Wednesday, August 13, 2008

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.

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