Are you budgeting your income wisely? Do you and your family have adequate health insurance? Are you able to save money? Will you be financially secure when retirement rolls around? Long-term financial success in any career comes not only from earning power, but also from good planning.  For nail technicians this means always setting aside enough money to pay for taxes, having the right kind of insurance and savings programs to cover unforeseeable disasters, and putting a small portion of every year’s earnings aside to finance their retirement. Also, because so few salons can afford to offer the benefits packages to their employees that large corporations can, nail technicians are usually responsible for providing their own benefits.

So the burden on nail technicians, who earn an average of $344.64 a week, is great. To show you how you can take charge of your financial future, NAILS asked Los Angeles-based financial planner Nancy Abrams to evaluate the financial situations of three typical nail care professionals and to provide a program to put each individual on the road to financial success.

NAILS’ asked a nail salon owner, an independent contractor, and a nail technician employee to work with NAILS financial planner and to commit to following Abrams’ program for a full year. Each individual provided Abrams with a list of short-and long-term goals, her income, all business and personal expenses, and her assets and liabilities. Abrams, a registered investment adviser and certified financial planner, reviewed each person’s financial situation with the goal of improving it and helping her reach her goals.

Over the course of the next year, we will follow each person’s progress as she learns to live within a budget and works to achieve her goals. In this installment, Abrams introduces each individual, provides a snapshot of her current financial situation, and outlines the necessary steps for reducing debts, increasing savings, and assuring a comfortable retirement.

While Abrams’ advice is personalized to fit each individual’s situation, all nail technicians and salon owners will benefit from the real-life examples and Abrams’ practical advice.

Only first names will be used in this series to protect the privacy of the individuals and their families.

Salon Owner Wants to Rebuild Credit

1992 was a difficult year for Kathy” a 36-year-old salon owner in Amarillo, Texas. Her salon was new, her husband was ill and unemployed, and she was still trying to recover from bankruptcy. 1993 promises to be a better year for Kathy and her family. Besides the income she earns from servicing clients, she rents space in her salon to four other technicians. After paying her business expenses, Kathy earns $933 per month. Their combined before-tax income is approximately $2,233.

Currently, nearly 26% of the family’s income goes toward car and furniture loans, and an additional 13% goes to pay medical bills. Although they have little money left over each month after they pay bills, the family looks forward to mid-1994, when the car and furniture loans will be paid off.

Kathy’s immediate goals are to obtain health insurance for her entire family and start a retirement savings program. She also wants to reestablish her credit and save to buy a home.

Kathy now ends up with approximately $585 per month left over after she pays her bills. Obtaining medical insurance to protect herself and her family should be her first priority. With two of her four children still living at home, an illness or hospitalization could be disastrous for the family.

Abrams recommends a health maintenance organization (HMO) for a family like Kathy’s. HMOs generally have the lowest premiums and require no deductible. Medical insurance for herself and her family will cost around $300 per month. However, because her husband has emphysema, he may be excluded from coverage for the first year. Kathy should check rates for health care coverage through industry organizations first, since they may offer lower rates than she could get by purchasing an individual policy.

Federal taxes take another large bite from the family’s monthly income. Because Kathy and her husband are self-employed, they are required to with hold their own federal taxes and make quarterly payments to the IRS (Texas has no state income tax). Kathy should consult a professional tax prepare to determine how much money she should save each month to pay her estimated quarterly taxes. Abrams recommends Kathy set aside $200 per month so that she has enough to pay her quarterly bill.

After obtaining medical insurance and saving for taxes, building an emergency fund that would pay her family’s expenses should she or her husband be unable to work ought to be Kathy’s next objective. All families should have the equivalent of three months income saved, but for the self-employed this is especially important. Should the salon hit a lull or Kathy’s husband become unemployed again, the family will need the savings to draw on.

Kathy’s monthly expenses total $1,648. If, after their car and furniture loans are paid off, they put the $598 that now pays those loans into a savings account, it will take only eight months to build an adequate nest egg.

Although her bankruptcy will remain on her credit history for 10 years, there are steps Kathy can take to reestablish herself as a responsible, pay-on-time debtor. First, she should open a savings account at a bank near her salon. When she first visits the bank, she should introduce herself to the bank manager, tell him she has an established business in the area, and even invite him to visit the salon. “I have learned from experienced with other self-employed clients that a long-term relationship with one bank often leads to special favors or considerations,” says Abrams. Kathy may need a business loan someday to expand her nail salon, and a friendly bank manager often will extend himself for a known customer.

To save for retirement and a down payment on a house, Kathy should establish a third savings plan (the first is for taxes; the second is an emergency fund).  Her savings goal for this account should be 10%-15% of her gross monthly income (about $225 now). When she turns 40 she needs to increase the savings to about 15%-20% of her gross income, and as she enters her 50s she should be putting aside 20%-25% of her gross income.

