An artist's guide to financial planning
Hi, I’m Lewis Weil, a financial planner in Austin, Texas. I work with a lot of artists, and I’ve seen first-hand that being a working artist is achievable. Maybe making art is a full-time job for you, and you approach it like you’re running a small business. Or, maybe you sell your art sometimes but do other work to support yourself. Heck, maybe you just make art for yourself. No matter what way you approach making your work, though, at some point you’re going to have to deal with money. To help you along, I’ve put together this unscary guide to dealing with money. Your money. It’s going to be okay. Keep reading.
Money is weird. Our brains really aren’t built for dealing with it, because our minds actually haven’t adapted that much from our days running away from tigers and hunting for berries to gorge on. We’re good at thinking about lunch, or about our chances of catching the bus if we leave right now. We think linearly—one thing after the other. Money isn’t linear, though. Money grows and shrinks exponentially.
Here’s an example of exponential thinking: If you took a piece of regular paper, and folded it in half, then folded it again, and again, and did that 42 times, how tall do you think it would be? Maybe a foot or two? Or as tall as you?
Here’s the shocker: It would actually reach from the surface of the earth all the way to the moon. Bullshit, right?! It’s true. Do the math yourself. Every fold makes the paper grow by 100%. This principle is called compounding: growth on growth, or loss on loss.
While it’s rare for finances to compound at 100%, it’s common for credit cards to compound at -20%, or for a retirement fund to grow at 8% a year. Also, inflation tends to makes stuff 3% more expensive every year. Because of this, small-sounding numbers become very important over time. These small numbers can cause you to accidentally get yourself into a deep hole, or help you to build a strong financial foundation. The key here is that it’s important to take advantage of the power of compounding, because it can make or break your finances over time.
The power of a 50/30/20 budget 💰
To me, financial planning is about feeling financially secure, so you can feel free. Having financial success means being free to make choices based on your passions, and not out of economic necessity. You can be free while making relatively little if you plan carefully—it all starts with a monthly budget.
In my experience, most people end the month with nothing left in the bank and are often reaching for credit cards. If you’re already in a position where you save money reliably, congratulations—you’re ahead of the game. If you aren’t, it should be your first goal. Don’t worry about investments, credit card points, cryptocurrencies, or anything else yet. Getting your monthly budget under control is how to build security and freedom.
A 50/30/20 budget is based on three simple categories:
- Obligations: how much you have to spend (50% of your income)
- Discretionary: any time you pay for a thing out in the world (30% of your income)
- Savings: the money that you don’t spend each month, which is building up your financial security (20% of your income)
To get started setting a monthly budget, add up all the costs of your recurring monthly expenses. This includes costs like rent, utilities, phone bill, metro, insurance, internet, vet, prescriptions, etc. These are your Obligations, i.e. the things you have to spend money on. Ideally this amount is no more than 50% of your income. Notice I said “ideally.” It’s not uncommon for me to see people who have 100% (or more) of their income going to obligations. While realizing this sucks, it’s better to know than not to know, and if nothing else knowing this will relieve some of the guilt you feel every month when your bank account is empty. But: if you are over 50%, it’s time to start looking for ways to increase your income, and bring down your expenses.
After taking care of your obligations, 20% of your monthly income should be going towards savings, i.e. your own financial security. The first priority with saving money is building up an emergency fund. No matter how small the amount, having some money in the bank that is yours is a success, and will give you some flexibility should you need it down the road.
The second priority as you work to save money is to pay off any high-interest debt that might be holding you back (debts with interest rates over 5% would count as “high-interest”). Most people don’t know what the interest rate on their debt is, and meanwhile, those negative interest rates are digging them into a deep financial hole. So, by paying them off quickly you’ll be doing yourself a big favor.
Let’s do an example of a 50/30/20 budget:
Jeanette works a couple jobs and makes about $2,000 a month. Her rent is $700, her utilities are $100, her insurance is $140, and her phone bill is $60.
