Insurance

The type of person who chooses to embark on a career in the arts is, almost by definition, a risk-taker. Maybe not reckless, but certainly willing to take a chance on a less certain path in life. We also tend to get by on a pretty tight budget. So it's no surprise that lots of musicians don't carry even basic insurance coverage.

Your number one insurance priority should be health insurance. I once went for four years without any health insurance. I don't recommend that anyone else do that, but it was an especially lean period for me, and luckily, I didn't get sick. Eventually, I wised up and got myself a high-deductible individual policy, designed to be paired with a Health Savings Account (HSA). If you are basically healthy and have an adequate emergency fund set aside to cover some health costs, a high-deductible policy can keep your health insurance premiums surprisingly affordable. HSA accounts are a recent development in the U.S. They are like IRA accounts in terms of tax advantages, but you can take out money without penalty to cover your basic health care expenses each year. Those of you who live in civilized countries with nationalized health care can disregard the above discussion!

Also highly recommended to musicians is equipment insurance. You might think that your gear is covered by your homeowners or renters policy, but if you use the equipment professionally, or it is stolen or damaged on a gig away from home, you might be left high and dry. You usually need a separate policy or rider for your professional equipment, and it's typically pretty affordable. Obviously, all jurisdictions require you to carry auto insurance, and you'd be crazy to drive without it. But again, as with all other types of insurance, you should consider accepting higher deductibles or lower levels of coverage to lower your premium if you have an emergency account.

There are an almost infinite variety of insurance policies that you may not need. If you don't have a family to support, you should probably think twice about carrying life insurance. You might not even need renters insurance if you live a typical transient musician lifestyle and don't have a lot of valuable possessions. I usually don't opt for extended warranty coverage offered at consumer electronics stores or car dealers. Sometimes these deals just offer redundant coverage for defects already covered under the manufacturer's warranty, and often the seemingly small monthly premiums add up to excessive sums over time. Then again, if you're a klutz, or prone to losing your cell phones, maybe it's a good deal!

You might be getting the idea that I'm not enthusiastic about carrying lots of comprehensive, gold-plated insurance policies. You'd be right. In areas of life where you are vulnerable and really can't afford a loss, adequate insurance is essential, but don't try to insure 100% of the risk out of your life. It would probably take 100% of your money to do that!

Have Your Cake and Eat It, Too?

I have some friends who only feel comfortable driving high-performance cars with leather seats. They are the same folks who always order the steak when we go to a restaurant. I drive a 14 year old Toyota Corolla and bring a bag lunch when I have to eat out.

Now, there's nothing wrong with living well, as long as you're living within your means. If you really value an expensive lifestyle, then there are careers which can support that: law, business, medicine, etc. But if you want to play music for a living, I'm sorry, but you may be setting yourself up for a lot of frustration. Let's face it, the music biz is not generally known as a gravy train, and if you went into it for the money, you're in for some unpleasant surprises.

It is certainly possible to earn a lot of money in the music business, but to consistently earn a lot of money is very rare indeed. There is nothing sadder, and sadly nothing more common, than seeing a talented musician reluctantly take a day job or even go bankrupt due to an overindulgent lifestyle.

The good news is that, if you can be content with a modest lifestyle, you can really prosper on a low income. Remember that what counts over the long run is not your income, but your savings. It's not what you earn, it's what you save. If you earn $30,000 a year and only spend $20K, then you're socking away a very respectable 10 grand per year.

As a matter of fact, you would be better off financially in the above scenario than if you had spent $70,000 out of an $80,000 dollar income. Why? Because people who earn $80,000 are in a higher tax bracket. In the U.S., an $80,000 taxable income puts you in the 28% tax bracket, while a $30,000 income puts you in the 15% bracket. Even major touring artists and large corporations recognize that it's advantageous to save a higher percentage of a lower gross income, and therefore they work hard to cut costs.

If you spend all of your time hustling to earn more money, then when are you going to get around to recording that solo album you've been planning for years, or take that advanced arranging and orchestration class you've been wanting to take? Finding contentment at a lower living standard can actually be very liberating in many ways.

