photo by sjsharktank
According to Coinflation.com, the melt value of a pre-1982 penny is 2.2 cents at the time of this writing. So we should all be in the scrap metal business. Oh wait, we don't really own our money; the government does. And conveniently a law was passed making it illegal to melt down US coinage. There goes that dream.
But this article isn't really about melt values of pennies. Rather it's about the cost of making money and the ways musicians financially shoot our selves in the foot.
But why listen to me? Well, I certainly have not made a fortune. But I have avoided most of the financial perils that I saw many of my dear friends fall into. While a classmate of mine, a DMA candidate studying classical saxophone, laughed about having 90k+ in student loans, I was pinching a quarter until the eagle screamed. No one bankrolled my education, but I was blessed to receive scholarships to all three schools I attended. In fact, I followed the money. Wherever I could get my schooling paid for I went. And I've worked every year since I was 17. When gigs and teaching was slow, I delivered newspapers from 3am to 7am five nights a week.
The reason I've said so much about college is it's where I've been for most of my adult life and it's where many musicians first get in real trouble.
cartoon by James Montgomery Flagg
There are many challenges for people in or out of school. Let's first look at the scarier side of the death and taxes equation. I'm not talking about the Grim Reaper; I'm talking about Uncle Sam. According to Bankrate.com a self-employed person earning the national household median income of $49,445 would owe approximately $6,073 in self employment or SE taxes. SE taxes are those attributed to FICA(read social security) and Medicare. My calculator says that's about 12.28%. According to hrblock.com, a married couple, with one dependent, both self-employed, earning a combined income of $49,445 would owe $7,780 in income taxes. That's an additional 15.73%. All combined, there is a tax burden of more than 28% or $13,853. I'm sure an economist or accountant would poke some serious holes through these numbers in that there are various uncounted deductions. Self-employed musicians are not rich. I would argue a 28% tax is excessive for a lower-middle class household. If I were able to keep the taxes I have paid over the past 10 years, I dare say I would be able to pay off my modest home's mortgage. I don't know about you, but that seems like a better fix for the housing crisis than corporate bailouts.
photo by rok1966's photostream
Everyone has heard, "you have to spend a little to make a little." The saying is so ubiquitous that we no longer think about what it means. Nearly every effort to make money requires the forfeiture of some amount of cash. You are never getting a full paycheck. The money making enterprise is inherently inefficient. Sure, some of your expenses are tax deductible. But many aren't or cannot not be fully deducted from ones taxes.
One seemingly inescapable part of earning an income is driving a car. You can deduct mileage from your primary vehicle, but what about gas and repairs. According to commutesolutions.org we are paying much more to drive than we realize. If the number of miles you drive in one year is 10,400 miles, your direct driver's expenses would be about $.98 per mile. Direct expenses include things like insurance, registration, finance charges, depreciation, fuel, maintenance and tires, etc. Indirect costs are given as $.39 per mile. These costs include accidents, state and local construction, air pollution damage, etc. The combined cost is $14,320 per year. Okay, these figures may seem a little bit biased, so let's say they are half wrong. 7k is allot of money for the privilege of driving to work. If you and your spouse are self-employed musicians making the national median income of $49,445, 7k represents another 14%. The sad thing is, this figure is only for one driver. What if you both drive this much? Again, there are lot's of ways to curb these expenses. For one, don't finance a car. I never have.
photo by Bryan Brenneman
Taxes are unavoidable. The need for a car is pretty strong unless you live in a big city. But debt, especially consumer debt, is within our control. Borrowing means working harder in the future to pay for something you've probably long forgotten about. Not only do you have the future taxes to pay and the non-tax-deductible business expenses like driving a car, but you also have to pay interest on the loan. According to creditcards.com the average interest rate for a new credit card was 14.10% as of may 2010. If you aren't convinced that they are a bad idea, consider this; the national average default in 2010 was 27.88%. That means almost one out of three people get to the point where they can't or won't pay the debt.
