How to Budget (And Save More Money) This Year

budget-201-k-2012-flickrGet your business—and yourself—into financial shape this year.

As a nail professional, you’re good at fixing a bumpy nail plate, cracked enhancement or a damaged polish job, but do you excel at balancing your expenses? With the economy in a seemingly endless state of turmoil, it can be easy for some businesses to get sucked in as bills pile up, rent and utility costs surge, and income slumps.

“The biggest reason for debt accumulation is biting off more than we can chew,” explains Ori Pagovich, managing partner at Gotham Financial Services in New York. “We tend to justify our decisions through rationalizations that get us in trouble or at least in debt. We make purchases (whether it be equipment or products) that we can hold off on. We try growing the business too quickly and think that we need to keep up with our competition.”

The main reason businesswomen get into money trouble is because they simply aren’t producing enough. “People have an income revenue problem first and foremost; don’t be misled that debt is a problem,” says Grant Cardone, star of National Geographic Channel’s The Turnaround King and CEO of Cardone Enterprises in Los Angeles. “With enough revenue, debt is never a problem and can even be a very smart thing.”


Budgeting: Do the Math

If you’re not a numbers person or if your spending habits are a little unpredictable, creating a budget might seem overwhelming. But the key to beginning any budgeting process is to set goals—and if you’re in a relationship or have a family, do so with your spouse and family members. “Businesspeople will need to have a business budget and a personal budget,” says Kevin Gallegos, vice president of Freedom Debt Relief in San Mateo, California. “For many salon owners, the two will intertwine.”

A simple way to create your budget is to list all of your expenses and divide them into two categories: fixed expenses (such as rent or mortgage) and variable expenses (such as supplies and some utilities). It’s challenging to lower your fixed expenses, but it’s possible. “In today’s environment, everyone is courting your business and is willing to price themselves to be more competitive,” says Pagovich. “Whether it is your suppliers, phone company or someone else, you can always shop around to lower your overhead.” Variable expenses are much easier to reduce since they’re important but not always essential. “Here is where we can be creative and cut back a little to save a lot,” shares Pagovich.

After you list all of your expenses into specific categories, assign a reasonable amount to spend on each item. “Your first draft should throw caution to the wind so you can see what you think your expenses are in an ideal world,” explains Pagovich. “Then you compare those expenses to your total earning. If there is an imbalance, let the cutting begin. You might go through several budget drafts before you settle on a comfortable set of numbers. Remember, never create a budget where your expenses are greater than your income on the belief that you expect to have a good year and that things will balance out. That approach will get you in trouble.”


Budgeting: Pay Down Debt

No matter how far you’re in over your head, ensure that your budget includes a systematic method for paying off debt.

Decide which approach to use. Opt to follow either the avalanche or snowball method (see “Avalanche Vs. Snowball” for details), and modify your budget accordingly. It may require some strict discipline, belt-tightening and revision of goals, but it’s essential for slashing balances from credit cards, loans and other debts.

Determine how much to pay. Find a fixed monthly amount you can pay toward your debt until all debts have been paid off. “This amount should be more than the combined minimum payments on all of your cards,” says Gallegos.

Call creditors and ask for temporary hardship status. “Some creditors may work out payment plans if you have had a true temporary hardship,” Gallegos explains. “For instance, if you had a medical emergency and could not work for a period, but now are back to normal, and you’ve previously paid your bills, they might give you a break.” Negotiation is key.


Avalanche Vs. Snowball

Use either the avalanche or snowball method to help you pay off debt. Gallegos explains how.

With the “avalanche” strategy, you’ll make minimum payments on your debts, and pay the minimum plus any extra you can afford on your debt with the highest interest rate. Repeat this process every month until that debt has been paid off. Then, while you’re still paying the same monthly total, move on to paying off the debt with the second-highest interest rate debt. Keep following this strategy until you’ve paid all of your debts off.

The “snowball” approach involves paying off your smallest debt amount first and working up. Pay the minimum on all your debts. Then apply any remaining funds from your overall allocated amount toward paying off the debt with the smallest balance. After you pay off that debt, continue paying the same monthly amount you started with, following the same strategy as before: Pay the minimum on all your debts, but pay your remaining money to knock out your second-smallest debt faster. Working on debt elimination this way gives you the most immediate satisfaction.

“The snowball method can be more costly than the avalanche method because you might pay more interest over the long run,” says Gallegos. “But many people find that the success of paying down small debts helps motivate them to stick to the plan of paying down all debts. If you are not extremely disciplined, consider the snowball over the avalanche method, as it will likely increase your chances of success.

However, he recommends those with more personal discipline opt for the avalanche technique. “If you enjoy knowing you are beating the banks out of some of the interest they charge and know you can stick with the plan, it could be more rewarding to go with the avalanche method,” explains Gallegos.

