The image of the starving artist has prevailed too long. Financial stress does not usually enhance creativity in the arts.
The real lifestyles of rich artists would get very low television ratings. They are frugal to the point of being miserly, but they are also willing to take risks by investing their wealth in the markets, their businesses, and themselves.
Financial planning is simply doing what it takes to give you the means to do what you want. The poorer you are the more you need financial planning. You don’t have any margin for mistakes.
For those working in the arts, financial planning is artistic freedom. You can be an artist and also eat well if you don’t avoid the subject of financial planning all together. First, you have to get your cash flow and career planning in place. Then, you also need to address your insurance and legal concerns.
Sadly, the artistic temperament tends to dislike the procedural mathematics required for financial planning. This leads them to avoid the subject all together, trust people they shouldn’t, or suffer doing it themselves. You can be an artist and also eat well. In the long run, minutes of financial planning now saves hours or days worrying about future finances.
For each area you need help, identify who will accomplish the task. When you are just starting out you may have to do some financial planning yourself. Family members can also be very helpful. However, as your artistic time becomes more valuable, you will actually have more wealth if you outsource to trustworthy and competent professionals.
The first step is to keep track of what you spend each year. You need to know where the money actually goes. As many artists know, an artist’s freedom often lies in being extremely frugal. Some of your expenses will be weekly or monthly, others will be once or twice a year. Some will be tied to a specific artistic project. Plan with a 12-month perspective, handling each of these three categories separately. Job related expenses should be packaged under a corporation and associated with a job budget.
After you have a handle on where you are spending, the next step is to budget.
Your day-to-day spending should be approximately 65% of your take home pay. Living off 65% of your income may seem extreme, but it allows a family to stay out of debt and spend their money more deliberately.
The other 35% should be set aside for longer term savings.
Until you are running a surplus, set aside only 10% for charitable giving.
Another 15% percent should be put toward retirement savings even if the entire amount cannot be tax deferred. This amount should ideally be deducted before you even see your paycheck. How should your retirement dollars be allocated? Assuming you don’t work for a company that matches your 401(k) contributions, maximize your contributions to a Roth IRA first. Next, look at a SEP or Simple IRA for additional retirement savings as part of being self-employed. You can consider an individual 401(k) if your financial success warrants it.
Next, put at least 10% of everything you make into a taxable savings account. You can make this higher if you can live off less than 65% of your income. Retirement savings is all well and good, but if you are between patrons, you will need some cash to buy food.
Families who go into debt usually do so because of unexpected spending on their car, home, or emergency medical bills. The smartest way to go forward financially is to avoid going backwards.
Taxable savings can serve as an emergency fund, provide a down payment on a home, or be used to expand your current business or get a new venture started.
Manually making these money movements each month usually takes too much effort for an artist focused on their craft. For this reason we recommend that you automate these money movements so that living frugally and saving and investing is the default.
As your business grows, you should probably start a corporation, perhaps more than one. It actually isn’t that hard, and there are many more opportunities for financial planning and tax management if you have a corporation. Putting income and artistic expenses under a corporation can allow you to take more deductions and pay less tax.
To progress to the next level, you need to have a plan for maximizing your art making money. Many artists view this as a crass compromise with the prevailing culture when in fact their art is counter-culture, edgy and avant-garde. It doesn’t matter. Edgy art can be just as lucrative as pabulum for the masses. You don’t necessarily need to change your art; you need to be someone who can make money from whatever your style of art is.
Assuming that you are going to have a career in the arts, you need to have a reasonable and realistic career plan and know what the next step is toward reaching your goals. If you are in the performing arts or in an art that requires a collaborative effort, it is more important to plan the next step of your career. Try contacting people who are doing what you would like to be doing and ask them what intermediate work led them to where they are. If you are producing art, it may be more important to determine the next step in marketing and selling your product. In this case you may find it important to have a business partner whose sole job is selling whatever you produce.
Like all endeavors, the first 20% of the time you can spend on a career path or business plan will reap 80% of the benefits. My advice is not to miss the 80% benefits because you neglected to invest the 20% effort of getting started. If your work at creating one piece of art can be multiplied by using that art on lots of different products, the time and effort may well be worth it. To stay productive, update your career or business plan once a year on a weekend retreat.