So Jeanette’s budget is as follows:
- Obligations = $1,000 ($700+$100+$140+$60=$1000)
- Savings = $400 (20% of $2000)
- Discretionary: $600 (30% of $2000)
Get started figuring out your own 50/30/20 budget by downloading this template.
When Jeanette gets paid, the first thing she does is move $400 to her savings account. If she is carrying credit card debt, maybe she sends an extra $100 to get rid of it faster. Or, she puts it in her savings account dedicated to her emergency fund to ensure she has money in the bank just in case she needs it. The main thing here is to ensure you’re able to save 20% of your monthly income, and if you can’t save yet, you should use that 20% to more quickly get to the point where you can.
To make it easier on yourself, set up automatic transfers (any online banking service should allow you to do this). Every month, have your bank automatically transfer money to your savings account, and automatically transfer money to your dedicated discretionary account (probably your debit account). This way you won’t spend money you don’t have to spend. Once you’ve done that, really the main thing you need to do is keep an eye on your discretionary spending. Keep that up, and you’re doing great.
Once you’ve gotten rid of high-interest debt and built some cash savings, then it’s time to get the magic of compounding working for you. The good news is that investing has gotten really easy.
I like people to invest 10-20% of their income, or whatever they can (anything is better than nothing). I tend to like what are called “target-date funds,” and I frequently tell people to go to a company called Vanguard. Even if you are terrified and know nothing, they’ll help. They will ask you some questions and help you pick appropriate investments. (Full disclosure: I have nothing to disclose. I don’t work for them, and they don’t give me any money—I just really respect what they do to help people invest well).
There are other good providers. Fidelity is popular and has competitive products and services. And there are lots of interesting startups and apps. The popular term lately is “robo-advisor”—these are services which provide nice interfaces to help you invest. While there are some nice robo-advisors out there, I generally don’t send people to them because the fees are a little higher. Remember: because of compounding, even a fee that seems small can add up. But, if there’s an app or service you love and it makes the difference between you investing and you not investing, then I’m not gonna make a fuss about it.
Now let’s go deep on some of the nuances of investing. When we invest in the market, we are buying stocks and bonds. We buy stocks because of the potential of high returns, and bonds because of their reliability.
Stocks are pieces, or shares, of companies. You buy the stock in the hopes that the company will become more valuable and therefore, your shares will be worth more. Stocks can increase in value by a lot. Their worth can also go to nothing if the company goes out of business. Personally, I don’t believe in buying individual stocks unless it’s with money you can stand to lose—it’s just too risky.
Bonds are loans to governments or companies in which they promise to pay you a certain amount of money regularly, and then to give you the original loan amount back after a certain amount of time. They don’t pay you a lot, but they tend to be reliable.
Now, it would be a real pain to go pick out all the stocks and bonds ourselves. So instead, we buy “index funds.” These are collections of lots of stocks and lots of bonds, which together provide what we call “diversification.” With diversification, you buy lots of different stuff to protect yourself because, while any one company might go out of business, the odds are good that most of them won’t.
Your investing strategy needs to change depending on your age. Let’s assume most people want to retire at age 65. In this scenario, a 25 year-old has 40 years until they retire, whereas a 55 year-old only has 10. You want more stocks when you’re young, because you want the potential for more growth (and if the stocks don’t grow as much, you’ll still have time to invest in bonds). But when you’re nearing (or in) retirement, you want more bonds, because they’re more secure. This is why you buy “target-date funds”: they automatically rebalance themselves as you age.
Retirement account types
Of course, with all the above, you have to put your investments somewhere. There are a variety of retirement investment account types—some available only through employers—that have tax benefits. You’ve likely heard of some of the accounts designed for holding investments, like the “401k” and the “IRA.” Depending on the style of the account, you may get to defer taxes on the money being put into the account, or get to avoid taxes on the growth accrued through the account.
Pre-tax employer programs for retirement savings (401Ks, etc.)
