Keeping Books

Are you one of those self-employed musicians who only records income based on 1099 forms and only records expenses by throwing some receipts into a box for your accountant to deal with next year? I've been encouraging everyone to get a better handle on their own spending and saving habits, and the best way to do that is by setting up and maintaining some kind of systematic accounting records for your business.

If you've been sloppy in your past bookkeeping, the New Year is a perfect time to start fresh with a simple accounting system for all income and expenses. It can be as simple as resolving to write down each day's income and expenses on a written log before going to bed at night, or you can buy a program like Quicken, or try David Hahn's free Gig Tracker spreadsheet.

How much of your income you report for tax purposes is between you and the IRS, but I highly recommend that you get a clear picture of where your money is coming and going for your own sake. It's really a necessary first step before you can do any effective budgeting, and it also gives you a clear sense of your career progress relative to any goals you have set.

Also, please don't neglect to write down every possible business expense and keep all receipts! If you're not sure about something, write it down and check its deductibility later with your tax preparer. Business expenses are used to directly reduce net business income on US Schedule C tax forms, so every little expense makes a real difference in your bottom line tax liability.

Purposeful Giving

This is the time of year when many of us get into the spirit of giving and donate our time or money to various charitable causes. It's also a time when many nonprofits conduct their biggest fundraising drives. Salvation Army bell ringers and toy drives for underprivileged children are as closely associated with the holiday season as poinsettia plants and Santa Claus. It feels good to chip in for a good cause, but how much thought do you put into it?

According to the National Center for Charitable Statistics, there are well over a million public charities in the United States alone, and the number is growing rapidly. Most of these organizations are ethically run by people with the best of intentions. Some are well funded and effective, others less so. The last time you gave money or donated your time to perform for a benefit concert, did you do any checking on the charity you were supporting? Neither did I, but I should have. If you think about it, charitable contributions are really just another expense in your budget, and there's no reason they shouldn't be subjected to the same sort of scrutiny as your equipment purchases or grocery bill.

Let me be clear: I'm not suggesting that you shouldn't give to charity. I am suggesting that it is wise to actively choose your charities, rather than passively let them choose you. It may feel awkward or wrong to refrain from pulling out your wallet when you get an unsolicited phone call from a good cause or are confronted directly by a fundraiser on the street. But giving charitably only to organizations that happen to cross your path is sort of like only buying the food that's prominently displayed at eye level on store shelves (often the most profitable items for the store, but not necessarily the best for you).

Please take some time to consider what causes are most important to you, and where you think the greatest need exists. It takes a little research to find the best charities to suit your values, but there are some great online tools available to help you for free. Please check out these sites for starters: Charity Navigator, Guidestar

And remember, if money is tight (as it is for many of us these days), donating your time or skills to a really worthy cause can be a great way to help make a difference at any time of the year. Best wishes to you all this holiday.

Good Will to All

It's December, and I guess I'm getting a little sentimental. Every time the end of the year rolls around, it's natural to take stock of where we are and where we seem to be heading in life. Personally, I always find myself astonished that I've actually gotten away with another year of playing music for a living! The exact mechanics of sustaining such a career are a bit mysterious, but it definitely has a lot to do with personal relationships and good will.

It is a small world after all, especially in the music business. Word gets around fast, so even if you aren't altruistically motivated to be nice to people, you will certainly need to be agreeable simply for practical reasons. I like to think of my relationships with people sort of like gas tanks! Every person I know has a certain reserve of good will towards me, and every interaction I have with that person serves to either fill up or deplete that reserve. The goal is to maximize everyone's good will reserve towards me.

The funny thing is, although a good will reserve can be depleted very quickly and easily, there is virtually no way to rapidly build good will. It can only be built up to a high level through demonstrating steady, long-term positive attitude, ethical behavior, and reliability. Sure, referring someone to a high paying gig will score you some quick brownie points, but a one-time favor won't engender as much loyalty as years of showing up on time, or handling many small problems without complaint.

I have witnessed many cases of highly competent musicians gradually working their way up to positions of trust and gainful steady employment, only to lose it all over a single ethical breach. I've learned firsthand how easily good will can be destroyed through neglect, or by being unpleasant. In one case, I lost a gig because, after a particularly rough performance, I told the bandleader that I thought he needed to practice more. I've also lost gigs simply because I fell out of contact with the bandleader, or turned down one too many gigs. People have short memories, and allowing yourself to be forgotten is one way of depleting good will.

Always, always, always stay on good terms with everybody whenever possible. If you have to leave a gig for any reason (even if it's because you hate the gig!), try not to make it personal. Don't let people walk all over you, but leave your bridges unburned, because frankly, there's no advantage to be gained from burning them. Exercising patience and tolerance in all of your relationships will serve you in good stead as you advance to better gigs, where positive attitude is a prerequisite. It's also better for your blood pressure! Peace.

Keeping Investment Costs Low

Okay, admittedly not the most mouthwatering topic to most musicians, but trust me, it's important and easy to understand. What are investment costs? These are the fees that all those vilified Wall St. guys make their living from. If you trade individual stocks, you will pay a stock brokerage fee every time you buy or sell (thus, the broker has an incentive to get you to trade often). If you put your money in mutual funds, an annual fee (called the "expense ratio") will be deducted from your account, and you might pay additional fees (called "loads") whenever you buy or sell shares. Even if you decide to put your money in a "free" savings account at your local bank, they will get their piece of it by offering you a lower interest rate than they are getting when they lend that money back out.

It is reasonable for qualified investment professionals to charge something for their services, especially when they are helping you to monitor your portfolio and choose wisely between different investments. But there is no need to pay exorbitant fees for such services, and many investment advisers are still getting away with charging too much in my opinion. Fees in the range of 1.5% or close to 2% per year are not uncommon among mutual funds and portfolio managers, even at times like this when returns are poor.

1.5% may not sound like much, but over time, fees like that can significantly reduce your returns. For example, let's say you have $10,000 to invest for 10 years:

Mutual Fund A
Expense ratio: 1.5%
Annual gross return: 10%
After 10 years, you'll have: $22,610

Mutual Fund B
Expense ratio: 0.5%
Annual gross return: 10%
After 10 years, you'll have: $24,782

That's $2172 more that you could have collected just by selecting the fund with a lower expense ratio. That's a 9% difference in only 10 years! Notice that both funds had the same results in the market. In reality, different funds will vary in performance, but the funds with higher fees don't necessarily perform better. The only difference here is that one of the funds managed to negotiate a bigger cut for themselves. The difference is magnified further over longer periods of time. Also, this example assumes that neither fund is charging you a load for buying or selling shares. That would reduce your results even more.

