Financial planning is an essential skill for musicians so for the past few weeks, my class has been focused on helping my students to learn the basics of financial management and create their personal financial plans. Once again my friend Jim Remis, partner in a boutique accounting firm and Chairman of the Board of the Hartford Symphony, visited our class and together we provided my students with the kind of information that they need in order to have a comfort level around their finances: earning revenue creatively and from a variety of sources, budgeting, saving, avoiding debt and basic tax planning.
Here are some basic pointers in order to get started.
1. Articulate Your Challenges
A lot of students started out with a certain level of apprehension around their finances for reasons including:
• Fear of not having enough money;
• Spending too much money;
• Worrying about how to earn enough money to pay back student loans;
• Not knowing how to earn enough money to support themselves;
• Not knowing how to budget;
• A general feeling of “I’m not good at this”.
Other students simply needed more information: how to invest, understanding taxes and the implications of being self-employed and how to get funding for projects.
By articulating their challenges, my students were able to zero in on the areas that most needed their attention. In most cases, it was a matter of acquiring enough information about financial planning and then figuring out how to make a financial plan. And by facing their fears and acquiring more knowledge about finances, my students took the important first step towards financial planning.
2. Become Financially Literate
A good overall reference for acquiring financial literacy is the 360financialliteracy website, a free service of the nation’s certified public accountants which provides basic information on how to handle your finances through all stages of your life. It includes an examination of the typical issues that you face when you are a student, an employed person, starting a business retiring, or experiencing a financial crisis. It also provides tax and budget calculators so that you can begin to put together your financial information in a coherent way.
3. Think Expansively about Revenue Streams
Musicians tend to focus on performance gigs and teaching as the only ways to derive income from their art. In fact, there are many different ways to earn money as a musician. The Future of Music Coalition, national nonprofit organization that engages in education, advocacy and research to “ensure a diverse musical culture where artists flourish, are compensated fairly for their work, and where fans can find the music they want” has published a list of 40 revenue sources that musicians can draw on.
Thus, rather than clamoring for a slice of the existing pie, performers and composers can expand the terrain and create something that does not exist, especially in the current climate in which we live. As we discussed in our class, you must think expansively and creatively about how to earn money as a musician. For example, while house concerts “usually” involve piano or string ensembles, an entrepreneurial musician might find a way to do house concerts with non-traditional instruments. If you develop good relationships with others, they may be intrigued enough to hire you and listen to something new.
4. Plan on Multiple Revenue Streams
The reality for musicians is that few rely on one source of employment and the majority of musicians juggle multiple roles. A 2012 survey of professional musicians conducted by the Future of Music Coalition found that over half of the survey respondents derived revenues from 3 or more roles. Many musicians work as self-employed freelancers in a variety of jobs. In fact, according to a study from the National Endowment for the Arts, 44% of professional musicians in the U.S. are self-employed.
Therefore, musicians need to plant a lot of seeds in a lot of different musical “fields” and diversify their sources of work and revenues so that, in the words of Josh Quillen, a member of the successful percussion quartet So Percussion, you are “too small to fail”.
5. Budget Wisely
Budgeting is a matter of projecting your income based on past experience and best estimates, together with carefully tracking your expenses. For our class, my students set career goals and then translate those goals into financial goals.
For example, if your goal is to play in an orchestra and have a private studio, you need to calculate your monthly expenses and then assess where the money is coming from. Including in those expenses are savings (see below). Be sure that your income exceeds your expenses.
The Savvy Musician blog has an excellent budget template for musicians to help you get started.
6. Avoid Debt
One of the benefits of doing a budget is seeing how much you spend versus how much you earn. The goal, of course, is to spend less than you earn. So how is that so many people wind up with credit card debt and get themselves into financial hot water?
Musicians live on lean budgets so excessive spending can quickly add up to disaster. One basic thing is to pay attention to “emotional spending”. If you had a bad day and then “reward” yourself with the new iPhone 5, how helpful is this to your overall happiness? And what are the consequences? Going into debt is not worth it!
Since so many musicians are self-employed and have income that fluctuates, it is imperative that they start saving now! While many musicians wonder how to do this, another great resource from the world of accounting called FEED THE PIG offers practical tips on how to start saving. If you start saving small amounts now, those savings can accumulate very nicely over your lifetime thanks to the concept of “compounded interest”. Even though interest is at an historic low right now, it still makes sense to start saving now.
8. Tax Considerations for Musicians
As Jim pointed out, it is important for musicians with their multiple revenue steams to be aware of the tax implications of how you earn money.
Let’s start with having a job where you earn a salary. Your employer will pay half of your employment taxes and will withhold your income taxes. At the end of the year, you will either get a refund or pay the difference between what you owe and what was withheld.
If you are self-employed, you are responsible for paying your own taxes. The good news about being self-employed is that you also get to deduct your career-related expenses. Be sure to keep good records on everything that you spend. Organize this into a spreadsheet and keep the back-up receipts that document your expenses. It might even make sense for you to hire an accountant who can advise you on what is deductible. According to Jim, people who do their own taxes often miss opportunities for taking deductions so the money you spend on hiring an accountant can reap huge benefits.
So be aware of your fears and your skill gaps and begin by learning the basics. Next time, we will take a look at how to organize your financial information into a manageable financial plan.