Some types of accounts are only available through your job. At private companies you will see “401(k)” plans. At non-profits there are plans called 403(b), which provide a match on retirement contributions. If you work in local government, it’s a 457(b), and it’s called a TSP if you’re in the military. These accounts allow for “pre-tax” contributions, which means when you put in the money today, you don’t need to pay income tax on those funds. But, when you retire and start taking money out of these accounts, you pay the taxes on the amount you put in and on any growth from the investments.
Often, employers will offer to match your contributions into the above types of accounts. That’s a great deal, and you should at least contribute up to the match—it’s free money, after all. Just putting in that amount likely won’t be enough, though. Depending on your age, you need to be investing 10-20% of your monthly income to ensure you’ll have enough to comfortably retire.
Note: Do not take money out of your 401(k) until retirement, unless it’s a dire emergency. You have to pay the taxes on top of a penalty for early withdrawal, and you lose out on the years of compounding. This is a common mistake, and will kill your ability to build up personal wealth over time.
One last note: In 2018, the legal max you can personally contribute to a retirement account is $18,500 per year. Your employer can contribute more than that, which is why matching programs can be so helpful.
There are also accounts called “IRAs,” or investment retirement accounts, that you can open independently of your employer. You can open a “traditional IRA” which has rules like a 401(k): you get to deduct the contribution today, from this year’s tax return (and therefore not pay income tax on that money). You can invest $5,500 yearly ($6,500 if you are over 50). You can still contribute and have it count for the previous year’s taxes if you make a contribution before tax day, April 15.
There is a special type of IRA called a “Roth IRA,” which I’m a big fan of. With a Roth IRA, you pay the income taxes today, and then you owe no taxes later when you retire. Since we don’t know what tax rates will be in the future, I like to advise people to do both a pre-tax 401(k) and a post-tax Roth IRA when the option is available.
You do have to pay to invest, but you’ll never see a bill. This is because the fees are taken directly out of your account as something called an “expense ratio.” I like to see expense ratios well below 0.5%. 1% or above is robbery, if you ask me (1% might not sound like a lot, but remember the power of compounding—1% will eat up a lot of your money over the years!). Always ask to see the total expense ratio for any account you set up, and don’t trust anyone that tries to hide it from you.
Just don’t. Come at me, y’all.
Personal investing is about thinking long-term, being diversified, and taking advantage of compounding. Anything else is speculation, whether you’re picking individual stocks or cryptocurrencies. Of course, you’re welcome to be speculative with your discretionary money. Just not with your savings.
When someone decides they want to be a self-employed artist, they have to figure out if they can afford to do so. In order to have that knowledge, it’s important to start selling your work now, before you’ve fully committed to earning all your money through your art. Once you make this jump, your art will be your business, so you’re going to need to treat it as such.
To figure out how much money you’ll need to earn through your artwork, take all your personal financial obligations, add them up, and then double that number. (Recall that 50% of your income should be going to obligations, so double that number is what it takes to have some spending money and savings.) Keep in mind: this number is after you’ve paid taxes on your income, and after you’ve paid for any expenses like studio rent, supplies, etc.
After doing the math, you might be freaking out. It might seem impossible. And yes, it will be hard. But it’s not impossible. Running a small business is hard, trust me, I’m doing it. And, of course, being an artist is hard, too. Doing both is harder. Use this number to motivate yourself. Start small, and be patient. Remember the power of compounding. Work on keeping your art business growing. Keep your expenses under control. You’ll get there.
Some tips on business management 😬
Most people—hell, most business people—don’t know much about running a business. They just have an idea and they go for it. Do yourself a favor and follow some of the below good business practices.
Get a “DBA” (doing business as). This is the thing that lets people pay you as something other than your own name. Essentially, it’s your business’ name. Do an online search for DBA registration in your city. It’s easy and cheap.
