The Challenge Part VII: Investing In Your Financial Well-Being

Financial Well-Being

The words “money” and “musician” are not always synonymous.  Unfortunately, the starving artist mentality has become widely accepted in the entertainment industry.  Accepting the mindset that a musician’s financial well-being is either ‘snack or famine’ is extremely self-defeating.  There are a number of very simple changes each of us can make in our financial lives that will afford us more career opportunities, as well as long-term financial well-being.

As creative individuals, it’s important to 1) invest in your career and 2) invest in your future.

Invest In Your Career

Investing in your career is simply investing in the education and appropriate gear you need to do the job effectively.

For many musicians, living on a tight budget is nothing new, but this doesn’t mean that we can’t manage our money properly and enjoy some of the finer things in life.  If you know you’re going to spend $30 when you go out, set aside $20 and only spend $10.  Physically put the $20 in your own ‘tip’ jar.  If you spend $3.50 every day on a cappuccino, discipline yourself to buy one every other day, and put the $3.50 you save into your jar.

Another simple way to keep tabs on how much you spend is to stop using your debit card and carry cash instead.  It’s not as convenient, but by paying with cash every time you purchase something, you’ll physically see the money leave your hand.  This counteracts the invisible transaction generated by the swipe of a piece of plastic.  With cash you’ll see the physical value of an often insignificant purchase.  Then, after a month or two, take what you’ve saved and treat yourself to something that will benefit your career.

Invest In Your Future

Investing in your future is simply putting money aside for investments such as a house, family, child’s college, and ultimately, retirement.  Many musicians don’t have a long-term savings plan and the idea of investing can be overwhelming.  Fortunately, you don’t have to learn the ins and outs of the stock market or mutual funds to start investing.  There are many financial institutions and planners that will work with you.  However, the first step is to start contributing to your portfolio.  This can be as simple as taking 10% out of every paycheck and setting it aside.  This small amount will add up very quickly.  Follow me for a minute…

Roth IRA (Individual Retirement Account)

One investment opportunity to look into is a Roth IRA, which is both long-term, and tax free upon withdrawal after the age of 59½ .  You can currently contribute up to $5500 per year into your Roth IRA and this money increases over time due to compounding interest.  For example, if you’re 30 years old and contribute $5500 per year to your Roth IRA, by the time you’re 65 your total contributions of $192,500 ($5500 x 35 years) will yield roughly $930,511.

The Magic Of Compound Interest

Let’s take a quick look at how compounding interest works.

But First, A Primer On Inflation

The yearly inflation rate in America fluctuates from year to year, but the average over the last 10 years is 2.15%.  So, if you were to put $100 in your closet, in one year, that $100 will be the same as having $97.85 today.  You actually LOSE money by hiding it away and not doing anything with it.  At the same point, a regular bank may only pay 1.5% interest on your savings account, so again, just putting money into your savings account is actually losing you value over many years due to inflation (inflation is still higher than your banks’ annual interest rate).

How To Beat Inflation

The goal is to invest your money into markets that are generating more than 2.15% annually.  This is where investment houses, stocks, mutual funds, and ETFs (Exchange Traded Funds) come into play.  Putting your money into ETFs or Mutual Funds that generate 6-9% annually will grow your savings exponentially over the course of your lifetime.  Here’s why:  It’s called the Rule of 72.

The Rule of 72

The Rule of 72 states that every x amount of years, depending on your interest rate, your money will double.  So, let’s do some simple math.  Let’s say you invested $5500 into your Roth IRA, and your Roth IRA is fully invested into an ETF generating 8% annually (I’m using 8% b/c it’s simple math in regards to the number 72).  Using the Rule of 72, we divide 72 by the interest rate, 8% in this case, to get 9.  This means that in 9 years, the $5500 you saved this year will turn into $11,000.

Now, if you invest $5500 every year, your money will be growing exponentially EVERY year due to that compounding interest.  That’s how, in the first example above, in 35 years, your $192,500 investment can turn into almost a million dollars.

Break Out The Calculator

There are a number of online Roth IRA calculators, such as THIS ONE, and I encourage you to  play with some numbers.  You’ll be inspired by how much control you can have over your financial future, even on a tight yearly budget.

The Challenge

In closing, my challenge to you is to take an honest look at where you spend your money.  Document your daily or weekly spending.  Are there any areas of your financial life where you can be more responsible?  Try to set aside 10% of each paycheck for long-term savings and investing.  Discipline yourself to physically put the few dollars that you’d normally spend each day on superficial things, into a jar.  At the end of the month, add it up – there may be a new piece of gear in your near future (investing in your career) and at the very least you’ll be taking your first steps to a more financially secure life (investing in your future).

Note:  I know that math can get very confusing for some people.  The numbers used in this blog are simple whole numbers for the sake of simplicity and clarity.  Markets fluctuate over time, as do yearly interest and inflation rates.  These predictive numbers are to be viewed as examples only.

What have you learned from the Challenge Series so far?  Share your thoughts with us in the Comments Section below.

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