Ultimately, it's up to you to pick your investments based on a number of criteria. Investment cost is only one of those considerations. But let me leave you with one final thought: A mutual fund manager overseeing accounts worth $50 million (small by industry standards) will earn $500,000 per year by charging a one percent expense ratio. Isn't that enough?

Thanksgiving

Just a few personal reflections this week in the spirit of the holiday:


I'm thankful to be healthy, happy, and doing what I love for a living.

I'm thankful for the excellent mentors and role models who have helped point the way for me.

I'm thankful that progress doesn't come easily, because that means there is always potential to improve, and every accomplishment brings greater satisfaction when you know you have really worked for it.

I'm thankful for the good will, fun times and huge inspiration I get from so many amazing music business friends.

I'm thankful to realize that I don't really need very much, and the world is providing more than I need.

I'm thankful for the freedom to be my own boss and choose my own course in life.

I'm thankful that economic necessity has forced me to be less prideful and take gigs that made me learn and grow.

I'm thankful for all of the lessons yet to be learned, and for all of the creative works yet to be unveiled.


Best wishes to all of you this season!

Investment Diversification

In a recent blog entry, I emphasized the advantages of pursuing multiple musical income sources: higher total income, greater income stability, and increased networking opportunities.

The same principle applies to investing your hard-earned money. Maintaining a diversified investment portfolio basically means not putting all of your eggs into one basket. Remember when you told your parents that you wanted to be a musician, and their first reaction was to tell you to make sure you have another skill "to fall back on"? Well, I didn't like to hear it either, but looking back, I have to admit it was probably good advice.

In a similar way, betting most or all of your precious money on a single investment can be risky. If, for example, you choose to invest in stocks, most experts recommend holding stock of at least five to ten different companies to achieve reasonable diversification.

If you had invested all of your money in Lehman Brothers Holdings one year ago, you'd be broke right now because they went bankrupt in September. Few could have predicted that such a large firm, with a long and reputable history, would have been brought down so quickly. Even many highly trained and experienced professional investors regrettably invested in Lehman recently, so none of us are immune from making these kinds of mistakes.

If, on the other hand, you had invested half of your money in Lehman Brothers, and the other half in Star Scientific, Inc. (which has had a great year), you'd be roughly breaking even at this point. You would still be under-diversified, in my opinion, but this example illustrates the fact that even a little diversification is much safer than none at all.

As a small, individual investor with limited information, it can be hard to compete with the pros at picking good individual stocks or other investments. Perhaps even more importantly, brilliant artists like myself are too busy honing our creative genius (joke) to be bothered with monitoring the day-to-day performance of every stock and constantly worrying about timing our trades just right.

For people like us, there are mutual funds and ETFs. A detailed discussion of these investment vehicles is a subject for a future entry, but suffice it to say that they offer diversification in a simple package to the small time investor. Mutual funds and ETFs of the low cost index variety offer the ultimate in diversification.

If diversification is so great, why aren't all investors super diversified? The short answer is that they think they are smarter than the rest of us. If you are smart enough to only pick the winners and time every transaction ideally, then you can do better with an undiversified portfolio. Unfortunately, VERY FEW investors can pull this off with any consistency. Like, virtually nobody. Lots of people found this out the hard way recently when they tried sinking all of their money into real estate at the wrong time. They weren't diversified, and they bet on the wrong horse.

I'll be honest. Most types of assets have been losing value lately, so even diversified investors are getting burned. But just as a musician with multiple steady gigs can afford to lose one of those gigs, a well-diversified investor can avoid losing the whole enchilada when a few stocks go south.

Saving Is the Green Thing to Do

In this blog, I spend a lot of time talking about the merits of cutting expenses. Judging from the latest retail sales figures, it seems like a lot of folks are getting on this bandwagon, albeit reluctantly. A slumping economy and tightening credit have finally checked our great appetite for consumption.

But reducing consumption isn't all about deprivation or stinginess. It's really about clearing the clutter from our lives in order to focus on what's really important. At the risk of sounding overly philosophical or New Age-y, I would like to suggest that consuming less might actually be good for you, and good for the world. Here are just a few ways in which you can be kind to the environment while improving your own bottom line:

Drive a smaller car (or NO car). The vehicle will cost you less to buy and insure, and you'll spend less money on gasoline while producing less CO2 . It will still get you to the gig on time, and will also be easier to park when you arrive there.

Buy in bulk via the Internet. A little comparison shopping online almost always yields the best price available, and you will save gasoline and time wasted on trips to retail stores. Fewer people driving to stores means less traffic and less pollution.

Use it Up! I know sax players who will buy a box of reeds, use the best one and throw the rest away because they are "too green". Couldn't they use those for practicing, or put them on a shelf until they age nicely? By the same token, every time I put fresh strings on my gigging bass, I transfer the old strings to my practice/teaching bass to milk a little more life out of them. That's less junk for the landfill, and lower equipment expense for me.

Live in a smaller house or share space with roommates. Rent will be lower, and you will use less electricity and gas. Cleaning a small house requires less time and less use of environmentally unfriendly detergents and cleansers. You'll also have less space tempting you to fill it up with unneeded stuff.

Recycle and buy used items. I use ice cream container lids as drainage trays for my houseplants, and worn out clothes as rags for washing my car. Musical equipment can often be found at half price by buying used. The more stuff we can keep out of the landfill now, the better off we will all be in the future.

In contrast to the above advice, many politicians and economists are now praying for an increase in consumer spending to restart the stalled economy, but the fact is that over consumption is what got us into the current crisis in the first place. We must start living more efficiently, for the sake of the environment as well as for our own long-term financial health.

Market Timing and Opportunity

I hope that some of you who have been reading this blog for a while may be feeling persuaded to seriously start investing for your future. The questions that naturally follow are what should I invest in, and when? This first step is especially scary to take at a time of such great economic crisis as we see today. All but the boldest investors have been scared away from the stock market.

