank are positive steps that have helped her begin reestablishing her credit-worthiness. This is important to Kathy because she and her husband want to purchase a house in 1994. A local real estate and her husband may qualify for a home loan through a Housing and Urban Development program that would allow them to make a down payment of just $1,500. The agent told her that the house payments would be about $350, which is what she now pays in rent. She hopes to save enough money for a down payment by the end of summer.
Over the next six months, Abrams expects Kathy to buy health insurance and start saving $10 - $25 a week for her emergency fund. Abrams recommends Kathy save at least $600 in an emergency fund and pay off additional debts before she starts saving for a down payment on a house. Kathy’s 1985 Ford pickup and furniture will be paid off by July, giving the family an additional $438 a month to apply toward reaching these goals.
According to Abrams, an emergency fund is very important, especially for people like Kathy and her husband who are self-employed. Should the salon hit a lull (which it recently did, decreasing Kathy’s income by $300 a month for a few months), the family will need the savings to meet their obligations. With the recent bankruptcy, it is especially important that the family not be late paying any bills or they will seriously damage their credit again.
All families should have the equivalent of at least three month’s income saved; for Kathy’s family that means having approximately $6,500 put away for emergencies before they purchase a home. But because the down payment required is so low and because her monthly payments would be similar to what she now pays in rent, Kathy feels not saving is worth the risk to realize her dream of owning a home. Although Abrams doesn’t agree, she admits that many families stretch their budget to its breaking point to buy their first home. If Kathy does buy the house, Abrams stresses that her next priority should be to build her emergency fund to $6,500.
INDEPENDENT CONTRACTOR SELLING HOUSE AND BUSINESS
Kris has been very busy since September. She refinanced her car, which had a balloon payment of $4,000 due to in January, and lowered her monthly car payment of $4,000 due in January and lowered car payment almost $100. After reevaluating her life insurance/retirement policy, she decided to reduce her premium to $17 a month, which still gives her $59,000 in coverage. She puts the money she saves on life insurance each month toward health insurance. For $89 a month, she purchased an 80/20 health insurance policy through the Nails Industry Association.
Kris’ monthly income for 1993 was higher than the $1,185 she had originally calculated (for the previous article she told us her 1992 gross income). After her business expenses, she netted $1,629 a month in 1993. Though she has no money for extras each month, she can afford to pay her bills and she says she was able to pay cash for her Christmas purchase with some money she had set aside earlier.
Kris became engage in September and plans to move to Oklahoma, with her fiancé as soon as she hers house and her business. She has found a nail technician who will purchase her product inventory (worth $1,500), her client list, and her salon space lease for $6,000. She says she will be happy, despite taking a loss], if she can find a buyer who will make a $9,000 down payment on her house (which she will use to pay off her second mortgage) and who will assume her $62,000 first mortgage.
After she sells her house, Kris will move in with her parents for two months and continue to work in the salon so that she can save enough money to pay off her car loan and credit bill. She will use the money she gets from selling her business to pay her relocation and living expenses in Oklahoma until she has an established clientele there. She will continue to work as a manufacturer’s educator in Oklahoma to supplement her income.
Kris’s immediate goals are to pay off her bills and pay cash for all future purchases. Abrams hopes that Kris has enough money left from the sale of her house and her business to set aside at least $1,000 in a savings account or retirement plan. According to Abrams, Kris can open an individual retirement Account (IRA) for 1993 before April 15, 1994, which reduce her tax bill for 1993 as well as start her retirement savings. Whether Kris opens a saving account or an IRA, Abrams recommends she place the money in a growth stock fund that invest in medium-size companies; Abrams current favorite fund is Steinroe Special. “ The stock’s one year return is 20%, its three year return is 22%, and it’s five year year return is 19%. She can open an account for a minimum of $1,000 if it’s for saying, $500 if she opens it as an IRA.”
PUT YOUR MONEY TO WORK FOR YOU
You don’t have to be a financial whiz kid to make your money work as hard for you as you work for it. Kris’s and Kathy’s greatest accomplishment is an enhanced awareness of how they spend their money. In just a few months they have put their money to better use by reducing their debts and providing their credit worthiness. They have also protected themselves for the future, Kathy by expanding her salon and its potential income and Kris by obtaining health insurance.
