Building on success; Freddie Lee Sherman and his family have a solid financial foundation, but can they handle entrepreneurship? (Family Finances).

BIG AMBITIONS REQUIRE BIG RESULTS. FREDDIE LEE Sherman and his wage. Yolanda, are ambitious about building a business that will sustain them in the near future and throughout their retirement years. The Corona, California, couple's business and Website, Illustrationsnetwork.com, is expected to launch this spring and will showcase the work of minority artists and photographers to big corporations. Sherman plans to act much like an artist representatives. charging corporations a royalty fee to use the artist's work, collecting a 10%-15% referral fee, then paying the artist 25%-50% of the royalty fee, and keeping the rest. Even though the Shermans have had offers from outside investors. Freddie Lee and Yolanda plan to run the business themselves.

The 33-year-old creative director with Niles, Illinois-based Halo Industries, a promotions agency, also does freelance design work, pulling in a combined $150,000 a year. Yolanda decided to quit her job as a substitute teacher to become a full-time homemaker when she had their second child, Alex, two years ago. The 32-year-old photographer does, however, take on freelance assignments shooting weddings or studio work to help out with the family finances. She says she can make about $2,000 to $3,000 a month.

The couple's biggest expense is the $170,000 mortgage on a home purchased in 1999. They have $2,500 in credit card debt and a combined $5,000 left to pay on student loans from their days at California State University Fullerton in Fullerton, California. The High school sweethearts, married nine years, have a little more than $24,000 in investments, including a money market account worth $5,000, two Roth IRAs valued at $2,800 each, $5,000 from one-year's eligibility in Freddie's 401(k) plan with Halo (which has a 50% company match), and $9,000 in a traditional IRA, which lost $9,000 during last year's market downturn.

They also want to create a $10,000 emergency fund. They recently opened up a custodial account for their 13-year-old daughter, Adriel. Adriel puts in $20 from allowance and cash gifts each month, a total of $350 thus far. In addition to saving for their children's college education, the Shermans want to maximize their retirement funds. "We don't know where to start," says Yolanda. "I have been looking, but it is all so overwhelming."

THE ADVICE

The Shermans are putting more sweat equity than financial equity into their business. Freddie earns enough to support the family--about $120,000 after taxes. But because he is an independent consultant, he should direct more of his self-employed income into tax-deferred vehicles, advises Percy E. Bolton, a certified financial planner and president of Percy B. Bolton Associates Inc., in Los Angeles. "He will reduce his tax liability and increase his net worth by contributing mo(c; to his 401 (k) plan [15% vs. 3%]," says Bolton. He'll also benefit more from his employer's generous 50% match. BE had the Shermans consult with Bolton. His other recommendations are as follows.

* REALLOCATE ASSET MIX IN 401(K)

Freddie's asset mix is 50% in the Montag & Caldwell Growth Fund (MCGFX), 25% in the Vanguard 500 Index Fund (VFINX), 15% in the Euro Pacific Growth Fund (AEPGX), and 10% in the Montag & Caldwell Balanced Fund (MOBAX). He should reallocate his contributions, putting 48% in Vanguard, 40% in the Chicago Capital Bond Fund (CHTBX), which is a choice within his 401(k) plan, and the remaining 12% in Euro Pacific. The reason: He is duplicating efforts in the growth, balanced, and index funds, which are investing in the same types of companies, About 96% of the portfolio is invested in equities and 4% in bonds. Instead, the asset mix should be a 60%-40% split between equities and fixed income, including both international and domestic holdings.

* OPEN A SEP-IRA

Discontinue contributions to the Roth IRAs because the 401(k) is more tax efficient. You make deposits to the Roth with aftertax dollars, whereas you make contributions to the 401(k) with pretax dollars. Bolton says opening a Simplified Employee Pension Plan-Individual Retirement Account (SEP-IRA) would allow Freddie to contribute up to 15% of net income (from his employment as a consultant) pretax. Invest SEP-IRA contributions in a balanced mutual fund. With the SEP-IRA established, his combined SEP-IRA and 401(k) contributions can total up to $40,000 annually, Bolton says.

* ADD TO CASH RESERVE

Contribute the $2,000 cash prize from BE to the cash reserve. At $300 a month, the amount they are saving, it will take them 12 more months to reach their desired $10,000 threshold. The sooner they get there, the sooner they can reallocate the $300 contributions to fund their children's college education.

* FUND 529 COLLEGE SAVINGS PLANS

Start, contributing to a 529 College Savings Plan for both children. In California, it's called the Golden State ScholarShare College Savings Trust and is managed by TIAA-CREF. The benefit is that the money grows tax-free, you can fund up to $150,000 total, and the money remains with the parent if the child opts not to go to college.

* INCREASE INSURANCE COVERAGE

It is critical for Freddie to have disability insurance since he's the sole breadwinner. It is not likely that Yolanda would be able to earn $120,000 as a teacher and photographer should something happen to him. Currently, the couple has $250,000 in term life insurance on him and $100,000 on her. Bolton says increase those amounts to $500,000 and $250,000, respectively. Also, draft a will with a durable power of attorney, which allows them to make financial and healthcare decisions, for both. Creating a trust is the most optimal way to provide a guardian for the Shermans' children while also protecting their assets.

* CREATE A BUSINESS PLAN

Although the Shermans plan on using sweat equity, there will come a time when they may need outside financing for their business. Bolton says, Freddie should create a good relationship with a personal banker, contact the Small Business Administration to learn the process to apply for loans, and contact the Service Core of Retired Executives (SCORE) to get advice about starting his venture. "The time to do all these things is before you need them," he says.

Financial Snapshot:
Freddie Lee Sherman
Yoland Sherman

HOUSEHOLD INCOME

Full-time consultant   $  75,000
Freelance design          75,000
Total                  $ 150,000

ASSETS

IRA                    $   9,000
Roth IRAs                  5,600
401(k)                     5,000
Money Market               5,000
Custodial Account            350
Market Value of Home     220,000
Total                  $ 244,950

LIABILITIES

Mortgage Balance       $ 155,500
Student Loans              5,000
Credit Card Debt           2,500
Total                  $ 163,000

NET WORTH              $  81,950