I am always reluctant to tell people specifically what to buy, or when to buy. Variances in the risk tolerance and the current and future financial needs of individual investors make it unwise to offer blanket investment suggestions. But I will go out on a bit of a limb here and point out that, historically, the darkest of times have usually offered the best investment opportunities. In other words, when everybody else is panicking and selling, investment prices get driven down, creating opportunities to invest at bargain prices.

This scenario certainly describes what is going on currently in world stock markets. The S&P 500, an index tracking the share prices of the 500 largest U.S. corporations, is down 40% from one year ago. Of course, there are real, legitimate reasons for stock prices to be declining (such as sagging corporate profits), and there is also the possibility that significant continued losses may still lay ahead.

I certainly wouldn't encourage anyone with a very low tolerance for risk to jump onboard this roller coaster right now, but please bear in mind that most of us have precisely the wrong instincts for buying and selling at the "right time". It is enticing to get onboard when we see that an investment has recently performed well, and it's scary to buy or hold on to an asset that has been losing money.

In general, I suggest resisting such instincts and simply investing what you can on a regular basis, then holding those investments for the long term, regardless of current market conditions. Don't try to gamble your way into the market all at once, but don't allow yourself to be frightened into inaction, either. There will never be an obvious "safe time" to buy, and if you wait for such a time to arrive, you will probably have already missed out on substantial market gains.

One more word of caution: please don't invest more money in stocks than you can afford to lose. Musicians especially need to establish and maintain a financial safety net before speculating on riskier investments, and the current recession may bring unexpected gig losses. Good luck navigating your way through this storm, and remember that every upheaval also brings opportunities.

How Did We Get Into this Mess?

In the spirit of the political season, I'm going to get up on my soapbox today and do a bit of lecturing. There has been an awful lot of finger pointing, rationalizing, and denial going around lately with regard to all of the economic turbulence we are experiencing. Even many experts seem genuinely at a loss to explain exactly what went wrong and how we have come to this. Lots of musicians and other ordinary folks are feeling like helpless victims of those who "control the system".

Well, this may not be a popular thing to say, but I personally feel that we all bear responsibility, collectively and individually, for the financial condition we find ourselves in at any given time. Most people reading this blog are living in capitalist democracies, with a great deal of freedom to engage in free enterprise as they please. But with such freedom comes the responsibility to educate oneself and stay informed on financial matters. If you don't basically understand how a capitalist economy works, how can you expect the system to work to your advantage?

The good news is that anybody with a junior high school education can easily learn the essential principles of responsible personal finance. It's really not as complicated as most people think. Yes, professional investors do use fancy statistical analysis tools to evaluate markets and investments, but the average investor can generally get by pretty well using just basic arithmetic. I've long felt that a basic personal finance course should be a required part of every high school curriculum. I have no idea why this is considered a taboo subject for public education, and I'm convinced that with such training, the average citizen would wind up in far better financial shape. And if each of us individually kept our financial house in order, the overall economy would function a lot better.

I'm also convinced that if ordinary citizens had a better grasp of responsible money management, we would be more likely to hold our elected leaders accountable to maintaining responsible government budgets, instead of the rampant deficit spending we currently see in governments around the world. Let's face it folks, we've been resistant to learning about money for too long, and that ignorance is now coming home to roost. Things will only get better when we all start getting smarter about personal finance.

Inflation: the Savings Killer

What a time to be writing a personal finance blog! I can't recall a time when there have been so few attractive investment options. As virtually everybody has heard by now, traditional investment vehicles such as stocks, bonds, real estate and commodities are all in very bad shape lately. Most of the people with money these days seem to be mainly concerned with safely hoarding whatever they have left, opting for ultra safe, low interest cash equivalents like U.S. Treasury bills.

But stuffing mattresses is really never a good investment plan. This discussion will get slightly technical, but it's important that you understand the concept. The problem with hoarding cash is inflation. Inflation is the investor's enemy, slowly but surely eroding the value of your hard-earned savings. I can remember when I started playing bass in the mid-80's, a set of bass strings cost $10 at the local music store. Nowadays, the same set of strings runs around $18. That's almost double what it used to be, but to tell the truth, I hardly noticed as the price incrementally edged up over the years. In the same way, a nest egg of X thousand dollars, which might seem impressive by today's standards, will surely go less far ten or twenty years from now.

In the United States, most economists consider a "normal" rate of inflation to be somewhere in the neighborhood of 2-4% annually, and the government manipulates interest rates and other monetary policy tools to try keeping it around that level. Actual inflation rates, however, can vary considerably. If I assume that the government will be effective in maintaining inflation at, say, a 3% level over my lifetime, then I must earn consistently at least 3% on my investments just to prevent my savings from eroding. And if I eventually plan to live off of those savings, I will need to earn even more.

The problem with cash equivalent investments is that interest rates often barely keep up, or actually fail to keep up with inflation. My money market account is currently paying only 2%. The way things are going, it doesn't look likely that interest rates will be going up significantly any time soon, but even under the best of circumstances, cash equivalent investments rarely exceed inflation by very much.

Historically, investments such as stocks and bonds, although they involve more risk than cash, tend to outpace inflation by sufficient margins to actually grow your nest egg over time. It is certainly scary to invest in such things at times like this, but the prospect of eventually retiring with a severely stunted cash nest egg is even scarier to me. I suggest taking another look at my previous blog entry on the related subject of compound interest. Then try playing around with some numbers using these online inflation and compound interest calculators.

There is another new source of good career advice for musicians online. Please have a look at the Musician Wages website.

Diversify Your Bad Self!

One popular misconception about the music business is that most musicians make their living exclusively from live performances, or exclusively from studio session work. I'm not sure why people tend to make that assumption, but I suppose it may stem from the fact that most people only see and interact with us on stage. In spite of this romantic myth, the reality is that virtually all full time musicians these days earn their income through multiple activities. In fact, I can't think of any players who limit themselves to gigs only, and I know hundreds of successful musicians all over the world!

There certainly must be exceptions to this generalization, but I would argue that even if you can make a good living through gigs alone, you will still be limiting the potential extra income and job security that greater diversification could offer you. Think about it. If you are playing a 4-hour steady gig 5 nights per week, that is still only a 20-hour work week -- why waste your daytime hours? Here is a list of less commonly considered money making ideas for musicians:

• Doing music clinics at local schools
• Instrument/equipment rental
• Rehearsal space rental
• Teaching music lessons
• Playing on recording sessions
• Producing recording sessions
• Selling time in your home recording studio
• Live sound engineering
• DJ work (blasphemy!!!)
• Licensing original music
• Selling original CDs or band merchandise
• Booking other bands
• Cover band gigs (if you're an original artist)
• Solo gigs (if you're already in a band)
• Accompanist work
• Music copying and arranging
• Daytime gigs at churches, coffee houses, etc.
  

