Personal Finance Essentials for Composers
Updated: Jul 31, 2022
An Interview with CBS Business Analyst and Certified Financial Planner®, Jill Schlesinger
Shortly after starting my freelance game audio career almost 35 years ago, I walked into my local Citibank branch and asked about opening a retirement account. At the time, I didn’t know anything about investing or saving for retirement except that I probably should. I must have had a big “INVESTING NOOB” sign on my back. Because what I walked out with, I later learned, was a terrible investment for me, although it did earn the Citibank ‘advisor’ with whom I met a nice fat commission. Discovering that was a wakeup for me: that I needed to learn about the financial side of being a freelancer, in addition to the music, sound and tech side of things.
Jill Schlesinger is an Emmy-award winning Business Analyst for CBS News. She also hosts a nationally syndicated radio show, the Gracie Award Winning, Jill on Money, and pens a syndicated newspaper column of the same name. Jill uses her background as former financial planner to provide insight into personal finance and is both a journalist and a Certified Financial Planner®. Her book, “The Dumb Things Smart People Do With Their Money: Thirteen Ways to Right Your Financial Wrongs,” was published in February 2019.
I have been listening to Jill Schlesinger’s broadcasts and reading her columns for over a decade. Feeling particularly brave one day, I reached out to see if she would be willing to be interviewed for an article I wanted to do on personal finance for composers. Jill was kind enough to sit down with me and discuss what advice would she give to new or established freelance composers about how they should approach their current and future financial lives.
[Adapted from a discussion with Jill Schlesinger, July 2021]
What are some of the basics, the 101's that every freelance composer should know in terms of how they approach their finances?
[Jill Schlesinger (JS)]
Number one is having an emergency fund
As a freelancer, you need to keep a bit bigger cash buffer than if you were a regular employee. Keep 9-12 months of living expenses in a boring, safe bank or money market account. If Covid has taught us anything, it’s that we can all be at risk at any moment, and as a freelancer, we are already taking some risks that employees don’t have.
There are great parts of being self-employed; I think it's fantastic; I also am a self-employed person. I'm under contract with CBS, but I'm not an employee of CBS. And as a result, I always have a little slush fund in my account just 'cause you never know. So I think that an emergency fund is really important.
Number two is that you must keep awesome records
As a freelancer, you need this not only for tax reasons, but so that you know how you are doing overall as a business. Use Quickbooks or a spreadsheet, or whatever works for you, but you must have meticulous records.
Number three is to put together a support team.
As a creative worker, you want to be able to focus on what you do best. Get a lawyer who can help you protect your IP, and if you don’t like doing taxes, an accountant. If you have reasonable amount of money, maybe a financial advisor. Assemble a team that lets you do what you do so well.
Suppose there's a young aspiring composer. She just finished school. Maybe she has a little student loan debt. Maybe a car loan? A little bit of credit card debt? What should she do to set herself on the right track, knowing that the business is insanely competitive?
[JS] We talked about emergency fund: 9 to 12 months of your living expenses. Set that aside in a boring, safe account. Car breaks down, you lose a long-term client. That what the emergency fund is for.
Pay down consumer debt: credit card, car loans, student loans
Credit card debt is pernicious. It has very high rates, so it gets the highest priority. When you think about paying down debt you want to be methodical and list out every single loan you have in descending order, the highest interest rate to the lowest interest rate, and then establish automatic transfers from your bank account to those debts and begin the process of whittling them down.
But don’t rush pay down mortgage debt if you own a home or condo.
Understand your cash flow
To manage things like debt or business income, you need to understand what’s coming in and what’s going out. As a business owner you need to have a good sense of “what do I need to do to pay my bills every month and where is my money coming from?”
How does a freelancer handle taxes?
[JS] Regular (non-freelancer) employees have taxes withheld from their paychecks. But as a freelancer, you won't have taxes withheld from the checks you get from your clients. So instead, the government requires to pay estimated taxes, typically 4 times a year. That means that if you get a check for, say $10,000 for work you've done, you need to set aside a portion of that to pay your estimated taxes. How much you need to set aside will depend on your own tax situation-- do you have other income from a regular job? are you filing jointly with a spouse, and so on. But you do need to set that money aside, since if you have any kind of reasonable income, you'll need it to cover the taxes you owe. This is where working with your accountant (part of your team!) is so important. You should count on setting aside at least 20% of each check you get, and you may need to set aside far more to be able to pay--perhaps as much as 50% if you make a lot of money or live in a high tax state.