“Most people say they never realized where their money was going and didn’t think that they could plan for the future. Kris’s and Kathy’s focus on their finances is helping them make progress toward the things they’ve always wanted but never knew how to obtain. Over the next six months I’d like them to further clarify their goals and see if they can move closer to attaining them,” says Abrams.
Abrams will consult with Kris and Kathy again in three months and will give us a final report in six months. By then, says Abram, she expects they will be will on their way toward reaching their immediate goals and planning for the future.
HOW TO FIND A FINANCIAL PLANNER
If you feel inspired to overhaul your own finances but aren’t sure where to start but aren’t sure where to start, there are professionals who can help you organize your finances and develop a program to reach your goals. But, as in any field, there are good financial planner Nancy Abrams recommends asking friends and family for reference. If you can’t get a referral that way, you can call the institute of Certified Financial Planners (800-282-7526) for a referral to a financial planner in your area. Once you have the names of three financial planners, Abrams recommends you interview them to make sure you are compatible and feel comfortable with their experience and investment philosophies. She recommends asking the following six questions.
1. What are your credentials? “A Financial advisor should be registered with the Securities and Exchanges Commission,” says Abrams. Though not required to do so, some financial planners have completed coursework to be designated a Certified Financial Planner (CFP), which Abrams says indicates a level of competency.
2. How are you compensated? Some financial planners charge a flat fee or hourly rate for their services, some charge a commission on the products you buy from them, and some charge a percentage of your investment portfolio. “I think fee-only advisors are better because they’re not limited to what they can sell to earn money,” says Abrams. At the same time, fee-only planners may charge as much as $80-$125 an hour for their services if you choose a financial planner who is paid by commission, Abrams says, “Be leery if they don’t tell you up front what they are earning or if they push a product that you are uncomfortable with or promise a return on your portfolio that seems higher than what you expect.”
3. Can you describe your typical client and his or her financial situation? According to Abrams, you should choose a financial planner who specializes in your income range.
4. What is the financial planning process? “There’s a standard in the industry that the financial planning process begins with the client providing information on her income and expenses, net worth, insurance coverage, estate planning, and taxes. The planner and the client discuss the client’s concern and prioritize her goals. Then they devise an investment plan. The follow-up process varies with the planner and the client.” Abrams explains.
5. What can I expect my portfolio to look like? “If the financial planner is going to devise an investment strategy for you, ask what the asset allocation (portfolio diversity) will look like,” says Abrams. “The financial advisor should ask about your risk tolerance and should guide you about the risk of investments they recommend. For Kathy, for example, high risk is not good for her at the present time. At the same time, a portfolio is never stagnant; while you should be comfortable with what the advisor recommends, know that it should change over time.”
6. Can I see a sample portfolio of one of you clients who is in a similar situation to mine? “You need to see how the advisor set up a portfolio and how assets are allocated. I disagree with asking for references that you can call because my client’s name are confidential. But a sample portfolio gives you an idea of what yours would look like and may help you come up with questions,” Abrams explains.
After all your questions are answer, you will be better prepared to make a choice in the end, says Abrams, you should go with your instincts. “They should feel very comfortable with the advisor because they’re going to share information they’ve probably never told anyone else. The advisor should listen to what they have to say,” she concludes.
FINANCIAL SNAPSHOT: KRIS, AN INDEPENDENT CONTRACTOR
MONTHLY HOUSEHOLD BUDGET SEPTEMBER 1993 (REVISED) APRIL 1994
Income $1,629 $1,629
First Mortgage 674 674
Second Mortgage 178 178
Household Expenses 125 125
Car Payment 260 168
Telephone / Utilities 179 179
Cable 30 30
Life Insurance / Retirement 100 100
Medical insurance 0 0
Car Insurance 50 50
Property Taxes 50 50
Credit card Bill 0 0
Savings 0 0
Total 1,646 1,630
Extra Income (17) (1)
New Category Kris Should include in her budget