There are really countless ways to be compensated for your musical abilities. If you thoroughly researched and explored all of these opportunities, you could keep very busy making a good living, and you would also be better positioned to endure the loss of any one of your gigs. Let's keep our eyes open for unconventional or unexpected gigs, and please post a suggestion here if you think of any that I missed!

Making the Most of It

Just a few quick thoughts today about how to handle an economic/market downturn. A recession is usually a great time to:

• Hunt for bargains on goods (including used and new musical equipment)
• Hunt for bargains on stocks and other investments
• Offer a special sale on your CD or band merch
• Reexamine your lifestyle to cut costs and eliminate inefficiencies
• If gigs are slow, use spare time to practice/exercise/improve skills/learn to cook
• Possibly increase insurance coverage (crime goes up during recessions)
• Re-establish connection with former musical contacts
• Volunteer/go to friends' gigs/vote/host a jam session/build goodwill
• Simply enjoy life and do something to make a difference
  

A recession is generally a bad time to:

• Quit or start complaining about your gig
• Try selling off used gear or other goods
• Panic and sell investments at market lows
• Assume that the market has bottomed and rush into a big investment
• Not face up to your personal financial circumstances (this is ALWAYS a bad idea!)
• Budget based on overly optimistic assumptions about income
• Give in to depression or fear

Hey, it's not so bad, you'll get through this. And remember, we musicians are actually kind of lucky in that most of us have multiple sources of income, leaving us less vulnerable than someone who depends on a single employer for his entire livelihood. Feel any better? :-)

Dollar Cost Averaging

In my first few blog entries, I introduced some of the basic, common principles of personal finance: keeping costs low, paying yourself first, taking advantage of compound interest, starting an emergency fund, and defining investment goals. I consider these to be the most essential concepts for any long-term financial plan.

Another commonly mentioned principle that I have not yet discussed is dollar cost averaging. This is the practice of investing a fixed dollar amount at regular (often monthly) time intervals. So, for example, if you have an annual investment goal of $5000, you would transfer $417 into your investment account on a fixed date every month, as opposed to writing one check for $5000 at the end of the year. Many consumer investment accounts, such as mutual funds, offer an option to set up these regular investment transfers for free.

The standard rationale for dollar cost averaging is that it reduces the risk of market timing on your investment return. Tradable assets (like stocks and bonds) go up and down in price daily, but if you put in the same dollar amount every month, you will automatically be buying more shares when prices are low, and fewer shares when prices are high.

Studies have shown that even sophisticated, professional money managers tend not to be very good at timing their investments ("buying low and selling high"), so why should Joe Musician expect to be any better at timing his purchases? Actually, the data is somewhat mixed regarding typical returns through dollar cost averaging as opposed to other investment schedules, but the fact that average investors should avoid the temptation to time the market is generally undisputed.

I would argue, however, that there is a more compelling reason to employ dollar cost averaging in your financial plan. It is the ultimate "pay yourself first" tool. If you know that $417 is going to be automatically deducted from your checking account on the 15th of every month, then you will view that as simply another bill to be paid and you'll be forced to budget accordingly. If, on the other hand, you put off investing and plan to just write a $5000 check at the end of the year with all of your anticipated lucrative holiday gig income, you might come up short. For this reason alone, I think dollar cost averaging is a great way to invest.

Is the Sky Falling?

The past two weeks have seen some of the greatest financial volatility and dire predictions of modern times. Even some of the most savvy investment experts seem on the verge of real panic as bad mortgage investments lead to broad problems throughout the economy.

Many of my friends are asking me "are we on the brink of another great depression?" Of course, I don't have a crystal ball and I don't know how bad things are going to get in the months to come. But I do know one thing: those who have been consistently saving money and living within their means will weather the coming storm better than those who haven't.

It's easy to get cynical and angry about the reckless Wall Street practices which led to this mess. I am as angry as every other honest investor about the collateral damage my portfolio is suffering as a result of greedy investment banker speculation. It makes me sick to think that taxpayers will be required to bail out these criminals.

But that is the nature of our globalized free market economy. Just as the rising tide of 2003-2007 lifted all boats, so the current economic contraction threatens to lower all boats to varying extents. Like it or not, we are all very interconnected these days, and in the long run, the upside of that global network outweighs the disadvantages.

Rest assured that the people involved in the riskiest speculation during the housing boom will suffer the most painful consequences in its aftermath, with or without a bailout. Those of us who have been conservatively investing and staying out of debt all along will also get hurt, but to a significantly lesser extent. The people who stand to suffer the most are those who never saved anything at all, and thus have no safety net to fall back on when times get tough.

This is not the time to abandon your savings plan. Just as you will have good days and bad days in your instrumental practice regimen, you can also expect to go through peaks and valleys on your path to financial independence. Remember that long-term winners persevere through thick and thin, knowing that there will be ups and downs along the way.

Staying Local, Staying Loyal

It's always taken a certain amount of courage to embark on a musical career, and now seems like a particularly daunting time, what with all of the current instability in the music business and the economy in general. One strategy to improve your odds for long-term stability is through cultivating steady relationships with employers in your local music scene.

Too many musicians view local gigs as mere stepping stones on the way to stardom, but I've found that if you really make the effort to cater to the needs of your local benefactors and show loyalty to them, you can gradually build up a rewarding variety of steady work for yourself. With this in mind, here are some suggestions for your consideration:

Do's
1) Keep a positive attitude and be open to the gigs available to you locally
2) Consistently be there for your steady gigs when they need you
3) Stay in regular touch with all of your local contacts
4) Be prepared, considerate, and punctual on EVERY gig (even the cheap ones)
5) Get to know your clients and be responsive to their needs
6) Do favors for people and express your gratitude for favors received

Don'ts
1) Don't sub out your gig every time you get a better paying offer
2) Don't leave town for extended periods (people will stop calling)
3) Don't cop the attitude that a gig is beneath you
4) Don't be stubborn; if a club owner or bandleader wants something different from you, try to accommodate him
5) Don't sacrifice a long-term, decent paying gig for a short-term, great paying gig

If you can maintain this kind of attitude, you won't lose many gigs. And as you hold on to your existing gigs, you will fill up the holes in your schedule with more steady work. This should all eventually add up to a decent and relatively stable income. I'm not suggesting that you should be a pushover or that you should never aspire to anything bigger, but if you can't maintain a great attitude on local gigs, don't expect to get offered any bigger opportunities. Use the challenges and frustrations of smaller gigs to develop your constructive, pro attitude.