Consolidate debt on your own or with a service. “If you have many accounts with crippling interest rates, you might get some relief by consolidating your debts,” says Gallegos. “Be forewarned: If you don’t change your lifestyle, you risk going into even greater debt! But if you are convinced you can change your habits, consider combining debts to have one interest rate and one payment to focus your efforts towards.

“Alternatively, a debt consolidation service can turn many bills into one bill payment,” he continues. “But some services have high fees and many rely on loans secured by personal property, like a home or car. If you can’t make the payments, you risk losing those valuable items. Your credit score will also probably be damaged.”

Consider credit advocacy help. “Individuals who have very serious debt and who are struggling to make required minimum payments may consider debt settlement,” says Gallegos. “These businesses work on a consumer’s behalf to lower the principal balances they owe. Customers might be able to pay less than their total balance but it can be a long process that hurts your credit score. It is best suited for people who would otherwise need to consider credit counseling or bankruptcy.”

Seek credit counseling. “Credit counseling agencies set consumers up with a debt management plan that reduces the monthly payment,” Gallegos says. “They can do this because they have pre-arranged agreements with credit card companies to lower interest rates on existing debt to a creditor-issued ‘concession rate.’ People will still pay the full amount of debt, and their credit score will be hurt.”


How to Stick to Your Budget

For many, setting up the budget isn’t the difficult part—it’s sticking to it. To make the process go smoothly, implement these simple organization systems.

1. Track spending by keeping receipts and a spending journal or log. “Most people are surprised to find just how much they spend each day on small items,” relates Gallegos. “Writing it down—just as writing down everything you eat when you are watching your weight—opens your eyes to your real spending patterns and helps you avoid getting into debt.”

2. Deposit cash and checks as you receive them. Otherwise, it’s very easy to lose (or spend willy-nilly) loose bills or let a check lie around too long and expire.

3. Open all mail, including every bill, as soon as it arrives. “Many people avoid opening bills to defer ‘bad news,’” says Gallegos. “This only makes the situation worse and can create the potential for delays (and interest/fee charges) in payment.”

4. Pay each bill immediately upon opening or use a bill-paying filing system. “That ‘system’ may be a folder that resides on a certain spot of your desk, a basket on a desk or an online calendar,” says Gallegos. “Choose what works best for you and then use it religiously.”

5. Consider switching to cash for as many purchases as possible. “Studies show that people spend an average of 15% less when using cash versus credit cards,” says Gallegos. “And it helps eliminate the possibility of credit card debt.”


Income Boosters

Profit is the be-all end-all of most successful nail salons. And if debt is eating away at your profits, it’s time to boost what you’re bringing in. “Some of the biggest companies in the world have tremendous amounts of debt,” Cardone says. “The solution is more sales, more cross-selling, more revenue without getting more debt. First priority is on revenue production. People who have money go to nail salons because they are spending money on extras that they don’t need. That’s good news for salon owners—you’re already dealing with people who have disposable incomes—but now they need to capitalize on every opportunity. Remember the ‘second sale’ is always the easiest.” The second sale refers to any additional or add-on service or product that you suggest to your client.

Rather than creating a budget, Cardone says nail professionals must think of step-by-step strategies to generate more income. He lists three methods nail salon owners should focus on in abundance.

  • Pay closer attention to clients.
  • Create an unmatched experience (serve energizing beverages during services, attempt to rebook immediately at the end of the service, offer each client’s family member services free on one hand as a sample, create a club card of buy-10-get-one-free to encourage repeat business, etc.).
  • Encourage follow-up; thank each client for coming in with a personal, handwritten letter and phone call.

“One needs to increase revenue,” says Cardone. “Any business that makes decisions based on the bottom line and ignores the top line will cease to have a bottom line.”


Make a Change

When digging your business (and yourself) out of debt, don’t dwell on the negatives. “Get attention off of contraction; get attention off of past failures,” recommends Cardone. “Shift all attention to future solutions, which is the creation of future revenue.”

Strive to do better. Start thinking like a savvy entrepreneur and enrich yourself with educational material that betters your business. “The average CEO/owner of a company reads 55 books per year,” says Cardone. “The average worker doesn’t finish one book. The difference in the income between the two is 10 times. You can draw your own conclusions on the importance of reading.” (See “Read More” on page 104 for suggestions.)

A broken budget may make you feel like you’re Alice at the bottom of a very deep rabbit hole. But don’t fret; you always have hope for climbing your way back up to ground level. “People get into debt all the time, unfortunately… and many of them get themselves out,” explains Gallegos. “It takes time, patience and persistence, but with hard work and by building new habits, you can change your life and attain financial freedom.”


– Ilona French


Images: 401(K) 2012 via Flickr, 401(K) 2012 via Flickr

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