Thursday, March 26, 2009

Financial Black Holes

"No matter how much I earn, it just never seems to be enough!" Is this you? I honestly don't like to tell people how to live their lives, but this week I am going to court controversy a little bit and talk about some of the most common money traps that people tend to get themselves into. The following ventures may offer you unquantifiable rewards, may even be necessary in your life, but they will almost always place a substantial and continual demand on your pocketbook. If you haven't already made these kinds of commitments, I simply suggest that you think long and hard before taking the plunge.

Cars - I know, I know -- you can't get your gear to the gigs without one. That is certainly true for most of us (although I lived and gigged all over Japan for seven years without a car and it's still possible in some urban places like NYC), but there is no reason to burden yourself with more car than you really need. Taking out a dealer-financed loan on a $40,000 SUV just to transport your guitar and amp around to gigs is a massive waste of money. Even most drummers can fit all their gear into a much smaller, used car and still make it to the gig just fine. I have written about this before, but it bears repeating because of the many ways it can sap your finances. Crunch the numbers before you buy your next vehicle, and don't forget to factor in repair costs, insurance, resale value, and fuel costs.

Recording Studios - Full disclosure: I own both a car and a studio! Well, at least my car and studio are of the small, modest-budget variety...but still, to tell the truth, I'd be better off financially if I hadn't spent the dough on either one. If you run a commercial studio and keep it booked sufficiently to earn a profit, then more power to you. However, even most of the long-established studios here in LA are losing money these days due to advances in home recording technology. And even those who are staying in business have to constantly spend money to keep their equipment and software up to date. There always seems to be one more piece of expensive gear that's needed!

Real Estate - There, I said it! For generations, most of us have lived under the dubious assumption that it's always better to own a home rather than rent. The recent collapse of the housing bubble makes it easy to jump on the anti-real estate bandwagon, when in fact houses are now more affordably priced than they have been in years. But I've always been a little skeptical about homeownership, and I still am. Simply scraping together a sufficient down payment to purchase a home does not guarantee domestic bliss. You will still have to contend with average home maintenance costs and property taxes amounting to over 3% of the house's value per year. At the current U.S. median house price of $170,000, that comes to over $5000 annually just for taxes and maintenance! That's not including payments and interest on the mortgage. If you can truly afford it and the housing market turns around sometime soon, then real estate might be a good investment to consider. But you had better be patient and prepared to shell out a lot of money while you wait for that equity to grow. If you're single and already have a cheap deal on rent, you might consider staying put and investing the difference in stocks, bonds, or other investments.

Children - Okay, now I know that this one is going to generate some hate mail. Let me just say for the record that I do like kids. I was even a kid once myself! But that doesn't change the fact that the single best predictor of personal bankruptcy is having children. The cost of rearing children today is astronomical, and I have personally witnessed many of my friends struggle with the pressure of balancing parental responsibility and a musical career. It's not impossible, but it is hard. And unlike illness, injury, vagaries of the economic cycle or natural disasters, it is a choice that you get to make for yourself. Of course, once you make that leap, there's no turning back. I'm not telling you what to do. I'm just suggesting that you give these things some thought.


Dave said...

Great post as always Doug. Thanks.

Alexa Weber Morales said...

Yep, kids are costly. But perhaps more valuable than a blanket statement to that effect might be a data point on number of kids and solvency. I have 2 young kids, and always wanted 3 but can now see that as a self-employed musician that's just not a viable option.

Another data point that could be interesting would be divorce. I think (don't know) that it's more costly to be divorced than married, no? I mean, if you had kids and property to begin with.