By the way, I was recently interviewed for the very informative music business podcast Musicians Cooler. Please check it out for many great tips:

http://www.musicianscooler.com/

The Modern Renaissance Musician

New technological advances offer unprecedented power and opportunities to musicians. With affordable, powerful new software and global Internet access, anyone can effectively create and market music. But you must first be willing to master this technology in order to reap its full benefits.

I'm no different than most of you reading this blog: all I really want to do is sit around writing and playing songs all day. But when it came time to make my solo album, I immediately knew there would be a lot more to it than that. I could have hired a producer, engineer and recording studio to handle the whole recording process for me. I could have hired a graphic designer to design my album artwork, promotional materials and website for me. I could have hired a promoter to get airplay and sell the album for me, etc., etc. All of these things cost money, though...a LOT of money!

D.I.Y.

In order to make the kind of album I wanted to make and stay within a reasonable budget, I had to wear many of these hats myself. That meant setting up a home studio, buying and learning to use professional recording software, designing and maintaining a new website, and devoting time to promotional activities. It is a lot of work, but I have saved a fortune by doing these things myself, and picked up some valuable new skills in the process.

Perhaps you're intimidated at the prospect of using recording or web site design software? Often, you'll find that these things aren't quite as hard as they might seem. Also, remember that even if you hire a "pro" to do it for you, you might still not be satisfied with the result, but you're stuck with it. If you do the recording, designing, etc. yourself, then you can keep working at it until you achieve the desired result. As they say, if you want a job done right, do it yourself!

Having said all that, doing absolutely everything by yourself can be overwhelming, and there are some jobs that may be best left to experienced professionals. For example, I am of the old school opinion that nothing beats real, live experienced musicians (as opposed to loops or sequences) for backing tracks. Many also feel that the cost of hiring a professional photographer is money well spent. You might be able to barter or call in some favors from friends with the needed skills. But don't be too quick to delegate all of the work to others. Remember, your music is like your kids: nobody else will ever care about it as much as you do, so try to take personal responsibility for as much as you can handle. Good luck!

P.S. I just discovered another cost-cutting music fanatic like myself! Please check out Bob Baker's free e-book on money saving tips for musicians:

http://www.bob-baker.com/buzz/recession-proof-music.html

Time to Dream

Okay, most of my blog posts up to this point have essentially been exhortations to be disciplined and save money. Doesn't sound like much fun, does it? And what is the point of saving money anyway, when I could walk out the door and be hit by a bus tomorrow? Well, the point is to achieve my dreams, most of which will require money. And since I probably won't get hit by a bus tomorrow, some kind of plan seems in order.

So now I'm going to ask you to dream -- something that musicians are generally pretty good at! Dream about your future. What kind of lifestyle would you like to achieve, and by what age? Where would you like to live? Do you plan to get married, or put kids through college? How long do you expect to keep working? Some of these goals may not yet be clear to you, or may change as your life progresses, but try to picture your future as best you can. Estimate roughly how much money each goal might require (taking future inflation into consideration), and divide your goals into short-term, medium-term, and long-term categories.

It can be shocking to add up how much you will spend over a lifetime! It can also be pretty impressive to estimate how much money you will earn in a lifetime. If you're a musician, chances are good that the lifetime earnings estimate will appear lower than the lifetime expenses estimate! But you can make up the difference through investing, if you plan wisely.

Getting a handle on your future money needs will allow you to gauge how much you'll need to put away each month in order to achieve your short, medium and long-range goals. It will also help you to choose the appropriate mix of investments to meet your goals. Generally speaking, it is usually wise to choose lower-risk investments for shorter-term goals. For example, if you plan to buy a new car next year, you probably shouldn't put all of your savings for that car into highly volatile oil futures. If you did, there is a chance that you could double your money quickly, but there is just as good a chance that your money could suddenly evaporate right when you need it. One year definitely falls within the short-term time frame, and safe investments like Certificates of Deposit are usually best in such cases.

Musicians may have one advantage over the rest of the population in terms of investment goals. Many of us actually love our jobs, and don't necessarily want to retire young. The longer you keep working, the less ambitious you will have to be with your retirement savings goal. On the other hand, some musicians have their peak earning years when they are young, and may be somewhat less able to earn and save substantial money later in life, even if they decide to keep working. It can be difficult to predict your future money needs precisely, but you will certainly need some money! Try to estimate as realistically as you can, reevaluate your plans from time to time, and save accordingly so that you aren't caught shorthanded when those expenses arise.

Pay Yourself First

Q: What do losing weight, mastering a musical instrument, and saving money have in common?

A: The decision to do it is easy, but it's hard to get started, and even harder to maintain.

Actually, saving money may be the easiest of these three goals, because it really requires very little time and exertion once you get started. The key is consistency. A little bit of money saved every month will move you toward financial independence more surely than relying on occasional financial windfalls, in the same way that practicing for an hour a day will lead to more musical progress than practicing intensively just on weekends.

How can you save money consistently when everything else in your life takes priority? You can't. That's why you have to treat your monthly savings amount as a bill which must be paid (to yourself). In fact, you should think of it as your most important bill, to be paid first before all other obligations. Pretend that there is a scary loan shark or mobster invoicing you for it each month......better not disappoint him!

Even if you're only putting aside $50 per month, you should pay yourself first. Your rent, utilities, and other bills get paid because you have to pay them, right? Treat your savings the same way. And remember, as I mentioned in an earlier post, we are talking about long-term savings here, so it's important to send the money off to a separate, "do not touch" account each month.

Many mutual funds and other investment vehicles offer automatic investment plans, in which you designate a fixed amount to be automatically deducted from your checking account and invested each month. That is the ultimate in pay yourself first investing, because you can't even use the excuse that you ran out of checks or missed a monthly contribution because you were too busy. This strategy also enables you to use dollar cost averaging (subject of a future post) to reduce market timing risk.

