Monday, July 28, 2008

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 Some of the numbers are out of date, but the essential principles are still the same.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

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.

Thursday, July 24, 2008

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 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?

Wednesday, July 16, 2008

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.