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.
Friday, January 16, 2009
Friday, January 9, 2009
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.
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.
Friday, January 2, 2009
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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!
- 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.
- 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.
- Need a white bow tie just for one particular gig? Check thrift stores for great deals on cool stage clothes.
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.
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.
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.
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?
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?
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