Rule of 72

Ever wondered how much that music store line of credit is really costing you in interest? Or how much difference it will make to have your money stashed in a 4% Certificate of Deposit, as opposed to a 1% savings account? The Rule of 72 is handy for making quick thumbnail estimates of how interest accumulates.

First, I recommend reviewing my previous blog entry on the subject of compound interest. That can be a real eye opener for many people. Once you have an idea about how compound interest works, you start to understand how important it is to get the maximum return on your investments, and pay the minimum rate on your debt. Even a one or two percent difference can really add up over time.

If you are trying to make a decision or plan based on alternative possible interest rates and you don't have access to a precise compound interest calculator, just remember the following formula:

72 ÷ annual interest rate = number of years it will take for the balance to double

So, for example, if I invest $2000 at a compounded 6% rate of interest:

72 ÷ 6 = 12

In about 12 years, if I don't add or take out any money and the interest rate remains at 6%, my account balance should hit $4000. You can use the same calculation to estimate how long it will take your debt burden to double, or how long it will take for a given rate of inflation to double the cost of living.

I have been running a little experiment for some time now. In 1994, I put $100 in a credit union share account and resolved to make no more deposits or withdrawals until the account doubled in value. Well, it has been 15 years, and the balance currently stands at $168. Not too impressive, eh? That's because the average interest rate on that account over the past 3 years has been a paltry 1.07%. At that rate, it would take over 67 years for my $100 to double! Actually, my interest rate was slightly better in the '90s, so at the current rate, it should only take another 17 years. But that is still a total of 32 years! The lesson to be learned from this experiment: small differences in interest rates make big differences in results!

Getting Out of Debt

Okay, here's a topic that many musicians can relate to! People get into debt for all sorts of reasons, but it's only recently that getting out of debt has become fashionable. If you are currently drowning under an adjustable rate mortgage that's way beyond your means, then I'm afraid I don't have any silver bullet solutions to offer you....perhaps the government will figure out some way to throw you a lifeline.

But if you are simply struggling with garden-variety consumer debt or student loan debt, then there are some proven strategies for getting yourself out of the hole. First of all, as the old saying goes: if you find yourself in a hole, stop digging! Avoid additional debt like the plague. If you continue to allow yourself to think of borrowing as a solution rather than a problem, you will never escape debtor status, regardless of your income level. Most of my blog entries up to this point have been about living frugally and saving money. All of those habits will help you to eliminate debt as well. Since consumer loan interest rates are almost always higher than any reliable rate of available investment return, you should view paying off a loan early as tantamount to earning a high rate of return. Think of paying off your 11% credit card balance as a generous 11% gift to yourself, because that's what it is! That's more enticing than almost anything else you could spend your money on.

Lots of people owe money to multiple creditors, and often don't know how to prioritize their debt payments, so they just make the minimum payment on each bill that comes. Minimum payments are for suckers! The minimum payment option is designed to draw out your debt and earn the creditor maximum interest from you.

The first thing you should do is to make a list of all your credit accounts and find out the interest rate for each one. You can continue making minimum payments on the lower interest rate accounts for now, but target the highest interest rate first, and pay as much as you can on that account each month until it's paid off completely. After that one is paid off, target the second highest interest rate account in the same way, and you should be able to pay this one off even faster, because you now have one less account to service each month.

This strategy requires focused commitment to eliminating debt, because as you pay off your outstanding balances, your available credit limit will probably increase and those old temptations may arise again. Believe me, becoming debt-free is a very liberating feeling. It really is the best gift that you can give to yourself!

Restructuring Your Business

There's been a lot of talk lately about corporate downsizing and "trimming the fat". Perhaps you're in one of the unlucky bands who have already lost a steady gig when management decided to cut back on the entertainment schedule. It seems to be hitting everyone at this point.

Did you realize that you, too, are a business manager with downsizing alternatives? Sure, you are! Even if you operate as a sole proprietor, you may still be able to find ways to lower your costs of doing business and thus offer your clients better value. For example, you can:

1. Resize your act. If you normally perform as a five-piece band and the clubs are balking at your fees, you can offer to go out as a 3 or 4 piece for less money. The ultimate bargain is a solo act, but these gigs are usually limited to players of certain instruments (guitar, piano, etc.).

2. Cut back your hours/barter. Another deal you can strike with management is to play fewer hours for less pay, or agree to accept free food in exchange for giving up some pay. I'm not a huge fan of this option, because it may be hard to get back to the old pay scale once business improves again. Still may be preferable to having no gig at all, though.

3. Lay off middle management. If you have been getting most of your gigs through agencies, try contacting venues directly and booking more shows yourself to save on agency commissions. Of course, when dealing with a venue originally introduced to you by an agent, it would be unethical to later bypass the agent. Similarly, if local teaching studios have been booking most of your students for you, you might make significantly better pay by setting up your own studio and booking students yourself.

4. Renegotiate with suppliers. You should definitely be driving a hard bargain when making any equipment purchases these days. Don't be afraid to ask for a lower price! Most retailers are really desperate now, and they are very willing to negotiate.

If You Can Handle It Now, Handle It Now

This simple motto has served my very well over the years in a number of contexts. The gist of it is that a good way to avoid the procrastinator's predicament is by dispensing with little tasks as soon as they come up. My rule of thumb is that, if it takes less than 5 minutes to handle something important and be done with it, then I will drop whatever I'm doing at the time to handle that task.

This might seem to contradict the importance of setting time-budgeting priorities. For example, I try to spend an hour every morning practicing piano. Nobody pays me to do it, it only happens because I make it a priority. But if, in the middle of my practice session, it occurs to me that I need to write a check or make a quick phone call, I will give myself a 5 minute break to take care of that. If it's under 5 minutes, then it's really not significantly cutting into my practice time, it's just a healthy, normal break. And handling it as soon as it occurs to me ensures that the task won't be forgotten.

This rule applies to a lot of money management issues. Balancing a checkbook, paying a bill, even transferring balances between accounts are all tasks that can be handled in almost no time, but how many of us let these tasks accumulate to the point of becoming an intimidating mountain of work? Remember, if you're letting too much of your money sit in a low-interest or no-interest account, then you're cheating yourself out of potentially significant annual interest income. It wouldn't take 5 minutes to write a check and transfer that money into your money market account.

Of course, there are many important tasks that cannot be properly handled in under 5 minutes, so time must be scheduled for dealing with bigger issues like devising a retirement plan. But you might be surprised at how many of life's tasks can be dealt with quickly and easily.

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.