Finance tips for musicians

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Meet Margaret Leddy! A recent MBA graduate with a concentration in Investments. Maggie also has a masters in violin, and is based in Boston! Here she shares her knowledge and passion for music, and shares awesome financial tips. 

Part I

When it comes to money, it is best to be honest with yourself and think about how you want to spend the money that you make. Some people value nice cars, others traveling the world, while others just want to spend the bear minimum and watch their money grow. But what makes a good investment and what makes a bad one? Is a college education worth the expense? Is it worth splurging for your dream car? These are questions only you can answer. However, if you do hope to retire someday, you will need to take some action now.

  1. Know your average income and average spending and create a flexible budget. If you haven’t done so already, consider setting up a budget. Take a look at how much you typically make in a given month, and how much you spend. You will have fixed costs and variable costs every month. Budgeting for fixed costs is pretty straight-forward. Those are the costs that never change month to month, such as rent, car insurance, utility bills, etc. Variable costs are those that tend to be less predictable.

    If you want to start tracking your money quickly and easily, just track your income and expenses day to day. You can either use an excel spreadsheet, google sheets, or a notebook. Sit down once a week (or every evening if you have the time!) and take a look at your transactions. Most credit card and checking accounts have separate transactions listed in real time.

    Sign up for an account on mint.com and link this to your bank accounts, credit cards, etc. Mint.com will sort your spending into categories based on the transactions that are listed in your accounts. For example, Eversource, an energy company, will automatically be categorized as a utility. With mint.com you can also set budgeting goals in order to stay on track.

    Be sure to account for taxes when you set up your budget. If you are a freelancer your taxes will probably not be withheld; in this case you may want to consider paying taxes quarterly so as to avoid paying a large sum in April. Always track any business related expenses, including transportation to gigs, strings, sheet music, etc. And consider consulting with a tax expert to determine other means of reducing your tax burden.
     
  2. When it comes to paying your debts, prioritize those with the highest interest rates, such as credit card balances. If you have a credit card with an unpaid balance, try to avoid using it. You may need to adjust your budget; find an area to cut spending so as to free up funds for eliminating high interest debts.
     
  3. Save for an emergency. Even if you are in debt, saving money can be possible with the right strategy. If the interest rate on your debt is higher than the interest rate on your savings, prioritize paying off the debt. If the opposite is true allocate a higher percentage of your income to your savings.
     
  4. Invest for retirement. If your employer does not offer retirement benefits, you may want seek out the advice of a financial professional. If you would prefer to take a stab at it on your own, consider an investment company such as Vanguard, which maintains retirement funds that are available for direct purchase. If you have no experience with investing, take a look at Betterment, a company that utilizes robo-advisors to help you navigate investment markets. I personally like to use target date mutual funds, which are designed for investors who do not wish to actively manage their accounts. Of course, there are risks that should be considered when investing--I highly recommend consulting with a professional financial advisor before undertaking any investment plans.

Some useful financial apps:

  1. Mint https://www.mint.com/
  2. Personal capital https://www.personalcapital.com/
  3. YNAB (You need a budget) https://www.youneedabudget.com/
  4. Tiller https://www.tillerhq.com/

Part II

Last week I mentioned a Personal Balance Sheet and this week I wanted to expand the topic and help you come up with a successful balance sheet for yourself.  

You can download your own personal balance sheet here!

Any business or company's financial statements always include a balance sheet. The balance sheet is considered a snapshot at a point in time of a company that includes company assets and liabilities. The balance sheet reports what a company owns and what a company owes, giving a potential investor the current financial position of the company. A personal balance sheet will not only give you a picture of your financial position, but it will act as a useful tool in measuring your progress toward your financial goals, maintaining information about your financial activities, and provide helpful data that can be used when preparing tax forms or applying for credit or loans.

Once you complete your balance sheet, you can calculate your net worth. Determining your net worth will provide an indication as to how you might prioritize your financial goals. I mentioned in the previous article that there are personal finance apps such as Mint that have a feature which assists in setting up a personal balance sheet. I have included an excel spreadsheet that I like to use, which is based on the balance sheet found in Kapoor, Dlabay, Hughes, and Hart’s 12th edition of Personal Finance.

Step 1 in the process of setting up your balance sheet is determining the value (or estimated value) of your assets/possessions. 
Your assets include liquid assets such as cash, and items that can be quickly turned into cash (liquidated). For example, money in a checking and savings account, cash value of insurance, cash in your wallet or under your mattress are all included in your liquid assets.
> Next, list any real estate that you own. The value is the current market value of the home, condo, etc.
> Next, determine the value of your personal possessions (don’t forget your instrument!). Include the market value of your car if you own one. Kelly Blue Book is a great resource for looking up the value of cars:https://www.kbb.com/whats-my-car-worth/?ico=kbbvalue. Also included are electronics such as your laptop, headphones, mobile phone, etc., as well as, jewelry, furniture, and the like. You can value your personal possessions at the purchase cost, but a more accurate method might be to have them appraised, or to check online to see what the items are currently selling for.
> Finally, if you have a retirement account or investments accounts, include those. The sum of your liquid assets, real estate, personal possessions, and investments will be your total assets.

Step 2 is to list all liabilities starting with current liabilities and then adding in long-term liabilities. Current liabilities include: bills, credit card balances, auto loans, etc. Long-term liabilities include: mortgages, student loans, and any other debts owed over a longer period of time. The sum of current liabilities and long-term liabilities is equal to your total liabilities.

Step 3, the final step, is to subtract your total liabilities from your total assets. This will give you your net worth!

This information can be a valuable reference tool when determining financial goals. For instance, if you have a negative net worth, you may want to prioritize paying off your debts before investing money. The process of creating a balance sheet may take some time but, once it is set up, it will be easy to make adjustments each month, quarter, or year, depending on how often you choose to update it. The goal will be to increase your net worth over time.

Having detailed information can help you to decide where to make changes in order to increase net worth. Increase any of your assets (consider investing in a mutual fund to grow your assets that much faster!), or decrease any of your debts (tackle the high interest rate debts first!) and voilà! Good luck and happy saving!

 

References

Investopedia Staff. “Reading The Balance Sheet.” Investopedia. 20 May 2018. Web. 14 Aug 2018.https://www.investopedia.com/articles/04/031004.asp

Xu, Hannah. “Why you NEED to have a personal balance sheet to become rich.” LinkedIn. 15 Nov 2014. Web. 14 Aug 2018. https://www.linkedin.com/pulse/20141115083211-213321273-why-you-need-to-have-a-personal-balance-sheet-to-become-rich/

Dlabay, Les R., Melissa M. Hart, Robert J. Hughes, and Jack R. Kapoor. Personal Finance. 12th ed., McGraw-Hill Education, 2017.