Financial planning isn’t just for business owners: it starts with your very first paycheck. These financial milestones typically occur in the first year on the job: Taxes, Budgeting, Raises, and Commission. In this guide, we talk about the plans and steps you can take to ensure that no matter how much money you make, you will have financial success.
Budgeting Strategies for Your First Job
Before you flourish and become time-crunched, it’s a good idea to have a money management plan in place. You can make a lot of money in the beauty business but if you don’t manage it wisely, you may not keep most of what you make. To prevent this from happening, take control of your finances so they don’t take control of you.
Create a Personal Budget
Budgeting may seem difficult as a new professional. You might find yourself earning entry level wages or perhaps you’re in the process of paying off your student loans and the majority of your paycheck goes towards your loan payments. A quick search on Google or Pinterest will bring up a ton of budgeting strategies you can use to get closer to your financial goals.
Seeing how much money you spend on necessary expenses (rent, car insurance, groceries, etc.) vs. those “extra” expenses (a new palette, happy hour drinks, etc.) can be shocking. (Consider yourself warned.) Outlining your actual spending habits will help you design a first job budget that fits your needs. Sticking to a budgeting strategy is one sure way to help identify the areas where you can save vs. spend. For example, if you find yourself buying that morning cup of coffee at your favorite coffee shop, you could be spending $5 each day on just coffee. This habit will set you back about $1,825 per year. Instead of treating yourself to a caramel latte every day, make your coffee at home or only treat yourself once a week. This will cut your expenses significantly and will let you put some of this “splurge” money into your savings account.
Open A Checking and Savings Account
If you don’t have a savings account at a bank already, you need to open one ASAP. This is step one in a smart, first job budget. Not only will having a savings account allow you to put your money into a safe place but having a written record of savings will make future “big” purchases easier. While you’re at it, if you don’t have one you will need to open a checking account. Most likely, your new place of employment will have direct deposit and you will need a checking account so they can deposit the money you earned. Whether you have direct deposit or not, it’s a good idea to have both savings and checking accounts. Deposit your tips in your savings account and your paycheck into your checking. The money in your checking account is allocated for necessities like rent, food and healthcare. Your savings account should be reserved for big purchases and unexpected expenses.
Don’t Spend Your Tips, Save Them
Typically, most salon, spa, and shop professionals do not work in a business that offers retirement plans like a 401(K). One smart choice is to save all of your tip income to build up a retirement fund. You can also use your tips to build up your savings. Start today by putting it in your savings account and watch it grow! Be sure to deduct a minimum of 25% of tip earnings for tax reporting purposes and make plans for the other 75%. Every 6 months you can take 25-50% of it to bring down debts or add to your rainy-day fund. Once out of debt, you can continue to keep saving the rest. You can even transfer a good amount each year into an interest-bearing account like an IRA. Once you start this practice you won’t miss the money. You will become used to living off the rest of your earning.
This is a classic money saving strategy. By simply bringing your lunch to work you can cut your cost by $2,500 a year. Don’t believe you’ll save that much? Track how much you spend on food and drink in one week. If you find yourself grabbing that quick lunch, you’re probably spending an average of $10.00 per day.
When you get your first paycheck, it can be very tempting to splurge on something you’ve had your eye on for a while. As much as you might deserve this treat, try to keep your sights set on the future and create your first job budget before you buy anything. We promise saving a portion of each paycheck will be well worth it when you can cash in your savings for your dream car, perfect condo, or the start-up supplies for your very own business.
Understanding Compensation Plans
As you prepare for any job in the beauty and wellness industry, you might be overwhelmed when it comes to choosing the right type of compensation plan for you. Compensation structures can vary from one salon, spa, or shop to another. Each plan features several pros and cons you will need to weigh to find the right plan.
The three most common compensation plans are Commission, Hourly/Salary, and Hybrid Commission Structure.
