Thursday, August 28, 2008

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.

Thursday, August 21, 2008

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.

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.

Thursday, August 7, 2008

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.

Friday, August 1, 2008

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.