Illustration: Leo Peng
Managing your finances as a creative doesn’t have to be painstaking—it can even be fun.
We tend to try to ignore the things that stress us out, which leads to more stress. I’ve found that many self-employed creative people have no idea how much money they’re making and spending every month. They’re often met with a surprise when they check their bank accounts. By getting a handle on your finances, as well as your business goals and your plan of action, you can free up time and mental space to focus on making music. Below, we share some basic tips for running your business that’ll give you a clear idea of where you’re at as a business and where you want to be.
Before diving in, however, know that I didn’t figure these things out on my own. Business consultant and owner of Anchor & Orbit, Sarah Schulweis taught me about turning goals into actions and cash flow through the Business Foundations Program. Personal finance manager and founder of Money Positive, Lewis Weil showed me how to create a budget and manage my finances. The below tips will get you started, but remember that there are people out there who can help you when you get stuck.
Disclaimer: I’m not a financial or business consultant; these are simply the tips I’ve gathered along the way as a freelancer. Take what you like, leave the rest.
1. Know your cash flow and create a budget
You can’t create a budget without knowing how much you’re earning and how much you’re spending. This is called a cash flow. An official cash flow statement is probably unnecessary; tracking your income and expenses in a spreadsheet and / or with an app should be sufficient.
I use Quickbooks Self Employed ($18 / month) and a simple Google spreadsheet (free). The downside of tools like Quickbooks is that they don’t map out your future income for forecasting like you can with a spreadsheet, but they do make tracking your past income easier with automation. I connected my bank accounts in Quickbooks so my income and expenses are automatically tracked. I categorize them by U.S. tax categories, which you can automate to a certain extent and double-check manually. I also use the program to create and send all of my invoices so everything is all in one place.
Income varies greatly from month to month for most self-employed creatives. By tracking it, you can start identifying any patterns that might exist and plan accordingly for busy months, slow seasons, etc. Knowing your cash flow will help you create a budget for all living and work expenses. Calculate your average monthly income, identify your baseline expenses (rent, bills, groceries, etc.), and see which expenses can be cut or decreased to allocate more to savings or investment in your music business, whether that’s equipment, recording expenses, session musicians, touring, PR, management, etc. Lewis says your goal net income should be at least double your baseline expenses.
Sarah Schulweis of Anchor & Orbit and Cashflow Cleanse says, “Understanding your financial patterns can be done through historical data. But, if you’d like to see change, mapping out how you’re making money, finding ways to improve that (by increasing your rate, conducting more marketing to grow your customer base, shifting your offering, etc.) takes strategic planning rather than reactive reporting.”
2. Open a business bank account and divide your expenses
This is my favorite tip because it’s so simple. Lewis Weil of Money Positive encourages self-employed people to open a separate checking account for their business expenses. If you’re a sole proprietor operating your business under your name (i.e. John Smith), you can open a business bank account in the U.S. with your social security number. If you’re operating under a different business name (i.e. Smith Industries), you’ll need a federal Employer Identification Number (EIN).
In addition to separating expenses and income, business bank accounts can be useful if you apply for grants, loans, or government assistance in the future. I saw friends go through this during the Coronavirus pandemic with the PPP loans.
The idea is that all business-related paychecks / Venmo deposits / direct deposits go into your business checking account. You’d then pay for all of your business expenses from that account, including paying yourself a salary. That salary is what pays all of your personal expenses like rent / mortgage, groceries, and so on.
When you do your bookkeeping every month (or whenever you decide to do it)—meaning, when you categorize your expenses and forecast your income—your business and personal expenses will already be divided by bank accounts. A pro tip for folks in the U.S.—I also opened a business savings account attached to my checking that I put money into for my estimated quarterly tax payments every month. That way, I know it’s there when it comes time to make that payment, and I’m not met with a surprise. I use Quickbooks to estimate my quarterly payment and use a calculation in my Google spreadsheet to double-check it.
3. Understand debt
Lewis Weil made a point that resonated with me when he said, “The way businesses use debt and the way people use debt is a little different, but when you’re a sole proprietor or super small business, the debt feels personal because you’re personally responsible for it.”
When Lewis approaches conversations about debt, he’s really talking about two different topics—getting rid of it and using it wisely. He shared, “If you have high-interest-rate debt that you’re allocating a lot of your income to, then you need to get rid of it or it’ll just get worse. First, I like to see that people aren’t making new debt, that they have the ability to sustain themselves. At that point, they can start paying off debt. For artists who are early in their career and don’t have the ability to easily pick up gigs and commissions, this might mean taking a regular job for a while to get out of debt and build up savings. I’ve seen plenty of people go be baristas for awhile while they got the cash sorted out.”
