To bring a new voice, a valuable perspective, and great advice for all photographers to our blog, we have teamed up with the fine folks at Wonderful Machine. On occasion a blogger from the WM team will be contributing to this expert advice column. In this latest installment, Bill Cramer writes about a little topic we’d all be wise to pay attention to: wealth management for photographers.
Photographers think a lot about how to make money, but saving it is a different matter altogether. It’s something that presents a unique challenge for many photographers who don’t collect a regular paycheck or have employer-sponsored retirement plans. Saving can be even tougher when there’s always some new piece of equipment, software or marketing program demanding your hard-earned cash. But it is essential for anyone interested in owning a home, sending their kids to college or retiring someday to make savings plans.
Saving is something that I’ve been conscious of since I was a little kid watching Wall Street Week with my dad on Friday nights. I can remember learning that some people in the world had saved enough money that they didn’t need to work anymore. They had so much money that they could live off of just the interest and dividends from their investments. I remember thinking what a great idea that was and I was going to try to do it. Though I’ve never made a ton of money as a photographer, I’ve always been able to save; even when I was shooting fifty dollar assignments for the AP.
Here are some basic tips that can help you get started. (I am not an attorney, accountant, or investment professional. These tips are based on my experience, but you shouldn’t take it as professional advice.)
- Live within your means.
Regardless of how much money you earn, you have to spend less than you make. For some people, that might mean living with their parents for a while or buying a coffeemaker instead of going to Starbucks. Being frugal is different from being cheap. Cheap is stiffing the waitress. Frugal is skipping dessert so you can tip the waitress.(Even better, stay home and cook for yourself!)
- Only borrow money to buy things that appreciate in value or generate revenue (like school loans, photographic equipment, and home mortgages). Borrowing money to goon vacation is foolish because you’ll be paying for it long after your tan has faded. Borrowing money to buy a car is questionable. It’s a depreciating asset, but if you need it to get to your job, it may be worth it. Just don’t let the “free money” seduce you into buying a more extravagant ride than you can afford.
- Pay off your credit cards in full each month.
Credit cards are great for buying things because they can streamline your recordkeeping and it’s like a free short-term loan, but if you’re not careful, it can turn into a very expensive long-term loan. Regardless of the credit limit of the card, you have to be aware of your personal credit limit based on your cash flow. That easy loan can be seductive, but it’s a Faustian bargain. Like buying your groceries at 7-Eleven, you’ll pay a premium for the convenience. Better to borrow a lump sum at a reasonable interest rate that you pay off each month. Even if you borrow money from a relative, write up an agreement with a payback plan and stick to it. Pay off the debt with the highest interest rate first, then work your way down.
- Reconcile your credit card and checkbook every month.
(See how at the bottom of the page.) The process will not only keep you from overdrawingyour accounts but minding every penny you earn and spend is the first step towardssaving. Keep your ATM and credit card receipts and make sure they match up with yourstatements. Those slips of paper will serve as a reminder to make smart choices allmonth long. Don’t pay ATM fees. Open an account at a local bank and use their free ATM when you need cash (some convenience stores like Wawa in the Philadelphia area waive the ATM fee).
- Be satisfied saving small amounts of money at first.
Every journey begins with a single step. Develop a habit of saving each month and then gradually increase it as your income grows. Once you get into the habit, you’ll get as much of a thrill from saving as you do from spending.
- Learn how compound interest works.
Some claim that Albert Einstein said that “compound interest is the most powerful force in the universe.” In the short-term, interest may seem like a very small reward for your efforts. But over decades, it’s the interest on the interest that allows your money to grow exponentially. This is why the rich get richer, and the poor get poorer. Over a lifetime of saving, the interest that builds up can be double or triple the principle you’ve saved.
- Charge as much as possible for your photography.
There will certainly be times when you’ll do favors for friends and relatives or charitable causes. But everyone else should pay top dollar. Your pricing should be dynamic. Evaluate each assignment and stock sale individually and price it to maximize your income. Learn how licensing works, how to write a licensing agreement and how to charge for it. Share pricing information with other photographers. Ignorance drives prices down; knowledge drives them up. You can find lots of examples of photography estimates on our Photographer Blog and APhotoEditor.
- Pay as only much as necessary for all of your business expenses.
Be realistic about what kind of return on investment you’re going to get with every person you hire and each purchase you make.
- Understand the difference between your business and personal money.
For a sole proprietor just starting out, it might not be worth the trouble of having both personal and business credit cards and bank accounts (though there’s no question that you’ll want to do that eventually). When your business is small, there’s a lot of value in keeping things simple. What is important, though, is to document each transaction and attribute it to the appropriate category so it’s easy to fill out your tax returns and so you can explain yourself in case you get audited by the tax authorities.
- Create a bookkeeping routine.
Gustave Flaubert said, “Be regular and orderly in your life, so that you may be violent and original in your work.” When I was still doing my bookkeeping, every Sunday morning I would put a load of laundry into the washing machine and sit down to do my bookkeeping for the week. I would deposit my checks, pay my bills, and record each transaction on a paper ledger (shows you how old I am). By doing that work a little bit at a time throughout the year, it saved me the headache of doing it all at once at tax time. In the United States, the Internal Revenue Service will want to see not only how much money you spent on your business, but how you spent it. You’ll be required to fill out a Schedule C tax form that splits out things like rent, equipment, supplies, insurance, etc. So it will be helpful if you track those categories along the way. QuickBooks is a popular bookkeeping application that will make that process easy for you.
