Financial Planning for Artists

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Financial Planning for Artists
Budgeting and tax planning are imperative for artists

There is an art to making money, but holding on to it requires a different set of skills.

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There are a number of issues that are specific to artists when it comes to financial planning. First of all, most artists live in a feast or famine environment. Not only are their cash flows irregular, their earnings cycles typically swing from periods of low income followed by a big increase and then, all too often decrease sharply again. Because their earnings often occur in a brief time span, potentially catapulting them to the highest tax bracket and maximizing their tax hit, budgeting and tax planning are very important. There is an art to making money, but holding on to it requires a different set of skills. When you have made it and lost it, it is a lot harder to do it again the next time.

Another point unique to artists is their attitude towards money. A lot of artists are intimidated by money. "I just don't know how to handle money" is a common phrase we hear from our clients. This attitude prevents many artists from seeking out and using help that is available to them.

Distasteful is another word. "I am an artist, I am not in it for money. I want to focus on art, not money." These are sentiments shared by many artists. But unless they are doing it as a hobby, like it or not, artists are business people. Few artists see themselves that way.

The objective of a financial plan is to set realistic goals, to provide stability and security. Financial planning is mostly about habits. If you have bad habits when you have little or no money, you will have bad habits when you have a lot of it. Good habits can alleviate stress and give you options. More importantly, it can give you peace of mind so that you can focus on your art. When you develop good habits, you are investing in yourself, which is the most powerful investment you can make, more important than the money you'll save.

Financial planning helps you prepare for economic uncertainty, and ever changing tax laws¹. It helps to fulfill the need for self reliance. Financial planning is about setting realistic goals and establishing a consistent plan to achieve them. In order to provide comprehensive and long-lasting financial service, different areas of financial planning and management are emphasized at various times in an artist's career.

For early-career artists, cash management is important. This involves budgeting, cash flow analysis, developing a savings plan and setting up an emergency fund. For mid-career artists, tax and retirement planning is key. To help reduce taxes, tax advantaged investments might be emphasized. Another strategy is to gifting to family members or donating to charitable organizations. Strategies to defer tax include setting up retirement programs such as an IRA or 401(k). Many artists are unaware that tools like these may be available to them. For established artists, ongoing wealth management is the focus. This involves estate and education planning, tax planning, and retirement planning.

Many legal and tax issues impact the art world. Keeping appraised of developments and working with trustworthy professionals whose business it is to keep current is essential to one's financial well being. Just as a medical check-up is a vital component of one's physical health, a financial "check-up" can be critical not only to current financial health, but also to avoiding the pitfalls that loom down the road ahead.

We use four easy steps in creating a financial plan. The first step involves collecting information. Then, both short and long term goals are set. The third step is to implement the plan. Finally, the plan needs to be monitored.

To determine retirement needs, for example, a person at age 45 has a desired retirement spending of $40,000 per year in today's dollars. Based on a 4% inflation assumption, over a 20 year period, $40,000 will have ballooned to $87,645. This means that by the time this person retires at age 65, he will need to have an annual retirement income of $87,645. If this person lives for another 20 years, the amount of money he needs at retirement will be $1,083,488, assuming he earns an annual 10% return over the 20 year period².

Because of the power of compounding, starting early is the key. A person at the age of 19 begins investing $2,000 a year for 7 years. His total investment of $14,000 will grow to $586,548 by age 60 assuming he is getting 10% return on his investment2. Another person starts investing at the age of 26 will have to invest $2,000 every year for the next 35 years to have $596,254 by age 60. His total investment will be $70,000, five times more than the person who begins investing seven years earlier. This is just an example of the type of information that can be invaluable to an artist grappling with financial questions.

Finally, take steps to educate yourself, develop good habits about money, work with trustworthy people and spend a little bit of time focusing on yourself as a business. This will free up a lot of time for you to focus on the areas you enjoy and that bring meaning and value to your life. When properly approached, money can alleviate stress. It allows opportunities, opens up possibilities, both artistic and life style, such as travel and education. It is a well-documented fact that most artists, regardless of their field, experience financial difficulties over the course of their careers, and that many of these difficulties might have been avoidable. Getting the facts and working with the right people can be the key to making the right decisions and making them before troubles strike.

1 Prudential Securities is not a legal or tax advisor. However, its Financial Advisors will be glad to work with you, your accountant, tax advisor and/or attorney to help you meet your financial goals.

2 From 1970 - 2002, the annualized rate of return for large cap stocks is 10.81% and 12.85% for small cap stocks. Source: Ibbotson Associates. Past performance is no indication of future results. The numbers cited are for illustrative purposes only. Future results may vary. The article does not propose any specific investment or asset classes, and does not advocate any investment activity without a financial plan. Actual equity performance over the past few years has been significantly below the long term trend, and in most cases equities should represent only a portion of any investment portfolio or plan.