Give some thought to what your long term savings goals are and how much you could realistically manage to "bill" yourself for monthly. Once you start this kind of plan, you will need to take it seriously and commit to it.

By the way, the same principle could also be applied to getting out of debt faster. For example, you could decide that your self-imposed "minimum payment" for every credit card bill will from now on be 20% greater than the actual minimum payment stated on the bill.

Failure to Plan = Plan to Fail

Whether you realize it or not, opting for a career in music almost always constitutes a choice to operate as a sole business proprietor. For U.S. tax purposes, you will be treated as an independent contractor, and will usually reap none of the benefits of employee status. You should also check with local government jurisdictions to find out about business licensing requirements (yes, I'm serious). But most importantly, you need to understand that every new business needs a plan to succeed, and yours is no exception.

How much money do you have to start with? How long will that money last while your business is getting established? What market (i.e. what kind of gigs) are you targeting? What skills/contacts/equipment will you need to compete in that market? What are your overhead costs? You should think through as many of these details as possible in advance. Ideally, you should even write out a formal plan of action with specific objectives and deadlines for yourself. If you're not sure what will be necessary, then seek out advice from others who have already successfully established themselves in the field.

Let's face it; most musicians are not very business-oriented people. I'm guilty, too. Frankly, the thought of going out to clubs to network and schmooze makes me groan. But that's how gigs are gotten, so I do what has to be done for the sake of staying in music. When you are a sole proprietor, you have to look out for yourself, because nobody else will be looking out for you. It's not that they don't love you! But, trust me, everybody else in this business is simply too busy hustling their own gigs to worry much about you. Truthfully, there are many generous and kind folks in music, but it's always best to operate on the assumption that you are fending for yourself.

Getting established and keeping the gigs flowing on a monthly basis usually keeps us all sufficiently preoccupied, but don't forget about long-term plans. Breaking your act into higher paying gigs, budgeting for a future album project, and saving for your eventual retirement are the types of goals which often fall by the wayside for lack of planning. Remember: if you don't do it yourself (or hire someone to do it), it won't get done.

The good news is that you are your own boss! You can set whatever kind of schedule you wish. You don't have to take any gigs or work with anybody you don't want to work with (but don't be too picky). You can take a vacation whenever it suits you. You can be however ambitious you want to be, and you don't really have to answer to anybody else.

Your business will grow and change and move in unexpected directions. Be open to different opportunities, and be flexible enough to remain viable for the long run. To the extent that you have a plan and keep revising and implementing it, you will have better odds of achieving the kind of results you want.

Seeing the Whole Picture

For the past several weeks I've been taunting you with the many advantages of accumulating a nest egg. If you're like most folks, you may protest that it's all you can do to keep up with current bills, and saving money seems like some kind of distant dream. Perhaps you have fallen into negative savings, and just eliminating your debt seems like an ambitious goal. Wherever you currently stand, I assure you that the benefits of becoming a net saver will be worth the effort of getting there, and your future viability as an artist may depend on it.

In my experience, the majority of people who feel helpless over their financial situation have one thing in common: they don't clearly see their whole financial picture. In other words, they just deposit whatever money comes in, and pay whatever bills arrive. They might get around to balancing the checkbook once in a while, but this still doesn't provide complete, clear comprehension of where all the money is coming from and going to.

A great way to really get a clear picture of your personal cash flow is by writing down every transaction for a month. Divide a sheet of paper into two columns at the beginning of the month. Every time you deposit a check, earn cash at a gig, or earn interest on a bank account, describe the transaction and write down the amount in one column. Every time you pay a bill, get a haircut, or buy a pack of gum, write it down in the other column (a small notepad may be convenient to carry around for this exercise). You must write down everything!

At the end of the month, tally up each side and spend some time analyzing the cash flow. For example, what percentage of your total expenses was fixed amounts like rent? Which source of income produced the highest total revenue? How much did you spend on food? For musicians, it may be necessary to repeat this exercise over several months to get an accurate picture, since our income flow can vary seasonally. Don't forget to factor in periodic expenses, like quarterly estimated income tax payments.

There are so many things you can learn from this exercise. Most people are surprised mainly by the breakdown of their expenses. Once you realize how much you are spending on debt interest or Starbucks, you may be inspired to make some changes! You might also be surprised to learn who your best benefactors are. Most musicians have multiple income sources, but sometimes the best paying gigs aren't the steadiest sources of income, or don't really amount to the best wage when you consider the hours and effort required.

The exercise I've just described is kind of like a "reverse budget". It's a chance to honestly assess your natural earning and spending tendencies. Obviously, this is a great launching point for taking control over your finances by resolving to make certain changes. Do some calculating to see where you could cut back on expenses or focus on more lucrative work to maximize the monthly positive cash flow (hint: lowering expenses is usually the key). You may need to formalize the new plan in the form of a budget. This is the first step to taking control over your finances. Whether you are trying to climb out of debt, or trying to save your way to financial independence, you must first see clearly where all of your money is coming and going.

Having Money Saves You Money Pt.2

Have you ever gotten a real bargain on a nice used instrument? When I look back on the best deals I've ever gotten, I realize that there were usually two factors working in my favor. First, I had the full purchase price on hand, in cash, and was ready to buy when the opportunity arose. Second, the seller needed the money somewhat urgently. Now, I certainly don't advocate taking advantage of people, but my point is that musicians who don't have any money often wind up selling themselves short when financial pressure arises. How many friends do you know who have hastily sold a treasured piece of equipment in order to pay the rent? They often will later regret such a sale, and may even pay a premium to replace the same gear later. This cycle of behavior is what keeps pawnshops in business.

Last week, I described how having a financial cushion in the form of an emergency fund can give you peace of mind and cut down on some banking expenses. I'd like now to expand on that concept, and show you other ways that having money can save you money. For example, I'm sure you've noticed that many gas stations offer a discount for paying in cash, as opposed to using a credit card. This is because all merchants have to pay a fee to the credit card company for every sale charged on plastic. In fact, even with major purchases of musical equipment, etc. you can sometimes negotiate a lower price if you pay cash. You can almost certainly get a better deal if you buy in bulk, presuming that you have enough money on hand to buy in bulk. For example, I only buy bass strings once a year, but I buy a LOT of strings! This way, I typically can negotiate $5 per set off the cost of buying individual string sets at the local music store.