As your art becomes more successful you need to focus on saving and investing. Artistic windfalls should not be spent on short term increases in your standard of living. A sound savings plan will begin to work for you, providing interest, dividends and capital gains that can make permanent increases in your standard of living. Patience and perseverance with your investing will reap a lifetime of rewards.
Want to know how to be a financially independent in just 20 years? Save $1,100 a month and invest it in the stock market averaging 11.5%. You’ll have a million dollars that could spin off enough income to allow you to do whatever and eat well. Behind the magic of compound interest though is first and foremost a financial plan that lives off less than you make. The aforementioned 65/35 budget formula is a good place to start.
One of the worries when you are self employed is health care, especially the worry of a medical emergency that will swamp your family’s finances. If you are in relatively good health, don’t smoke, and don’t abuse alcohol or drugs, you should lean toward covering your own medical expenses out of pocket and having a very high deductible health insurance in case of an emergency and a Health Savings Account for regular expenses.
To protect you against catastrophic medical expenses, Health Savings Accounts are coupled with a High Deductible Health Plan (HDHP). However, to qualify as a HDHP, there are large minimum insurance deductibles. The good news is HSA-eligible HDHP premiums are only a fraction of the cost of a traditional medical insurance plan.
Qualified expenses may also include items which may or may not count toward your deductible. This means that you may be able to use pre-tax money to pay for vision and dental costs like contact solution and teeth cleanings even without dental or vision coverage.
The higher your deductible the less expensive the insurance will cost. I recommend you get as high a deductible as you can and put your savings toward building up the balance of your health savings account until it is larger than your deductible. Anything you don’t spend one year carries over to the next year. You need medical coverage to protect you and your family in an emergency, and a Health Savings Account is the first place to look.
Also, if you have children you may want some life insurance. Don’t hesitate to buy the minimum life insurance you need. I recommend that you buy low-cost term life insurance and invest the difference. You should also look at disability insurance and an umbrella policy.
The next step is to get your documents in order. There are five very important documents to make sure that you have readily accessible.
First, you need a will so that your partner and children are taken care of in the event of your death.
Second, you need a living will so that someone else can make decisions about your life if you can’t.
Third, you need a power of attorney that authorizes some one to manage your finances if you are sick or disabled.
Fourth, you need to compile a directory of basic information for anyone who needs to take over handling your finances in an emergency.
And fifth, you need an annual collection of financial statements both for yourself and also for those helping you with financial planning. This collection of documents will help you track your finances.
These yearly financial statements should include a net worth statement, an asset allocation analysis, the cost basis for all taxable investments, the past year’s performance, your current income and a copy of the first two pages of your tax return. Pulling these documents together is difficult the first time, but updating them every year thereafter is much easier and will help you visualize your progress.
You will need to know some tax basics. You also have to understand when taxes and tax reporting is due. If you have self-employed income, you must make estimated quarterly tax payments. Our tax code is ridiculous, burdensome, and stupid beyond measure. Even if it doesn’t make sense, they will still send you to jail and take away your house for not understanding it.
The IRS also doesn’t care if you send them too much money, so you need to understand how to take every possible deduction. Good record keeping is the key, and potentially your weakness.
The artist can take a number of unique tax deductions. Expenses that are tax deductible are those that are 1) incurred in connection with your trade, business, or profession 2) ordinary and necessary and 3) not lavish or extravagant under the circumstances.
You cannot know what qualifies simply from that description. Only by looking at the actual IRS legal cases can you determine what qualifies and what does not. You need a supportive CPA to help you through this process. More than just helping you fill out the forms, they should be proactive in their tax planning and advice.
Life’s many and varied financial responsibilities put a lot of stress on all of us, but they are easier for the analyst to address than the artist. Hopefully, this has given you some practical advice to begin to manage the financial challenges you are facing.
Remember, if you need help, ask. We may be able to help. Also, the National Association of Personal Financial Advisors at www.napfa.org is one of many helpful sources to find competent fee-only financial advisors.
The original version of this article was published in two parts on August 13 and 20, 2007.
Photo by Svetlana Pochatun on Unsplash