While it seems ambitious to ask Kathy to save 10%-15% of her gross monthly earnings at a time when money is already tight, she needs to get in the habit of saving money, even if it’s only $5-$10 per week. As her income increases and her debts decrease, Kathy can increase the amount she saves until she reaches the goal of 10%-15% a month.

Kathy should keep her nest egg and federal tax savings accounts in a passbook savings account or money market account (which will earn a higher rate of interest than a passbook savings account ), where the funds are easily accessible. Because passbook savings accounts don’t pay very much interest, she should invest the money ear-marked for her retirement and eventual home down payment, rather than just save it. She needs to consider that the higher return on an invested dollar usually makes it worth the risk over the long term.

There are many investment options, but Abrams recommends mutual funds for the person who doesn’t have sufficient knowledge of or the inclination to follow the stock market. A few growth mutual funds, such as 20th Investors, allow investors to invest small amounts. Don’t underestimate the growth potential of small amounts of money: 20th Century’s Ultra Funds has earned an average of 29% over three years, 23% over five years, and 15% over 10 years (which means that if Kathy had invested $50 a month 10 years ago, she would have $13,983 now). Mutual funds can be volatile over the short-term, so Kathy should stick to less risky ventures if she will need the money in less than three years.

Over the next three months, Abrams expects Kathy to open a savings account at a local bank for her emergency fund and federal taxes. Kathy should also get quotes for health insurance, research which policy best suits her family’s needs, and apply for coverage.

Financial Snapshot: Kathy, a Salon Owner

Goals:                                                                                 

• Plan for retirement

• Secure personal insurance

• Establish good Credit

• Own her own home

Expenses  

Personal Assets and Liabilities

Assets Household Furniture $ 2,000 1985 Ford Pickup 7,000 1985 Pontiac Grand Am 2,500 Construction Tools 1,000 Salon Equipment and Furniture 2,000

Liabilities

Revised Household Budget

Revised Household Budget

 [PAGEBREAK]

Nail Technician Wants Increased Income

Catherine is a 27-year-old nail technician employed at Chicago salon. She recently moved to Chicago and hopes to increase her income and quickly build up her savings. Currently, her take-home pay ranges from $1,400-$1,500 per month. Her assets include $660 in savings, a car worth $8,590, and personal possessions worth $1,000. Fortunately for Catherine, she has no debts except for the $4,332 she owes on her leased 1981 Corvette. However, if she wants to purchase the car at the end of the lease, she needs to save $3,500 over the next 10 months to pay for the lease buyout.

The only insurance Catherine has is on her car. Abrams warns that going without medical or disability insurance is too great a risk. Should she become seriously ill or disabled, she will not have an income and will quickly go into deep debt.

Even though she is in good health, Catherine needs the protection of health insurance-any-one could get appendicitis or fall and break a leg. Because she is an employee, Catherine can approach her salon owner about offering group insurance as an employee benefit. Alternatively, industry associations often offer members special rates on health insurance. For Catherine, just as for Kathy Abrams recommends an HMO. Health insurance probably will cost Catherine $100-$150 per month. Although her premiums with a percentage-based insurance initially may be lower, Abrams says Catherine’s premiums won’t increase as quickly with an HMO.

Catherine also should determine if she would be covered by worker’s compensation insurance should she be injured while working. Some states also have disability insurance that is paid for by employers. She needs to find out if she is covered and what the benefits would be should she become disabled.

Disability insurance is important for Catherine because she is self-supporting. If she decides to obtain her own policy, she can lower her costs by increasing the elimination period (the time she is responsible for her expenses before the insurance starts paying). Catherine should talk to an industry association to see if they sell a group disability policy, which will be less expensive than individual coverage.

Presently, Catherine has $278 left over after she pays her expenses each month. However, she needs that excess income to save for the balloon payment that will be due on her automobile in 10 months. To ensure she has enough money when the loan comes due, she needs to save $350 per month, starting immediately. She needs to save an additional $55 per month to cover her semiannual car insurance payment. Abrams frequently recommends that individuals use a segregated savings account when saving for a particular purpose. She believes this will help prevent them from using the money for other expenses.

Putting aside the car savings each month and buying insurance will be costly. So to help Catherine attain her goal of increasing her monthly income another $1,000 per month, Abrams offers several options. Even though Catherine is an employee, she is paid on commission for her work. She can ask her salon owner to increase the commission percentage, but she may be willing to negotiate an incentive program whereby Catherine’s percentage increase as her clientele grows.

Regardless of the assistance available from her boss, Catherine needs to continue her aggressive approach to building her clientele. She already works evening hours and fills in around the salon. She might also consider supplementing her income by working as a manufacturer’s educator.

Once Catherine has planned how she’ll increase her income, she needs to begin building an emergency fund that equals at least three months expenses. With $660 presently saved, she still needs to set aside an additional $3,000 as a cushion against the unforeseen, such as losing her job or having to stop working. If she can save $300 per month once her income grows, she will have $3,660 in savings in just 10 months.