I think that most of us tend to aspire to at least match the lifestyle our parents enjoyed when we were growing up. If you happen to come from a privileged background, then a musician's lifestyle might feel like a step down to you. Lifestyle is a very personal thing, and you have to be honest with yourself about what is going to make you happy. But remember that everything in life is a tradeoff, and money can't buy musical bliss. Good luck in finding your own comfort zone.

Financial Advisors, Sharks, and How to Tell the Difference

Don't let confusion or intimidation about the investment world prevent you from securing your financial future. Many of the concepts you need to understand can easily be explained in plain English, and this blog seeks to do just that. But, ultimately, you will still have to make specific investment choices for yourself.

There simply isn't any one formula or "silver bullet" investment plan that is right for everyone. Professional investment advisors exist for the purpose of helping you sort out your own ideal investment mix. Unfortunately, as recent Wall Street scandals have shown, there are some unscrupulous people working in this business, so I'd like to offer some advice for helping you to pick an advisor.

Probably the most important thing to watch out for in seeking investment help is conflict of interest. Your advisor should be working with only your best interests in mind, so that's why I recommend that you avoid advisors who accept commissions or payment from mutual funds, insurance companies, or any third party. Look instead for a fee-only financial planner. These advisors may charge you a higher hourly rate for their time (or may not), but you get the assurance of knowing that they are really working for you, instead of essentially working as salesmen for someone else. If you have any doubt about this, don't hesitate to ask them directly whether or not they accept any sales commissions or third party compensation. There is also a national association for fee-only advisors, the National Association of Personal Financial Advisors.

Other important factors to inquire about include experience, training, track record, and investment style. After reading this blog and other investment advice, you may have already reached some conclusions about your own risk tolerance and investment preferences. Most good advisors are open to discussing these issues with you and honoring your personal wishes. Sometimes, people with very low risk tolerance get mismatched with an aggressive financial planner and wind up being taken on a roller coaster ride that they otherwise wouldn't have chosen to get on. Or the opposite kind of mismatch can happen, too.

Impressive past results and glowing reviews from satisfied clients are great, but remember that your own results may differ, and your personal needs may be different from the needs of those other clients. Don't look for hotshot performance or trendy investment choices. A good financial plan seeks long-term, stable, reasonable returns.

Also, be aware that there are no legal training requirements for financial advisors, but of course you want to find a knowledgeable one, so a Certified Financial Planner (CFP) credential, or at least a business degree, is probably a good thing to look for.

Ultimately, you don't have to hire a financial advisor. You could, for example, do some homework and calculating on your own, and then pay a modest sum to a fee-only advisor for a brief session to review and critique your plan.

Retirement Savings

Okay, so the big consumption party ended in 2008 and now we're all ready to tighten our belts and get serious about saving, right? But where to begin? The whole concept of investing seems pretty alien and intimidating to most musicians and ordinary folks. I've already addressed some basic investing principles in last year's blog entries, but now I'd like to offer some advice on how to go about choosing your own specific investments.

You don't need a degree in finance to invest wisely and successfully over the long run. It may be wise to hire a financial planner, at least to help you get started, so next week I will discuss choosing your financial advisor. Everybody's individual situation is different, so getting an expert's opinion on your personal situation can be very helpful.

For starters, though, it's pretty safe to offer a couple of generalizations for beginning investors. First of all, I want to stress the importance of establishing an emergency account before embarking on longer-term investment plans. The recent volatility in employment and throughout the economy makes me appreciate my own money market emergency account more than ever. Without some cash to fall back on, it can be very scary to keep working as a musician in tough economic times.

Once your basic emergency account is established and funded, where should you invest next? Very often, experts recommend that you take advantage of any available tax deferred retirement plans before investing elsewhere. If you are a young, single musician, retirement might not seem like the most urgent financial goal to be worried about. But then again, if you plan on being self-employed for life, who do you think is going to be planning your retirement for you? If you live in America, you might be counting on Social Security. Personally, I hope that Social Security will still be around when I reach retirement age, but I'm certainly not counting on it. And even if the system remains in good shape, Social Security checks really don't amount to a livable income, so you'd better start saving for yourself.