Now let's think bigger. If you start saving for your next car while your current ride is still relatively new, you could possibly avoid having to finance that next car. Obviously, paying full price in cash will give you a strong negotiating position on that purchase, and save you from paying interest on a car loan. But those aren't the only cost advantages. If you finance the car, you will be required by the bank to carry full comprehensive insurance coverage for the life of the loan. In the urban areas where most musicians live, that could more than double your insurance premiums! You might voluntarily choose to have extensive insurance coverage anyway, but if you have a nice emergency fund stashed away, you'll probably feel secure with somewhat lower coverage or a higher deductible (knowing that you can afford another car if necessary). Similarly, your life, health, and property insurance coverage needs will probably be reduced as your cash reserves increase further.

I could go on for days about other ways that having money saves you money, but I think you get the idea. I'm not trying to make you feel bad if you don't happen to be sitting on a pile of money at the moment, but I am hoping that you will get inspired to set aside a few thousand dollars to start an emergency fund. You might be surprised at how easy it is to continue saving, once you've gotten in the habit.

Having Money Saves You Money Pt.1

I hope this summer finds you all busy with gigs, saving like the proverbial ant, because we all know that when gigs dry up next January, the grasshoppers among us will be going hungry!

Thanks for all of the comments since my last post. Some have expressed concern over recent underperformance of traditional investments like stocks and CDs. While I'm not in the business of recommending specific investments or prognosticating about market ups and downs, I want to emphasize the importance of taking a long-term investment perspective. The fact is, the overall U.S. stock market has averaged more than a 10% return over the past 20, 50, even 100 year periods. So a year or two of low or even negative returns shouldn't be cause for most investors to panic.

Some folks, however, probably would like to see a more immediate benefit. That's why today, I'd like to offer further savings encouragement by explaining how even a modest nest egg can quickly make your life easier. How much is a "modest" amount? Of course, that depends on your individual situation, but my rule of thumb is that a single person with little or no debt should shoot for having at least a $10,000 emergency fund to begin with. I can clearly remember when I first passed that milestone years ago. I certainly wasn't rich (and I'm still not), but I immediately felt significant peace of mind from having that "cushion" to fall back on. This feeling has never left me, and has actually given me more confidence to take chances in my musical career. Honestly, I'm not sure that I would still be persisting as a musician today if I wasn't confident that I could get through a slow period of gigs.

You can surely save up 10 grand. It might take a couple of years, you might even have to take a day job for a while, but you can get there. Now, once you have that emergency money, you must resolve not to touch it, except in true emergencies (examples: hospitalization, your car dies suddenly, etc.). Recording your next CD is NOT an emergency. To avoid depleting your emergency fund, it's important to keep the money in a separate account from the checking account used for your day-to-day living expenses. Many people use a savings account. I also recommend looking into money market savings accounts for this purpose, which often pay superior interest. And if you do dip into the emergency account, replenishing it must become top priority.

All of the above is common, standard personal finance advice. But here is the often unmentioned, really cool thing about having a little financial cushion: it actually saves you money! No more bank fees for overdrafts, bounced checks, or falling below the minimum balance. On the occasions when you do have a real emergency, you won't have to resort to credit cards or high interest loans. Your emergency fund can even serve as collateral if necessary. These savings add up significantly over time, and once you start to see the advantage of having a nest egg, you will probably get inspired to step up your savings toward other goals. Next time, I'll discuss more ways that having money can save you money.

Compound Your Prospects for Success

Thank you for the many positive responses and great feedback on my first blog entries! There have already been several requests for advice on getting gigs and promoting independent music. I do intend to touch on these topics in future posts, but for now may I suggest checking out a new book on that subject by my friend and successful independent artist, Chris Juergensen. For now, my highest priority is conveying the importance of getting started now with your financial plan.

My father was never the longwinded lecturing type, but when I was in college, he handed me a short booklet explaining basic principles of good personal finance, telling me "I wish someone had given me this advice when I was your age". I took the advice to heart, and 20 years later, I'm really glad that I did. The booklet is unfortunately no longer in print, but I found a scanned copy of it online. Some of the numbers are out of date, but the essential principles are still the same.

What did I learn from this book? Most importantly, I learned that starting early with a savings plan will almost certainly make life much easier later on. The main reason for this is the way that compound interest works. I can see your eyes starting to glaze over already. Boring? It's actually quite exciting once you see how the money stacks up.

When you invest over time, the growth of your money is compounded by earning interest not only on your initial investment, but also on the interest you earned in previous years. You earn interest on your interest, and the longer you stay invested, the more dramatic the effect becomes. Here is an updated example based on the booklet mentioned above:

Early Start Musician
Invests the maximum $5000 annual contribution in an IRA (retirement account) at a 9% compound rate of interest for 6 years starting at age 25, then adds nothing more to the account for the next 14 years.

Late Start Musician
Spends $5000 a year on guitar effect pedals and stuff that he doesn't really need for 6 years, then starts investing $5000 every year into the same IRA at 9% for the next 14 years.

Here's how their accounts look with interest accumulated over 20 years:

Age--------------Early Start Musician---------------Late Start Musician
26---------------------5450----------------------------------------0
27---------------------11390---------------------------------------0
28---------------------17866---------------------------------------0
29---------------------24924---------------------------------------0
30---------------------32617---------------------------------------0
31---------------------41002---------------------------------------0
32---------------------44692---------------------------------------5450
33---------------------48715---------------------------------------11390
34---------------------53099---------------------------------------17866
35---------------------57878---------------------------------------24924
36---------------------63087---------------------------------------32617
37---------------------68765---------------------------------------41002
38---------------------74954---------------------------------------50142
39---------------------81699---------------------------------------60105
40---------------------89052---------------------------------------70965
41---------------------97067---------------------------------------82801
42---------------------105803--------------------------------------95704
43---------------------115325--------------------------------------109767
44---------------------125705--------------------------------------125096
45---------------------137018--------------------------------------141805

Our "late starter" puts in $70,000 and doesn't even catch up with the "early starter" (who only put in $30,000) until age 45! Now, I don't mean to alarm anybody or label people over age 25 as "too late". On the contrary, I just want to emphasize the importance of starting to invest sooner rather than later. For anybody who is older, the urgency of getting started is even greater, but it's never too late to start.

