Seattle Times financial makeover: A Seattle businesswoman who adopted a daughter last year gets help securing her financial future.

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After nearly 20 years of living hand-to-mouth while making guests comfortable at her downtown Seattle bed-and-breakfast, Lindsey Nichols has finally reached a point where she can breathe easier.

Business at Pensione Nichols has blossomed lately, the result of Nichols applying some of the expertise she acquired during a stint in the corporate-hotel world while her mother ran the small inn they opened together in 1989 on First Avenue near Pike Place Market. With the boost in business, Nichols’ income has doubled in the past year.

In 2007, Nichols adopted her daughter, Avery, now 3. They’ve settled into a Seattle neighborhood just down the street from the elementary school her daughter will attend.

“I just love being a mom. I love running my business. I love living here,” Nichols says. “I just feel like I’m the luckiest person on the planet.”

But single-motherhood at 48 and all the responsibilities that entails has Nichols wondering how to adjust her finances to better suit her circumstances.

Though her business brings in about $140,000 per year, Nichols owes roughly $630,000 on two interest-only mortgages and a business loan she used to buy out her mother’s share of the pensione a few years ago. The mortgages cover her house and a former home nearby that she now rents out at about a break-even rate.

The interest-only mortgages, one of which carries an adjustable rate and a prepayment penalty, make Nichols nervous, especially with home values and interest rates fluctuating so much.

“It’s one of those crazy, pick-a-payment ARMs,” Nichols says. “All this stuff is all sort of Greek to me, and I glaze over a bit about the details.”

Manageable payments

With her increased income, the payments are manageable, but she wants to start making a dent in the principal for the $370,000 she owes on her primary home and the $180,000 she owes on the rental property.

“I am looking for help because I’m making more money than I’ve ever made in my life, and I’m not really doing anything different,” Nichols says. “And now I have my daughter to think about and how to plan for her life.”

To do that, Nichols worked with Robin Tan, a certified financial planner with KMS Financial Services in Kirkland.

Nichols and Tan developed a written plan that focuses on Nichols’ primary goals — providing for her daughter, having financial stability and leading a balanced life — and answers questions that preoccupy Nichols’ thoughts:

• What to do with her two interest-only mortgages.

• What to do with $100,000 languishing in her checking account.

• How to save for her daughter’s college tuition.

• How to budget and plan for retirement.

Tan applauds the fact that Nichols has resisted the temptation to dramatically change her lifestyle with the success of her business.

“I wish it was something that a lot of business owners would do,” Tan says. “Usually, when income jumps, expenses jump, too, but Lindsey has been able to save first.”

The bulk of that savings sits in Nichols’ checking account. She’s also started to put aside about 16 percent of her income toward retirement in a Simplified Employee Pension (SEP) plan (see accompanying story), which she funded with about $22,500 in 2007.

Tan notes that 100 percent of Lindsay’s SEP plan is in stock mutual funds. Because of the recent market downturn, Nichols should not immediately change her allocation, Tan advises. But to achieve an 80/20 or 70/30 mix of stocks and bonds — suitable for her age and risk tolerance — Tan suggests that Nichols add more bonds to the mix in her next SEP contribution.

Tan agreed that Nichols’ mortgages need attention. Since Nichols only put a 15 percent down payment on her primary home in 2007, she pays private mortgage insurance (PMI), an expense Tan says is unnecessary.

Tan recommended Nichols refinance the 6.875 percent mortgage, using $22,500 of her savings to raise the loan-to-value ratio to 80 percent.

Nichols immediately applied for a new, 30-year mortgage at 6 percent. With the lower interest rate and no PMI payment to make, Nichols will save about $4,400 per year, Tan said.

Rental property

As for the rental-property mortgage, Tan says Nichols had already looked into converting it to a fixed rate to take some risk out of the picture and work down the balance, a move he supported.

“Because of the terms of that mortgage, I had to wait three years before I could convert it” to a fixed rate, Nichols says. “That time has passed, and when Robin told me to go for it, I locked in right before rates started going up again.”

Tan says the 30-year fixed-rate mortgage she locked in, at 6.39 percent, will result in some savings on interest over her ARM, which had a current rate of 6.55 percent.

“More importantly, Lindsey now does not have to worry about rising interest rates,” Tan wrote in the plan for Nichols.

As for the rest of the money in her checking account, Tan recommends Nichols set aside five to six months’ of expenses — about $40,000 to $50,000 — in an emergency fund. The remaining $30,000 in savings can be invested within a taxable account using a portfolio of diversified, no-load mutual funds, Tan suggests.

“There’s no reason to leave the $30,000 earning at money-market or checking-account interest rates,” Tan says.

For her daughter’s college fund, Tan told Nichols to explore a 529 savings plan or Washington’s prepaid 529 Guaranteed Education Tuition (GET) program to take advantage of tax-free growth.

“Lindsey will need to save about $250 per month to fund about two-thirds of Avery’s college needs ($10,000 per year for four years) … if she would like to start saving now for college,” Tan writes in the plan.

Nichols initially told Tan that she wanted to retire at 62. Tan says she’ll have a higher probability of success if she works until 67, assuming her business continues to perform well, she saves 16 percent of her income annually and she sells her rental property in 2020 when she’s nearing retirement.

Peace of mind

Despite the reality check, Nichols says the plan has given her more peace of mind.

“The big factor for me now is the economy and my business, because this is all dependent on my business growing,” Nichols says.

Tan also stressed the importance of protecting her assets. Nichols already had a plan for her daughter’s care should something happen to her. But Tan said Nichols needs to formalize it with a will and a power of attorney for both health care and property.

She should also consider disability-income insurance, a long-term-care insurance policy, earthquake insurance and an umbrella liability policy, Tan says.

Nichols appreciated that advice.

“(Tan) introduced me to the idea of protecting myself in the event of anything,” Nichols says. “With a small child and me as her only parent, then I really do have to think about those things.”

Overall, Tan says Nichols is in a healthy financial situation, with reasonable expenses and an aggressive savings plan.

A few weeks ago, Nichols says she was itching to buy a better used car. Tan gave her his blessing, building a “new” used-car purchase every five years into her budget.

Nichols bought the car, a purchase she says she previously would still be second-guessing if it weren’t for the plan.

“It felt good to me to be able to make decisions like that,” Nichols says. “And not have the nagging feeling like, ‘Oh my gosh, what did I just do?’

“Even though my gut knew I could swing it, I would have lied in bed awake at night and wondered.”