Commission is paid on a percent of revenue of the cost of services performed during a pay period. The percentage varies and is between 35-60%. There are two types of commission structures; (1) flat rate of agreed upon percentage, again anywhere between 35–60%. (2) is a sliding scale with varying percentages depending on your total service dollars.
The sliding scale looks something like this:
- $0-500.99 = 40%
- $501-999.99 = 45%
- $1000 -1500.99 = 50%
- $1501 - up = 55%
The upside of this structure is the more you produce the more you earn, which leads to higher levels of motivation and unlimited earning potential. For a newbie, the downside is this structure can make it hard to make ends meet because if you don’t produce, you don’t get paid, making it difficult to rely on a consistent weekly paycheck. If you are motivated by money and you have an entrepreneur’s spirit, then this commission structure may just work for you.
This structure is exactly what it says: you will work a certain number of hours and be paid for hours worked, not results produced. The salary is typically minimum wage. The good news is you get paid whether you produce or not, which has it’s advantages for a new professional in the process of building their book. The downside is your earnings are capped whether you have a full book or not. Because you are not paid for productivity, you may not be as motivated to go out and actively promote yourself.
Hybrid Pay Structure
This structure consists of an hourly wage plus commission or bonus pay. The great news is this structure guarantees a minimum salary with potential for additional earnings. This structure tends to have lower hourly and commission rates than straight commission or hourly wages. However, it gives you the peace of mind of knowing what your minimum weekly wage will be with the potential to earn as much as you want.
How Do I Negotiate My Commission Rate?
Now that you have a clear picture of the various commission structures, let’s begin the negotiation conversation. It’s important to keep in mind the salon, spa ,or shop is a “for-profit business,” meaning the owner(s) deserve and want to see a profit from their investment.
The business model, meaning is it privately owned, corporate, or franchise will typically set the tone for the negotiation conversation. Corporate and franchises usually have a pay structure in place that is commensurate with your experience and what you bring to the table. When in the middle of negotiations, it’s important to show what you bring to the table now and what potential contributions you will make in the future. Examples include number of clients you can bring into the salon, spa, or shop, service and retail average tickets, referral rates, rebooking rates, advanced technical education, community (on online and offline) involvement, and teamwork.
The more you can bring to the table the better your chances are of securing a higher commission rate. If you are just starting out, don’t be discouraged. You can suggest milestones during your negotiations, that once achieved, will result in higher commission rates or bonuses throughout the year.
There is no universal pay structure within the beauty and wellness industry and one can easily get caught up on the compensation model or rate. The overall objective is to create a fair compensation plan where everyone's a winner.
The habits and practices you put into place today will have a lasting impact on your financial success. As a beauty and wellness professional you will most likely be earning your money on salary/ commission or commission only. The amount of money you make in this industry depends on you, but, if you don’t manage it wisely, you may not keep most of what you make. Learning how to manage your money early in your career will save you from many sleepless nights.
How to Ask for A Raise
This isn’t something that will happen within the first six months or maybe even a year into a job, but it’s important to consider the opportunity for raises down the line at your new job. A raise in the beauty wellness industry is not always as straightforward as it is in other industries. Your salary structure dictates how you can go about making more money. If you are a salary employee, then you most likely will have yearly reviews and get a cost of living raise. If you are paid on the hybrid model, you may negotiate yearly raises for your salary portion of your compensation and If you are paid commission, then a price increase is how you will get a raise.
Regardless of your compensation structure you will need to have the money conversation with your manager or salon/spa/shop owner(s). It might feel awkward to plan these conversations, but the benefits outweigh the discomfort. Whether you are compensated on a commission structure or you receive an hourly rate, asking for a raise doesn’t have to be a scary conversation.
Before you ask for a raise, know what the expectations are for receiving one; review your employee handbook and talk to your owner or manager about what benchmarks need to be met before a raise/price increase can be considered.
Most businesses have performance metrics. These metrics, also known as benchmarks, are used to measure your performance. They give us something to strive for and create a fair playing field. Numbers don’t lie. Know what you bring to the table by knowing your numbers.