- Embrace capitalism.
The alternative is even worse.
- Saving isn’t just green in dollars; it’s green in terms of sustainability too.
It’s true that spending helps the economy in the short term. But spending is an economic dead end (both individually and collectively) without a proportional amount of savings to go along with it. (Savings provides capital for individuals to buy homes and for companies to grow.)
Enough platitudes. Here’s an actual system you can put in place to start saving. Find a no-fee (or low fee) checking account at a bank near you.(Don’t expect that account to pay any interest.) Once you build up enough of a cushion where you can comfortably pay your bills each month, open an interest-bearing money market account (Vanguard is a good place to do that). Let’s say you decide to keep $5,000 in your checking account. Each month, when you balance your checkbook, transfer any excess money to your money market account. Maybe you decide to keep $20,000 in your money market account as a reserve. Every quarter, as that money builds, transfer the excess money to a low-cost stock index fund that invests in shares of lots of big companies (I like the Vanguard 500 Index Fund). That’s where you’ll get (on average) good appreciation in exchange for moderate risk. When you get close to a big purchase that you’ve been saving for, stop moving money into your long-term account and let it build up in your money market account.
You will eventually want to have two long-term accounts ? one for retirement and one for other long-term goals like buying a house. The advantage of a retirement account like a SEP IRA is that you won’t have to pay income tax on the money that you put in or on the resulting dividends or capital gains until you start withdrawing that money many years down the line. Consequently, it will grow much faster. If you make a ton of money, it might make sense to contribute to both a retirement account and a “house” account. But for most people, unless you have an employer matching your retirement contribution, it might make sense to first save for your house down payment, then once you’ve bought your house, start saving for retirement.
You might wonder how much money you need to retire comfortably. Certainly, it depends on the kind of lifestyle you’d like to grow accustomed to. On one hand, the cost of living in retirement can be less because you’ll probably have fewer mouths to feed (with any luck, your kids will be self-sufficient by then) and your house will be paid off, and you won’t have to save for retirement anymore because you’re retired. But some things will cost more. Chances are your health will decline, which will be expensive. And if you’re lucky enough to stay healthy, you might want to travel and enjoy yourself a little after all of those years of hard work. So all things considered, your post-retirement life might only be slightly less expensive than your pre-retirement life.
At the moment, a modestly middle-class life in America for a family of four will run you about $100k/year before taxes (depending on where you live). To make that off of interest and dividends, you’ll need 17 times that or $1.7 million. Over the past 100 years, the stock market has provided the best return on investment compared to alternatives like bonds, commodities (like gold, silver, pork bellies) or real estate. Unlike putting your money in the bank (or in your mattress), any investment can lose money. But the longer your horizon time, the safer the bet is that you’ll be ahead of the game when it’s time to collect. The U.S. stock market has returned an average of 9% over the past 100 years. Inflation has been on average 3% over that period. So adjusting for inflation, you might reasonably expect to effectively get a 6% appreciation on your money in the long run. (The numbers below allow you to see the appreciation in “today’s dollars,” as though there was no inflation to consider.)
So here’s one way you could map out your route to getting that $1.7 mil (it says interest, but what I really mean to say is appreciation):
Of course, you’ll see that even after saving for more than 40 years, you could still come up a little short. I’m assuming that since you’re a wise person and you’ve saved all along, your parents were probably sensible people too and that they left you a little something (in this case, we’re hoping for $325k). And if not, maybe Social Security will help out. Saving for retirement isn’t easy. But with a little planning and discipline, it’s an attainable goal for most photographers.
How to reconcile your checkbook:
Your bank will keep track of all of your transactions, but it’s important for you to keep your own set of transaction records. As you make each deposit and write each check (or make an electronic payment), you’ll want to record it in your ledger. At the end of each month, your bank will send you a statement detailing all of the transactions that they’ve recorded. But since the checks you write aren’t necessarily cashed in the order that you write them, and since many of them won’t show up on your new statement, you need to reconcile the bank’s records with yours to make sure every transaction eventually turns out the way it should.
If you use Quicken or some other personal bookkeeping application, it will prompt you to balance your account and guide you through the process. If you keep track on paper, you’ll have to reconcile your account manually, but it’s easy. All you have to do is check off each transaction as it appears on your statement, then check off the corresponding transaction on your ledger. When you get through the whole bank statement, write out this equation, filling in the numbers for the following items:
ending statement balance
+ outstanding deposits
? outstanding withdrawals
? outstanding checks
= ending checkbook balance
If those items add up correctly, you’ve successfully reconciled (some call it “balanced”) your checkbook. If it doesn’t add up, you’ve made an arithmetic error, or you’ve omitted or incorrectly recorded a transaction. On rare occasion, I’ve even found errors in my bank’s records. Go through your entries and rework the math until it comes out right. (One common mistake I used to make is recording a deposit as a withdrawal.) Reconciling your bank account is worth the time and effort because it allows you to know exactly where your money is and it allows you to be decisive about moving your money around to where it needs to go.
How to reconcile your credit card statement:
The credit card statement is a little easier to reconcile. You don’t need to keep your own ledger the way you do with your checking account. You just need to keep all of your credit card slips and then match them up with the list of charges when you get your statement. Then keep those slips with the statement in that envelope so you have a record of that purchase that you can go back to if necessary.