Fortunately, in the U.S., there are numerous types of retirement savings accounts available with excellent tax advantages. These include Individual Retirement Accounts (IRAs), Roth IRAs, Simplified Employer Pension (SEP) IRAs, and 401k plans, among others. Basically, all of these accounts are somewhat similar to traditional pension plans, but are held as individual accounts, instead of being pooled together among many company employees, as in traditional pension plans. Since musicians are generally self-employed, the pension option isn't usually available (unless you qualify for the musician's union pension plan), so these other alternatives are available to us. It can be tricky to sort out the differences between these different account types, but they all have some things in common:

1. Money in these accounts grows without being taxed until you take it out at retirement, and in some cases, you can also deduct the amount of your annual contributions on your tax return. That is a potential double tax benefit, which might not seem like a big deal, but in fact it can have a dramatic compounding effect on your ultimate payout.

2. Your contributions are subject to some limited annual amount, which varies depending on your income and the type of account. This is why it's so important to start saving early in these accounts, because you may not be able to make up the difference later through bigger contributions.

3. Most of the money in these accounts may not be taken out until retirement age without paying a significant penalty, with a few exceptions for things like catastrophic medical expenses. This may seem like a disadvantage, but it actually forces you to preserve your own retirement savings.

4. Money in any of these accounts can usually be transferred ("rolled over") to another retirement account without penalty, as long as you follow proper procedures for the transfer. So, for example, if you quit working at a company with a 401k plan, you may be able to transfer your 401k account into a personal Roth IRA account.

For self-employed musicians, I particularly recommend checking into Roth IRAs and SEP IRAs. To determine the best account type for you, start by reading this introduction to the different account types. Next time, we'll discuss choosing a financial advisor to help you through the process.

A Few Money Saving Tips for the New Year

You know that I love to look for bargains! Here are some more random tips that I've picked up for saving money.

1. Learn how to do basic maintenance on your own gear. If you're playing for a living, you really shouldn't be paying somebody else to intonate your guitars or to change fuses for you. Besides, the ability to do a quick truss rod adjustment can save your butt on a gig.
   
2. If you're going to a gig which will include long breaks or downtime, bring a book or something productive to do. Otherwise, you'll probably wind up going to waste money on overpriced coffee or fast food with the rest of the bored band members.
   
3. Use rechargeable batteries and AC adapters when possible, and keep a log book for battery changes. I know lots of musicians and soundmen who waste batteries like crazy. You don't want to get caught with a dead battery mid-gig, but it's easy to learn the average battery life for each piece of gear and change them on a reasonable schedule.
   
4. For Guitarists and bassists. Always wash your hands with soap before you play, and wipe down the strings with a clean cloth after every gig. Your strings will last a lot longer, but it only takes one song played with dirty hands to kill those strings, so this rule has to be followed strictly in order to really prolong string life.
   
5. Carpool to the gig. I once came down with a bad flu bug in the middle of a gig 60 miles from home. Thank goodness I had carpooled with the drummer, so I didn't have to drive myself home in that condition! Good companionship, good for the environment, good for your pocketbook.
   
6. For extended range bassists. Don't buy 5 string bass sets, as they are overpriced. Instead, buy 4 string sets in bulk and individual B strings separately. To save even more money, buy one B string for every two sets of 4 strings, and change your B string every other time you change strings. New B strings don't really sound noticeably better than old ones, anyway!
   
7. If the gig includes a free meal, arrive early and hungry to take advantage of it (though it is courteous to offer a tip to the server). If the gig doesn't include a free meal, eat at home first and avoid cutting into your profits. In my experience, bands don't usually perform their best on a full stomach, anyway.
   
8. Always have a friend who works at a music store! Not only will you benefit from rock bottom discounts on gear, but you will also undoubtedly get better service.
   
9. Need a white bow tie just for one particular gig? Check thrift stores for great deals on cool stage clothes.