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.

Friday, March 20, 2009

Mutual Funds and Exchange Traded Funds

Wait.... don't touch that dial! I know it's not a very titillating topic, and I also know that stock investing isn't very fashionable at the moment, but for the sake of long-term financial health it is a subject that everyone should know a bit about.

Have you ever found yourself with a little windfall of extra money and no idea how to invest it? Where did that money wind up? I think that most ordinary folks are a bit intimidated at the idea of picking stocks. How do I tell the good companies from the bad ones? When is the "right time" to buy in? For that matter, how do I even conduct the transaction?

Well, I'll let you in on a little secret: even the majority of professional economists and financial planners don't do much stock picking for their own portfolios. I don't either. In fact, I confess that I have never traded stock in individual companies, yet I have been investing in the stock market for over 15 years. How is that possible? Through mutual funds and exchange traded funds (ETFs). Basically, a mutual fund or ETF is a large pool of money contributed by many individual investors and managed by an individual or team of stock pickers, who do the research, make buy/sell decisions and handle the transactions on behalf of all the investors. Both mutual funds and ETFs charge a fee to their investors for this service. The fee for ETFs tends to be lower, but additional fees are charged for each transaction, so if you plan to buy or sell often, a mutual fund might be cheaper.

There may be several reasons that so many financial professionals choose mutual funds and ETFs over individual stocks. They may be trying to avoid potential conflicts of interest, or they might not have enough time to do adequate financial analysis and tracking of each investment. But I suspect the main reason is that they know the odds are against individual stock pickers. A lot of research shows that even the best professional stock pickers have a very hard time outperforming the stock market as a whole over the long run, so why not just settle for a mutual fund or ETF that samples the whole market? These are called index funds. They are cheap to manage, cheap to invest in, and that's where I keep most of my money.

Mutual Funds and ETFs can tremendously simplify the investment process for you, and offer you great diversification through one simple investment. All of these funds are consumer-friendly, with 1-800 numbers, nice websites, and easy to read statements. There are thousands of funds to choose from, and many considerations in choosing a mutual fund or ETF, but first I recommend reading my previous blog entry on the subject of fees, and then doing a little reading up on the subject of managed vs. index investing.

Yes, the stock market involves risk. If the phrase "past performance is no guarantee of future results" has scared you off in the past, think of what that ironically means today: next year might be a great year for stocks! The fact of the matter is that stocks still outperform every other kind of asset over the very long run, so it's unwise to dismiss stock investing entirely.

Saturday, March 14, 2009


So you've gone out and hustled up a bunch of gigs, and now you're looking for someplace to stash all of that cash. Where should you put it? You don't necessarily have to do all of your banking at the closest neighborhood commercial bank. In the United States, other options to consider include online banks, credit unions, savings banks, even PayPal!

Most of us musicians operate on an independent freelance basis, often receiving cash and checks from multiple sources. Every week, I get a stack of tiny little paychecks to deposit, so I need to have a convenient branch for day-to-day banking services. For this purpose, a checking account at the local bank is the way to go.

But frankly, keeping much more than your basic living expenses in a commercial bank account doesn't make sense these days. Have you looked at your bank's list of fees lately? I was recently charged $10 by my bank for receiving a wire deposit into my account. That's right -- they actually charged me a fee to accept a deposit! Many bank fees in recent years have been escalating at a double-digit rate, and when you consider the fact that they usually aren't even paying interest on your balance, there's no reason to reward them by depositing much more than the minimum balance.

For your larger, longer-term cash savings, consider opening an account at a credit union. Credit unions operate much like conventional banks, but are established and owned by groups of people with a common affiliation, such as a labor union or large employer. Many credit unions seek to expand their membership, so often they will accept you as a member even if you are not directly involved in the affiliated group. You will have to buy a token "share" of ownership in order to open an account, but because of the cooperative nature of credit unions, interest rates and fees are usually much more favorable than at conventional banks. Credit unions are also eligible for Federal deposit insurance, just like commercial banks.

Savings banks (and S&L's) are similar to commercial banks, and have traditionally offered somewhat more competitive rates. They have also traditionally gotten into more financial trouble, starting with the S&L crisis of the late 1980's and continuing with their large exposure to bad mortgages in the current banking crisis. Still, most deposits are insured, so you and I don't have to worry too much about it as customers.

Online banks, such as HSBC Direct and ING Direct, are giving brick-and-mortar banks a real run for their money. They reduce costs by not maintaining branches, and pass that on to you by offering very competitive rates. The downside, of course, is that you have to mail in all of your checks (unless you have direct deposit), and you give up the convenience of service at a local branch.

One other place you can keep some money is PayPal. Though it's not a bank (and not Federally insured), PayPal is now offering many of the same services as banks, including debit and credit cards, interest bearing accounts, and international money transfers. Personally, I'm looking forward to the day when all payments will be handled electronically. No more cash, no more checks, no more waiting in line at the bank on Monday afternoons, and no more absurd fees (hopefully)!

Friday, March 6, 2009

Be an Educated Consumer

I was browsing at a major consumer electronics retail store recently when I noticed a young couple shopping for camcorders. They looked perplexed and wary as they listened to the 17-year-old salesman explaining the product selection to them. Now, I don't know how their shopping experience worked out in the end, perhaps they found the perfect product and were completely satisfied. But my immediate thought was that these poor folks look like sitting ducks. They obviously hadn't done their homework, and the odds of getting the best deal without having researched the product are never good.

I know what you're thinking. Who has time to do product research and comparison shopping? With internet access, it is really so easy to research products that, in my opinion, there is just no excuse for making uninformed, impulsive large purchases. Of course, if you're shopping for dental floss, then the amount of money at stake is trivial. But serious penny pinchers like me will at least do some quick checking online to compare prices on all but the smallest purchases. It only takes a few minutes to look up a product on or through convenient price comparison websites like or

Another benefit of online product comparison is that many retail websites allow users to post product reviews. The two main pieces of information I'm looking for when shopping online are prices and reviews. Reading through consumer reviews can save you a lot of trouble, maybe even help you avoid buying an inferior product that you would have wound up replacing anyway. Subscription services like Consumer Reports offer the ultimate in-depth, objective reviews, but I've had good luck relying on the free reviews at most major shopping sites.

The bigger the purchase, the more time you should dedicate to researching online. If you are relying on retail salesmen to educate you about cars or household appliances, then you are at a major negotiating disadvantage. Make sure that you have some idea of the range of features and prices available before you talk to any salespeople.

Also, watch out for web retailers who try to lure you in with a low price quote, and then jack up the price at checkout with unreasonable shipping and handling charges. And for the best bargains, don't forget about buying used through sites like eBay and Craigslist. I built half of my home studio with Craigslist purchases!