Friday, December 26, 2008

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.

Friday, December 19, 2008

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.

Friday, December 12, 2008

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.

Friday, December 5, 2008

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?