Saving Without Sacrifice

As dark clouds loom over the near term economic horizon, even my rich friends are looking to tighten their belts. Here in Los Angeles, frugal living is suddenly in style. I see this reflected in substantially lighter highway traffic, as people consolidate trips and start carpooling to reduce gas consumption. Times like this can be scary, especially for anybody living close to the financial edge, but it's also a great time to establish good new saving habits. Habits which hopefully will last beyond the next market rally.

In my previous blog post, I explained my philosophy of "it's not what you earn, it's what you save". In the future, I'll go into greater detail about the many advantages of focusing on expenses rather than income, but for today, I thought I'd start by offering some practical, specific cost-cutting tips. Here are a number of examples of ways to keep your costs down without undue suffering:

It's the Little Things that Matter

- My favorite example: most people in Southern California (and many other urban areas) don't drink straight tap water. You can opt for spring water home delivery or purchase bottled water at the supermarket, at a cost of between 50¢ and $2/gallon. Or you can bring your own bottles to a drinking water vending machine and pay 20¢/gallon. Tap-mounted filters are another good money saving option. If you drink four gallons per week, this will save you $62 to $374 per year, and you're still drinking the same amount of quality water!

- I mentioned it last week, and I'll say it again. Excessive eating and drinking out can break your budget quickly. Instead, bring along a healthy snack or your own water bottle, and the savings can easily add up to $50-$100 a month.

- Use a site like www.gasbuddy.com to find out where the cheapest gas stations are in your area, then make a habit of stopping to fill up every time you pass one of those stations, even if your tank is still half full. If you drive 12,000 miles/year and get 25 miles per gallon, paying 10 cents less per gallon would save you about $50 per year, without having to cut back your mileage.

- If you take your car to a full-service carwash once a week, you might pay $7 to $15. Go to a do-it-yourself coin-operated carwash and get it done for $4, or better yet, wash it with your garden hose at virtually no cost. You'll get some good exercise out of it, and save $150-$780 annually!

- Try shopping online. You can find everything from CDs to clothing online nowadays, and usually at the best possible price, if you do a thorough search and compare deals. You'll save gas and time by not driving from one retail store to the next. Yes, you will usually have to pay shipping costs, but this is often offset by tax savings and lower prices from online retailers.

Don't Forget the Big Ticket Items

- Consider buying a good, low mileage used car instead of a new car at the dealer. You can save thousands of dollars in depreciation, while still getting almost the same useful life from the vehicle. Of course, it goes without saying that compact cars are usually more economical, in terms of both gas costs and insurance/maintenance. Do you really need a big truck to move your musical gear? If so, then exactly how big does it need to be?

- Shop around for a good deal on rent. Right now, as people are bailing out of homeownership in droves, rents are generally going up. But there are always good deals to be had on rent, for those willing to do a thorough search. It's worth the trouble, because once you find a deal, you can ride it out for years, saving many thousands of dollars over time.

- Reexamine your insurance coverage. This is a very personal issue, and everybody's situation is different. But you might be surprised at how much money you can save by getting comparison quotes from different insurance companies. Considering a higher deductible (for those with a comfortable emergency fund stashed away - subject of a future blog) is another way to lower costs. Compared to many of my friends, I am saving hundreds of dollars every year on car insurance alone.

Saving hundreds or thousands of dollars on a single transaction feels good, but remember that saving $100 per year on a dozen smaller expenses (like drinking water) would still add up to $1200 in your pocket at the end of the year. Who couldn't use 1200 bucks?

It's Not What You Earn, It's What You Save

Do you remember MC Hammer (or am I the only one here old enough to remember him)? He was a wildly popular hip-hop artist in the late eighties, selling over 15 million albums worldwide and earning well into the tens of millions of dollars. Within 10 years of his first hit record, Hammer declared bankruptcy. Contrast that with the case of my former mentor, Patrick, who has worked in obscurity as a jazz musician -a jazz musician!- for decades, and managed to accumulate a comfortable fortune of millions through shrewd real estate investments.

Perhaps the most widely held (and dangerous) financial misconception among musicians and other relatively low-income earners is that "it takes money to make money", or that investment is a subject relevant only to those at some elusive, undefined higher income level. On the contrary, saving and investing are crucially important for everyone, especially those of us who opt to have a career in the arts.

Why? Because financial trouble is the number one factor forcing talented artists into premature retirement. As a musician, I recognize that my average lifetime income is likely to be on the low side. Sure, I might get lucky and enjoy some period of commercial success, but statistically that is unlikely to last for very long even if it happens. Therefore, I need to be more financially savvy than the average Joe in order to wind up equally well off in old age.

In future blog entries, I will try to pass on various financial lessons I've learned over the years, both through personal experience, and from observing others. For now, I'd like to start with my favorite phrase: it's not what you earn, it's what you save. I'm going to beat you over the head with this one, because in my opinion, it just sums up everything for us artists. The point is that virtually anybody can save at least some money, and establishing that saving habit is infinitely more important in the long run than earning a big income. I know lots of people with six figure salaries who don't save a dime, and I know people earning $25,000 who save thousands of dollars every year. Who do you think is going to be better off in retirement?

Keep Expenses Low

I'm not saying that you shouldn't seek to maximize your income. Given a choice between two nice, steady gigs, I'll usually take the better paying one. But I might not have two nice gigs to choose from. In other words, raising income isn't always something you'll have control over, but expenses are generally within your control. Beyond a very basic subsistence level (food, shelter, clothing), I am mainly concerned with keeping my expenses low. For example, most of my musician friends eat out almost daily while running from gig to gig. If you plan instead to bring along a bag of dried fruit or nuts, let's look at how that adds up over time:

Fast food: $4.50x18 meals/month = $81
Bag lunch: $1.50x18 meals/month = $27
Savings from bagging it = $54 per month ($648 per year)

If the $648 annual figure doesn't impress you, consider that investing that amount at an 8% annual return for 20 years would add up to over $32,000! And that's not even counting the money you will save on future doctor bills and cholesterol lowering drugs! I've been applying the expense lowering principle for years, and this simple change in perspective really does make saving money surprisingly effortless for me. And believe me, I don't earn a big income! Many people might scoff at such a notion, but first ask yourself: Have I really paid attention to where my money is going, and done everything possible to minimize my expenses?

I'll offer many more specific suggestions in future blog entries about how to keep expenses low and get on course for a better financial future. For now, I would suggest taking an accurate account of your own cost of living, and please share any ideas you come up with for keeping those costs down.