The image of the starving artist has prevailed too long. At the July 24-29 San Diego Comic-Con there were tens of thousands of people working in the arts. Of the 650 hours of events and presentations, only one hour was devoted to financial planning for artists. Here are the financial essentials that artists avoid at their peril.
Financial planning is simply doing what it takes to give you the where-with-all to do what you want. The first time that financial planning keeps you from making a big mistake, it will have paid for itself ten times over. It is that important. The poorer you are, the more you need financial planning. You don't have any margin for mistakes.
Complicating the topic, the artistic temperament tends to avoid the analytical activities required for financial planning. This leads them to make one of these mistakes: avoiding the subject all together, trusting people they shouldn't, or trying to do it themselves. You can be an artist and also eat well. But first you must admit you need help, and find someone trustworthy who will.
For each area you need help, identify who will accomplish the task. When you are just starting out you may have to do some of the financial planning yourself. Family members can also be very helpful. As your artistic time becomes more valuable, it will pay to outsource some of these functions to trustworthy and competent professionals.
Members of the National Association of Personal Financial Advisors (NAPFA) are truly comprehensive and strictly fee only. They sign a fiduciary oath and accept no commissions which helps eliminate many potential conflicts of interest. You can visit www.napfa.org to find a fee-only advisor in your area. A comprehensive financial planner can help you with everything without trying to sell you anything.
This column will describe what you need to do regarding cash flow and career planning. Next week we will describe what you need to do about insurance and legal concerns.
The first step is to keep track of what you spend each year and 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, and 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.
Your day to day financial spending should be approximately 65 percent of your take home pay. The other 35 percent should be set aside for longer term savings. Living off 65 percent of your income may seem extreme, but it allows a family to stay out of debt and spend their money more deliberately to meet the financial goals they value most. Failing to account for the 35 percent is the greatest cause of financial trouble.
Here is where the 35 percent you don't spend each month will go.
Those who are artistic are sometimes generous to a fault. Until you are running a surplus, just set aside 10 percent for charities. Another 10 percent should be put toward retirement savings even if the entire amount cannot be tax deferred. This amount should be deducted before you even see your paycheck. This represents 20 percent of the 35 percent we are setting aside.
How should your 10 percent retirement dollars be allocated? Assuming you don't work for a company that matches your 401k 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 401k if your financial success warrants it.
Next, put at least 5 percent of everything you make into a taxable savings account. You can make this higher if you can live off less than 65 percent of your income. Retirement savings is all well and good, but if you are between patrons, you will need some cash to buy food. 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.
Of the initial 35 percent, there is now 10 percent left. Save this 10 percent for large unexpected expenses. 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.
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 have 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 percent of the time you can spend on a career path or business plan will reap 80 percent of the benefits. My advice is not to miss the 80 percent benefits because you neglected to invest the 20 percent 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 5 percent taxable account and 10 percent retirement account 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 percent. 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 65/35 formula is a good place to start.
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 stress does not usually enhance creativity in the arts. It is essential for artists who want to gain the freedom to pursue art as their livelihood that they follow the advice in this article. Financially successful artists do what they're good at, follow the 65/35 rule, and secure the analytical help of other financial types to help them along the way. ________________________________________
Marotta Asset Management, Inc. of Charlottesville provides fee-only financial planning and asset management. Visit www.emarotta.com for more information. Questions to be answered in the column should be sent to email@example.com or Marotta Asset Management, Inc., One Village Green Circle, Suite 100, Charlottesville, VA 22903-4619.
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