Don’t Quit Your Day Job (Yet)

Lachelle Story wants to be her own boss. She’s even given herself a deadline, early 2014, by which she plans to leave her post as a family care coordinator in an urban public school system where she provides counseling to students and parents to operate her home-based venture full time.

“I’ve always been entrepreneurial,” says Story, 33, who first forayed into entrepreneurship with an online boutique in 2005.

She believes running her own business is in her blood. Her retired father runs an executive coaching business and her mother formerly operated an executive search firm. “I want to enjoy the fruits of my own labor,” says the Alexandria, Virginia, resident.

Three years ago, Story started a public relations, marketing, and management company, Twenty28, that primarily serves musicians, authors, entrepreneurs, and area restaurants. She devotes roughly 20 hours a week to her clients, earning $3,600 annually. Her business partner and longtime boyfriend, Manuel Metcalf, invests five to 10 hours a week.

Now her challenge is developing her side business into a company that will provide her with income and financial stability. But she doesn’t have much of a safety net. She has a paltry $350 in savings, $650 in checking, and a little more than $4,000 in retirement funds. Her biggest debt is the $12,000 she owes in student loans; she also owes $3,500 in credit card debt. Story earns an annual salary of $54,068, taking home nearly $3,000 a month. After she pays her $1,600 monthly rent and living expenses, which include utilities, cellphone, and auto and renter’s insurance, she has a surplus of from $500 to $600 a month that she admits is used for leisure activities. “D.C. is all about happy hour and eating out,” she says.

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When Story graduated from college she had 10 credit cards, mostly high-interest department store plastic. As a result of frivolous spending, she amassed $12,000 in credit card debt and went through two rounds of debt counseling. Though Story learned a hard lesson, she hasn’t completely slain that dragon. “If I have a bad week at work I might go and buy a dress and shoes, but I’ll spend $100, not $500, and not every week. The last few months I’ve begun to pay attention to what triggers my spending,” she says. “I just started carrying my checkbook register and writing down everything I spend. Now I’m thinking more about what I buy because I see my balance every day.”

She says she’s ready to do what it takes to establish her business, including moving to a place that charges lower rent. “I want to do my own thing, but I also want to live the life I’ve become accustomed to. I want to enjoy myself, too.”

The Advice
Black Enterprise asked Vicki Brackens, ChFC, with Brackens Financial Solutions Network, an office of MetLife in Syracuse, New York, to provide some guidance to Story to help her strengthen her financial position and develop her business.

Get your financial house in order. Before even thinking about becoming a full-time entrepreneur, Story needs to improve her financial position. She should continue to run her business part time until she eliminates debt, develops a sound budget, accumulates emergency savings, and fully develops a retirement fund. Taking adequate time to develop and capitalize her business offers her the best shot at establishing a company for the long haul, Black Enterprise advises.

One of her first tasks, says Brackens, is to get rid of her $3,500 in credit card debt, especially since her two Visas have high interest rates, 23.24% and 15%. Brackens recommends that Story ask her creditors to lower the interest rate; lower rates would accelerate her debt payoff. “If she would take $450 of the [nearly $600] she spends on stuff she doesn’t really need and apply it to one bill as soon as possible, and freeze the credit card, she would be able to pay off both cards in eight to 10 months.”

Better still, she can take $1,000 of her contest winnings and pay off the card with a $1,000 balance. She should continue to work on increasing her 650 credit score.

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As for her student loans, she should investigate federal loan repayment programs. “Because she works with families and special education students in a school district, she might be eligible. If so, she could have her loans paid off in full in five years,” says Brackens. Furthermore, Story should visit the National Student Loan Data System website (www.nslds.ed.gov) and access her federal student loan (not private loans) records to confirm that she owes only $12,000. If she doesn’t qualify for any repayment programs, she will need to adjust her budget to begin paying from $100 to $125 when repayment starts in the fall.

Soup up savings. Story’s savings are anemic. “She is severely undercapitalized in terms of liquidity,” says Brackens. Story has begun tracking her spending, but Brackens advises that she use Quicken or Mint.com to systematically track business and personal expenses and see where she can make cuts. She should keep her personal and business finances completely separate.

Given the economy, Story should begin accumulating at least 12 months of expenses, Brackens says. But given her current financial situation she should not rush to leave her full-time employer until the business has a solid client base. In the meantime, the business can supplement her current income and provide another income stream.  She should put $1,000 of her contest winnings toward her emergency fund. Also, once she has paid down one credit card, she can plow the money she was devoting to paying off the card to her emergency savings. She should continue contributing 5% of her salary into her 401(a) retirement plan. Her money will be vested when she leaves the company.

Ensure adequate protection. One thing entrepreneurs often overlook is the cost of insurance when they themselves must foot the tab. Story should research health insurance options now. “She needs to know the true cost so she can build that into her cash flow,” says Brackens. She should review her auto and renter’s insurance to see if she has adequate protection for when she runs her business full time. “If she uses her home and car for business, for example driving clients, there are issues of personal injury and liability. She should talk to her insurance agent to see what new limits will cost.”

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Story only has employer-sponsored life insurance, and she has no disability or dental. The school district does offer disability, which she should sign up for during the open enrollment period, if she is still eligible. When she is on her own, she will need both disability and life insurance coverage.

Story and her partner, Metcalf, own the business under a limited liability company (L.L.C.); however, there is no operation agreement. “There is nothing that addresses asset division. If the business becomes successful, what happens in the case of separation or disability? She should go back to the attorney who handled the L.L.C. and get an operation agreement in place. For example, the client base is the biggest asset–who owns it?” Brackens points out. She doesn’t recommend a buy-sell agreement at this time, since there isn’t yet a lot of money in the business.

Fail to prepare, prepare to fail. The idea of being your own boss and creating a successful business overnight is often romanticized by aspiring entrepreneurs. Owning a business involves continual planning and sound financial decision-making. Story must be realistic about the time and resources she will need to establish a sustainable business. BE recommends that she read Become Your Own Boss in 12 Months (Adams Media; $15.95) by Melinda Emerson. Although Story has already determined the legal structure of her business, it’s important that she create a business plan that clearly outlines company goals, a marketing plan, operational goals, and a financial plan. She must know how much capital the business will need and how she plans to generate ongoing business. BE recommends that, in addition to accumulating personal emergency savings, she set aside at least six months of expenses in a business emergency fund–it will eliminate the need for her to borrow from her personal savings, and will sustain her through the ebbs and flows of business. She can spread this money across high-yield savings accounts such as ING or Ally and money market accounts.