Written for, and posted on, Ember & Solis.
As creatives and as entrepreneurs we have special circumstances we need to prepare for. The harsh reality (that many of us have begun to face head on during the COVID-19 crisis) is that in our field, we have the potential to be without income for months or longer at any point in our careers.
The stress and hardship this can bring on hits to the core. It hurts. I hear you.
If you had 6 months to a year of income saved up for this moment, things would be less stressful, a bit easier to cope right? That would be ideal, but the question we hear so often is “How is that possible!?” We have student loans, bills to pay, investments we need to make in our business. Today I’m going to walk you through a budget plan to get your finances in order so that the next time something like this happens, you will be ready to face it head on.
Part A : Build your Reserve
The first phase I recommend, is to put any extra money into a savings account reserved for emergency situations.
“Wait.. shouldn’t I focus on paying off my debt faster or investing in my business first?”
Here’s the harsh reality. This is not the first economic recession, and it won’t be the last. We experienced one in 2008, and here we are again. As an entrepreneur or creative by choice, we have the risk that during an economic downturn we may not have income for months, for a year even. The risks are very real and they are outweighed by many rewards of owning your own business, but the risks need to be managed. That’s why I’m recommending you build up a savings account before focusing on other areas of saving and spending.
What does this look like?
First, calculate your expenses each month. These are mandatory things like rent, electricity, food, minimum payments on any debt, and gas. If you had no income - how much money would you need to make it a month? Now multiply this by 6-12 months, and this is your goal.
If you don’t have this emergency fund saved yet, I recommend not paying extra on loans (make the minimum payment only), and not spending on things you don’t need (clothes, that new car, that new lens for your photography business that you might not need, etc). This emergency fund is going to be what may get you by one day, so this is your priority.
Set aside as much money as you can each month until you reach your savings goal. Put this money in its own special savings account so it wont be spent on other things later. Try to find a high yield savings account so that you can collect the highest interest rate on it.
Part B - Pay off debt
Once you have your emergency fund of 6-12 months in a savings account, do not touch it! Congratulations, you are now prepared for a loss of income from 6 months to a year, an amazing security to have for yourself - this is huge! You can lighten up a little on spending now, and allow yourself to buy a few non-essential items while you focus on paying down your debt to zero.
The approach that I think makes the most sense to pay off debt (and actually stick to it) was actually promoted by Dave Ramsey, and it’s called the “Snowball Method”. Here’s how it works!
1. Make a list of all your debt (credit cards, student loans, car loan, mortgage, etc).
2. Continue making the minimum payments on all of your debt.
3. Now, which debt has the smallest balance (For example, maybe this is a credit card with a $3500 balance?). You are going to pay whatever extra you can on this each month. So for example if your minimum payment is $100 and you have $500 extra you can spare each month, you are going to pay $600 each month on this debt until it is completely gone.
4. One down? Congrats! You’re knocking them off the list! Now, what is the next smallest debt on the list? Go ahead and take the amount you spent each month to pay off the debt in step 3 ($600 in the example in step 3) and pay this as an extra payment each month until it is completely paid off. So for example, if your next biggest debt was a car loan for $10,000 and your monthly payment is $200, now you are going to pay $800 each month ($200 minimum + $600 extra). You are still paying the exact same amount on debts as last month, but since once debt is gone - you are putting all of that towards another debt.
5. Two down? What an amazing feeling that will be! Continue this process on the next biggest debt until you are officially debt free.
Why does the Snowball Method work? By working from the smallest debts to the larger debts, you have milestones to celebrate which psychologically will help you keep to your goal.
Once you have paid off your debts you can lighten up even more on spending and allow yourself to start purchasing more fun items each month.
Part C - Save for Retirement
If you’re not employed by a company who helps put money into your retirement account, odds are you have to be the one who puts together a plan for the money you will need to retire. Relying on social security, a partner, or others to support you in the future is not as wise of a decision as taking this into your own hands.
As a creative, or entrepreneur, you will want to start setting aside money every month so that when you are ready to stop working, you will have a bucket of money to live off of. You will also want to invest this money so that it grows year over year, meaning the earlier you start this, the more your money will work for you!
Mutual funds are a great way to invest your money because they are less risky than buying stock from a single company. A good mutual fund should give you an 8% increase or more (average) on your money each year, over the long term.
Another great thing to look into when starting your own retirement account is a Roth IRA. By paying tax on the money you put into the account today, you won’t have to pay tax on the (much larger) amount you pull out when you are ready to retire. I highly recommend researching a Roth IRA and seeing if it is the right choice for you. There are many websites such as Fidelity, that can help you get started with a Roth or regular IRA account, which you can contribute money to each month, and invest based on the level of risk you are comfortable with.
Since a young age, I have been focused on saving money, having multiple streams of income, keeping debt to a minimum, and building assets. This structured approach has worked for me but may not work for everyone.
This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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