Because it will take her a while to increase her income and because she has to save for her balloon payment on her car in the meantime, it may be at least a year before Catherine can start saving for her emergency fund. The most important thing for Catherine- or for anyone trying to improve her financial situation- is not be discouraged by slow progress. If she can only put $50 a month toward her emergency fund until her car is paid off, that is better than nothing, If even then $3000 seems too much to save for emergencies each month, she should cut back to what does seem possible, say $150.

Once Catherine has an adequate emergency fund, she can begin saving for future investments. In June 1994, when her car is paid off, Catherine also will be able to use $361 from her current monthly car payment and the forced savings of $350 for the balloon payment to begin building her investment portfolio-both for retirement and for a down payment on a home.

Over the next three months, Abrams expects Catherine to open a savings account for her car insurance and the balloon payment on her car and apply for health insurance.

Financial Snapshot: Catherine, a Nail Technicain Employee

Goals:

• Pay Off Leased Auto

• Increase Monthly Income by $1,000

• Increasing Savings $3,500 or more

• Invest

Personal Assets and Liabilities

Liabilities/ Total

Present Household Budget

Household Budget With Increased Income of $1,000

[PAGEBREAK]Independent Contractor Wants to Reduce Expenses

Kris, a 34-year-old independent contractor from Georgia, is in the enviable position of owning her own home. Recently divorced after 11 years of marriage, Kris realizes that she needs to reduce her expenses or increase her income if she wants to retain her present lifestyle. In addition to working as a nail technician, she is a manufacturer’s educator. Her total before taxes income in 1992 was $14,220, while her expenses are $16,000 to $18,000 per year.

When she was married, Kris husband paid her federal and state taxes, but now Kris needs to pay her taxes. Her next goal is to secure medical insurance, for which she hopes to pay no more than $100 per month. Now that Kris is self-supporting, Abrams also encourages her to secure a disability policy that will protect her earnings should she be injured while working.

Fortunately, Kris may be able to reduce her expenses by as much as $360 per month by refinancing her home. She has two mortgages on her home: a first mortgage of $62,000 at an interest rate of 10%, and a second mortgage of $9,000 at 10.5%. Her total monthly payment on both mortgages is $852.

Mortgage rates have dropped to between 7 ½% and 7 5/8% for a 30- year fixed mortgage. If Kris can refinance, combining her mortgages into one, her monthly payment could drop to as low as $492, depending on the interest rate. This would save her $360 per month.

Kris can investigate refinancing by calling various banks in her area to find out who has the lowest mortgage rates. She should also consider talking to a mortgage brokers receive their fees from the lender, not the borrower. If she decides to use a mortgage broker, she should get references from customers.

Kris car loan will be paid off in January 1994, but because her job as an educator requires that she drive great distances and her car already has more than 175,000 miles on it, she is considering purchasing another car in January. Abrams anticipates that Kris can trade in her car the down payment on a new one and her payments should remain about the same.

Kris is concerned about meeting her tax liability each year. Because she is an independent contractor, she is obligated to pay estimated federal and state taxes quarterly. Abrams recommends an immediate appointment with a professional tax preparer, who can tell her how much she needs to pay and when payments is due. In the meantime, Kris should save at least $150 each month so that she will not be short when it’s time to pay taxes.

Kris has already looked ahead to her retirement and invested in a life insurance/retirement policy. Recently, however, she questioned its value and asked her father to check into it for her. If the policy is an annuity, which is an investment that would pay out a monthly sum for a set period, it may be worth-wile for her to keep it. If her father finds that it is life insurance. Abrams recommends Kris drop the policy and invest the money in a mutual fund Kris is unmarried and has no children, so life insurance is of no value to her. Even if he finds that the policy is an annuity Abrams recommends Kris reduce her payments on the policy to $50 in a regular savings account.

Kris long-term goal is to double her present gross income of $25,000. Because she earns close to three times as much working as a nail technician as she does being a manufacturer’s educator, she should evaluate the financial value of her position as an educator, taking into consideration the wear-and-tear on her car as well.

If the position takes away time she could be using to build her clientele and maximize her earning potential in the salon, she might earn more in the long run focusing solely on her clients.

When we check back with Kris, Abrams expects her to have made a decision about the life insurance/retirement policy, determined whether she can refinance her home mortgages, and researched health insurance. Even with her revised budget, Kris will not be able to purchase health insurance, build an emergency fund, or set aside enough money for taxes. Therefore, Abrams recommends Kris also focus on increasing her income over the coming months.

Financial Snapshot: Kris, an Independent Contractor

Goals:

• Secure Medical Insurance for $100 per month

• Set-up Tax Account to Pay Income Taxes

• Start a Retirement Fund

 Business Budget

Totals

Presented Household Budget

Personal Assets and Liabilities

Household Budget With Refinance

None of these women are wealthy, yet it is possible for each one to start working toward greater financial stability now. We will watch these individuals over the course of the year as they evaluate and exercise their financial options and work toward attaining their goals. The plans that Abrams has constructed require patience, commitment, and a desire to improve their financial fitness.