You’ll also want to get an EIN (employer-identification number). This is like a social security number, but for businesses. It will come up at some point in the future, so you might as well get one sooner rather than later. Getting an EIN is easy and free at this link.
Business accounts & LLCs
Once you have a DBA and an EIN, you can get a business checking account, preferably at your favorite credit union. Start keeping your business money and personal money separate. When you get paid for your art, this is now where that money goes. When you have a business-related expense, use this to pay it. Earn some profit? You can pay yourself, or you can invest it back into the business to get more supplies, go to events, or do whatever else your business needs to grow.
If you do this, your business is considered a “sole proprietorship”. This means you have full ownership, responsibility, and liability. It’s the same if you have a partnership, except you are sharing the liability with someone else, which can be scary. This is because with a partnership, you’re jointly responsible for the things your partner does, and vice-versa. Because of this, you might want to consider setting up an “LLC”—a limited-liability corporation. I’m not a lawyer, so I’m not going to make any promises or recommendations here—just be sure to consider what you’re doing and do your research.
The short answer to the accounting section is simple: Do it. You can get Quickbooks Self-Employed for a small monthly subscription, which includes an app to help you track your mileage and other things for those sweet tax deductions.
Once you start making real money, then it might be time to start working with a bookkeeper. It will make you a much better business if you can understand how your money is flowing, and other businesses will take you much more seriously once you start talking about your own balance sheets and profit-and-loss statements. I use and recommend the bookkeeper Key Figures Co-Op. They are awesome, affordable, and are cooperatively owned and operated.
Now that you’re running your own business, you need to pay your quarterly taxes! So many people don’t realize they are supposed to be doing this. If you have a regular job, then your employer is setting aside your tax deductions for you. If you are self-employed, it’s up to you to set aside your “estimated taxes.” The IRS wants your deductions quarterly, i.e. every three months. If you don’t do this, you might be subject to fees and interest when you file your yearly return.
The good tax news is that as a self-employed person, you get to deduct a lot of stuff. Drove to an event? That’s a deduction. Coffee with a collaborator? That’s a meeting, therefore it’s a deduction. Plane tickets to conference? Deduction. Home office/studio? Deduction! The tax code was written for businesses, because the government wants people to start businesses and hire employees and stuff. I recommend working with a CPA—a certified public accountant—to help you get all your deductions and file your tax returns properly. It will probably cost a few hundred bucks, but they could save you more than they cost you.
The secret to having money is getting organized and doing a little arithmetic. Keep your expenses near 50%. Save 10-20% of your money when you get paid. Figure out what your discretionary budget should be, and don’t spend more than that most months.
Hit me up at firstname.lastname@example.org if you need more help. I’m happy to talk with you, no charge. I always love meeting new people, especially artists.
If you want to learn more on your own, I love the book All Your Worth, by Elizabeth Warren and Amelia Warren Tyagi. You can find it for free at your library or used copies for just a few bucks.
— Lewis Weil
Note: Money Positive is a B Corp, and as part of its mission, aims to directly invest in and support nature. Money Positive chose to donate its writer fee (paid by TCI for producing this guide) to the Billion Oyster Project, which you can learn more about here.
Note II: Lewis and Willa (the editor of this guide) would like to extend a thank you to Ben Lotan and Tara Shi of This Will Take Time, who helped make this guide possible by connecting us.
Lewis Weil is the founder of Money Positive, a sliding-scale financial planning company that’s also the first (and only) one of its kind to be certified as a B Corp in the state of Texas. Weil was previously a professional molecular biologist studying neurons, seaweed, and DNA. While working as a biologist, he realized he was surrounded by brilliant people who were bad at money. This realization led him to taking financial planning courses at the University of Texas at Austin, then to becoming a registered investment advisor (RIA), and then to starting Money Positive with the goal of helping people to build longterm financial security. Weil lives in Austin, TX, where he spends his free time doing natural habitat restoration and hanging out with his partner Rae and his pit bull Bubblegum.