Each salon, spa, and shop will have their own set of metrics to measure performance, here is a list of metrics that will tell you the truth about your business.
- Percentage you’re booked, for an example you may only be your salon metrics might be at 80% booked to raise prices.
- Percentage of of repeat business
- Customer satisfaction
- Percentage of retail sales to service
- Continued education
Using these types of specific performance metrics is a good place to identify if the time is right to ask for a raise. If it is the right time, recap your performance, identify your successes, and provide numbers that back up your performance. Then schedule a time to review with your owner or manager.
How to Make Filing Taxes Less Stressful
Whether you are an W2 employed service provider, 1099 self-employed independent contractor, or a business owner, the one commonality we all have is to file taxes come April 15th. Everyone’s tax filing situation is different; the one thing that remains the same is that we all have to file our taxes, no matter our income bracket.
For many, tax season can be a stressful time of year. Locating and gathering all appropriate documents, filling out forms, and meeting filing deadlines can certainly make anyone cringe.
One way to avoid the frantic tax rush is to be prepared and have all your necessary documents at your fingertips. This ensures an easier filing process. Here are some small ways to make the entire process less stressful.
Figure out how you’re going to prepare your taxes
Are you going to use software and do it yourself? Are you going to use a tax preparer? Or are you going to utilize your personal accountant? If you are an employee and taxes are already withheld, then filing yourself is sufficient. When you get into the itemization of an independent contractor, it gets more complicated, and that’s where the knowledge of a tax account can be very useful. Don’t forget to report your tips! Under reporting earnings to the IRS can result in owing back taxes plus interest. Keep in mind, when your client pays by credit card and leaves a tip, the salon, spa, and shop are required to report it to the IRS, so you should too.
Obtain A Tax-Prep Checklist
Most electronic filing software or tax preparing companies can provide you with a tax prep checklist. This will let you know what documents you need before you begin filing via software or with your tax preparer or accountant. Obtain this list sooner than later so you are not scrambling last minute to gather all the information you need.
Set a Date
Set up a date to do your taxes. If you’re using a tax preparer, set up an appointment to meet. If you decide to do your own taxes, mark a date on the calendar to prevent you from waiting last minute.
Gather All Necessary Documents
Everyone’s tax filing situation differs, but some common documents may include: W-2 forms, 1099 forms, tip income logs, receipts, expenses, bank statements, P&L’s, quarterly filings if you are an independent contractor, a copy of last year’s tax returns, medical expenses, business expenses, child care, and education costs. If you are uncertain to what documents, consult with a tax preparer.
Review any Life Changes Within the Last Year
It’s important to remember as your life changes, so will your tax filing preparation. Things to consider: did you get married, have children, buy/sell a home, start a business? Each of these will change your tax process.
These helpful tax preparation tips will help you get organized, but when in doubt, seek professional tax advice before filing your next tax return.
What To Do With Your Tax Refund
You filed your taxes and you received a refund; yay! Before you spend it though, start think about investing it. Financially successful people invest their money into things that will make them more money. To avoid spending your refund on something frivolous, having a plan (and a goal) will ensure you don't use parts of your return on things you don't need. Here are a few ways you might invest your refund
Invest In yourself
Allocate some of the funds for your continued education, perhaps attending an advanced training or buy tickets for an upcoming trade show.
Invest in your toolkit
Invest in new tools for your professional kit. This is also a good time to replace items you need.
Invest in your future
Let's be real: if you have debt (school loans, car, credit cards) put the majority of your refund towards these items. This will free you up financially and allow you to creatively plan for your future.
Getting into a good habit of pre and post-tax preparation can certainly relieve stress and make certain you are using your refunds wisely. If you want to make the best decision possible, consult with a tax or financial advisor first. After all, they are the experts.
There is a lot to think about as you embark on your first job. Establishing your money smarts now, will serve you well for your entire career. Spend some time and effort applying these easy to do money management tips early in your career and see yourself and your finances thrive.