Often people rationalize borrowing when they consider the purchase to be an investment. Not to say it never works out, but consider the most common "asset" put into this category. Conventional wisdom said to buy the biggest house you could and expect inflation to make your mortgage effectively shrink. Well recent data shows that home prices are what they were in the mid 90's when adjusted for inflation. See a really great chart here. For many, 20 years of mortgage payments have amounted to a modest amount of equity and an immodest lining of bankers' pockets. These "assets" have quickly turned into liabilities for millions.
photo by Nicu Buculei
Now let's do the math for that hypothetical household earning $49,445.
Debt=? could be as high as 14%
If you are working to pay back debt, you may forfeit as much as 56% of your earnings before you've even touched the principle. Can you say, "milked dry?"
(Update Jan. 13th 2012: I realized I left one step out of my math. If there is a forfeiture of 56%, then it doesn't take 1.56 pennies to keep one pennie. It takes 2.26 pennies to leave one cent.
2.26 X .56 = 1.26
2.26-1.26 = 1
I guess the title of this article should have been "A penny unearned is 2.26 pennies saved. How sad.)
There are many more traps that financially bring us down besides taxes, cars, and debt. But just pointing out these aspects of most people's every day life shows just how difficult it can be to make it. What does this have to do with music? I contend that a life in music requires a great deal of time and effort, both of which are hard to come by. The financial decisions we make impact our ability to make choices about our lives. I do believe that the proverbial "Man" is out to get us. I'm no luddite, and I enjoy many of the boons of civilization. But I see so much of what amounts to bread and circuses all around us. At some point you must ask "cui bono?" ie to whose benefit?
Here are three solutions to avoid financial quagmires. First, grow your own. I mean this both figuratively and literally. I previously wrote about the five reasons every musician should garden. Serious savings can be had by not having to always go to the grocery store for a salad or fresh tomatoes. But this principle can be applied throughout ones life. What can you do for yourself with the resources you already possess? Often times you can exchange time for money and vice versa. Rather than spending the money you don't really have and all that goes with that, consider fixing something yourself.
photo by Robert Couse-Baker
Second, buy cheap. I shouldn't really use the word cheap. Too many times my thriftiness has tempted me into buying some tool or device-made in china no doubt- only to regret not buying the higher quality item. Often you do get what you pay for, especially when looking at the bottom tier of products. So really the word should be value. Buy value, not just the least expensive item. Value can be equated by the following formula:
TIME/PRICE = VALUE
In other words, the number of uses or the years used divided by the price gives you the unit's value. Cheap just means the lowest price. Don't confuse the two, or you risk paying many times more for a given product over a lifetime. An example could be staples like milk. If you buy a gallon of the real good stuff it may cost something like $5.99. Half-gallons of the same milk would cost $3.99. Assuming you don't change your consumption habits, you will save money in a very short time just by buying big. In fact, it would only take four gallons before you would have a free half-gallon in savings.
photo by El Bibliomata
Third, don't buy at all. Sometimes you don't need to find a way to do or get something. You don't need to find it on sale. You need to do without it. Of the three solutions presented, this one may be the most important one. You have to live within your means. It's a question of hurting some now or hurting more later. If you spend money you don't have, you'll accrue all the pain of income creation plus the unnecessary cost of borrowing. Depending on how big the purchase is and how high the interest rates are, you very well may pay several times the original price. I found this story of voluntary simplicity over at www.goodreads.com.
“The philosopher Diogenes was eating bread and lentils for supper. He was seen by the philosopher Aristippus, who lived comfortably by flattering the king. Said Aristippus, "If you would learn to be subservient to the king you would not have to live on lentils."
Said Diogenes, "Learn to live on lentils and you will not have to be subservient to the king.”
― Anthony de Mello
I'm not suggesting we do without, because it's going to bring us enlightenment. I'm saying a life in music costs time and energy. Don't ever forget; everything comes at a cost.