He continued, “Using it wisely is good business management. In the business world, debt is referred to as ‘leverage.’ Like a lever used to lift stuff heavier than a person can lift, businesses can use debt to do bigger things than they can do with the cash they have. Use debt to make things happen that’ll be a good investment or let you do things sooner than you would without debt. If you have people clamoring for your merch but can’t afford to get any printed, that’s a good time to use debt like a credit card. The trick is to pay it off with your revenues—even better if you re-invest the rest. Print some swag, sell shirts and pins, pay off the card, use the profit to help fund more swag. Rinse and repeat.”
He added, “If you’re going to use debt, you should have a strong idea that you’ll be able to pay it off with the revenues from that investment immediately or soon after. A word of caution: be careful about deciding something is an investment vs. just something you really want to do. Buying a new projector night of a show because the old one broke is probably a better business decision than canceling your set last minute. On the other hand, buying a nicer guitar even though you already have some guitars and telling yourself ‘it’s an investment’ is likely a case of just wanting it. The payoff needs to be obvious, not hypothetical. Buying plane tickets to get to a festival sounds good. Buying plane tickets because it would be really inspiring to be in Hawaii sounds fun, but the payoff is not direct. Try to separate your personal desires from your practical needs.”
4. Know your local tax laws and obligations
Every country has different tax laws and business regulations. In the U.S., taxes vary state by state and city by city. No matter where you live, do your research and consider talking to a financial consultant about your local obligations. The more you can mitigate financial surprises, late fees, and interest, the better.
5. Start small
The fewer new expenses and debts you accrue, the better. Try to keep your overhead and expenses as lean as you can at first. Thanks to today’s technology, musicians can try out new sounds and instruments (including pedals) right from their laptop with plugins and samples from places like Splice rather than buying expensive equipment right away. DIY recording has come a long way, and you can also look into studio cooperatives or sharing space with other musicians.
Start small and lean when it comes to your business setup as well. When you’re a solo operation without employees or contractors, the main benefit of incorporating in the U.S. is to protect your personal assets if you were sued. In that case, they could only go after business assets (i.e. money in your business account, not your personal one).
6. Consider your business model
As you’re outlining your goals and dreams, consider how you want to sell your services. Do you want to go the classic route of releasing albums, touring, selling merch, etc.? Do you want to do it yourself, or do you have the goal of signing to a label? Do you want to create compositions for video games, film, TV, and commercials? Do you want to create sync-able library music? Do you want to sell your beats to hip hop artists or produce for pop stars? Do you want to make and sell sample packs through a library or on your own?
You have a lot of options outside of the typical album release cycle. In all reality, you’ll probably need to dip a toe in several pools or spin many plates at first—that’s just the nature of the industry and economy today. Think about what sounds the most creatively fulfilling for you and what type of work would allow you the space and time to create what you’re passionate about. Talk to people with more experience than you and consider trying to find a mentor.
7. Create goals and work backwards
Starting small doesn’t mean you have to keep your dreams small. Shoot for the stars when developing your goals and work backwards. Want to work with the biggest names in hip hop? Great! What do you need to do to get there? Write it all out and start breaking it down into actionable steps. Ask yourself what you can do today with what you have. What do you need for the next step? How can you set yourself up for success?
Sarah added, “Doing this exercise can lead to specific action items or give you the opportunity to take a minute and brainstorm in an actionable and strategic way. It’s worth the brain space and energy to ask yourself expanding questions as simple as ‘How? Why? When? With who?’ It can be easier to plan than to actually take action, so I also encourage you to identify the tasks at hand rather than only your goals to get you to the next level. Ask yourself how you’ll reach those goals, and write out your steps.”
If you’re towards the Type-A end of the organization spectrum, you can assign dates or deadlines to these action items and create a timeline. With that, you’ll have weekly and monthly goals to guide your progress—a clear picture of where you are and where you’re going next.
That said, it’s important to go easy on yourself. We all work on our own timelines and have other things happening in our lives. If you have to shift your timeline, that’s okay. If you keep working towards your goals bit by bit and keep yourself open to new opportunities, things will happen for you.
It might seem like an odd decision to put goals towards the end of this list. I believe that getting organized and getting the essentials out of the way makes room for ideating and allowing dreams and goals to bubble up. When we don’t have a to-do list of things ‘we should be doing’ constantly running through our heads, we make space for creativity and the parts of our work we actually like to do.
8. Operate on your own timeline
I mentioned going easy on yourself. Taking that one step further, try to shield yourself from the comparison trap. You never know someone’s full story from their Instagram profile. You don’t know what type of help they’ve had, how much they’ve invested in their career, or what lucky breaks they’ve experienced. It’s cool to seek out inspiration, but remember that you are your best self and that’s all that matters. Be patient—overnight successes are never really overnight successes.
Here are some more resources on the basics of finances and business for creative entrepreneurs:
- An artist’s guide to financial planning by Lewis Weil
- Ask an Anchor: How do I get more clear on my finances by Sarah Schulweis
- All you need to know about the music business by Donald S. Passman
- Quit your day job by Eleanor C. Whitney
- The Ari’s Take blog
Do you have any questions about these business basics? Leave them in the comments below!
July 20, 2021