When should a freelancer start thinking about saving for retirement?
[JS] It is never too early.
The government gives us an incentive to save for retirement either by lowering our taxes or prepaying taxes at lower rates. Get into the habit of saving for retirement early, even if it’s just a teeny tiny bit. For most people starting out, a Roth IRA is usually the way to go. If you have earned income, you can put up to $6,000 per year into a Roth ($7,000 if you are over age 50), where it will grow tax-free.
As you start to make more as a composer, there are number of options as a freelancer that let you sock away a lot of money for retirement.
A SEP-IRA lets you put up to $57,000/year away in tax deferred income.
A Solo 401(k) or Roth Solo 401(k) allows you to put away up to $19,500 ($26,000 if you are over age 50).
If you are earning a lot, there are also retirement accounts that let you put in up to $230,000/year, pre tax.
Your accountant (remember your team?) can help you determine what’s best for you.
The important thing is to start small, start early, and continue to fund your retirement. Make a habit of taking some of your freelance income and put it into these tax advantaged accounts and let them grow for years or decades.
So you mentioned a Roth versus a non-Roth. What's the difference there?
[JS] There are two broad kinds of retirement accounts: Roth and non-Roth (‘traditional’).
In a traditional retirement account, you get a tax deduction for the money you put into it. Let’s say you decide to put 15% of your income into a traditional retirement account. You will only pay taxes on $0.85 for every dollar you make. When you take the money out, presumably when you are retired and it has grown for decades, you pay taxes on the money you take out at whatever tax bracket you are in at that time.
In a Roth account, it’s the opposite. If you decide to put 15% of your income into a ROTH account, it doesn’t affect your taxes that year; you pay tax on every dollar you make. However, when you take the money out—after those decades of growth—you pay no taxes on the money you take out.
Roth accounts tend to be great for those just starting out because you’re probably not making a ton of money and are in a low tax bracket. And even if you're in a high-ish tax bracket, maybe you're in the 22 or the 24 percent bracket, a Roth still may still make sense because it gives you some semblance of an idea of what your tax liability will be in the future.
I don't know if tax rates could stay the same, but they're pretty low right now, so maybe I'd rather pay my tax today knowing what the bill will be versus in the future, which is unknowable right now
What about something like an Indexed Universal Life policy instead of an IRA?
[JS] No no no no no no no no no.
Use a retirement account. Don't use insurance products. You don't need to mix insurance and investments. That's my number one message.
The second thing is to be careful when you start getting into complicated financial products.
I don't know anything about music, so I'm going to say something stupid here, but you know how sometimes you listen to music and it's really complicated and it's hard to like compute in your brain? It's like that with financial products. If it's really that complicated, I don't want to do it—and I used to be an options trader. Products like indexed universal life are very complex.
I think insurance products are wonderful for insurance and not so great for investing.
Suppose someone has a regular ‘day job’ and they would like to transition to be a full-time freelance composer. Should they be scaling back on the money they're putting into their 401(k) right now to try and beef up some non retirement money.
[JS] I don't think that's a bad idea. Especially if you know you're making a transition, beefing up that cash position makes sense.
I think one other thing to mention is if you have this 9-5 job, it's really good if you can say “hey, what benefits do I have at work that I'm going to need to replicate as a freelancer?” In many respects that gives you a great guide. “I have life insurance through work. Oh wait, can I take that life insurance with me? Should I replace it with other life insurance? I have disability insurance. Can I take that with me? I have my health insurance. Well, how am I going to get health insurance?”
Ok, Suppose I open up a Sep IRA or a solo 401K. What should I put in it? What should I invest in?
[JS] Simplicity is your friend. The smartest and easiest thing to put inside of a retirement or an investment account are index mutual funds. An index fund for stocks and another for bonds. If you are truly comfortable with risk and you want to go 90% in an S&P 500 index fund fine, but whatever it is the big key to investment success is:
Creating an allocation of stocks and bonds
Putting the money away regularly and methodically
Sticking to your allocation
You can rebalance the account every three months, six months once a year; it doesn't really matter that much. But have a plan and stick to it. [Note: “rebalancing” is the act of periodically buying and selling portions of your investments to keep the overall percentages the same.]
How should performance royalties figure into a composer’s financial life?
[JS] In the financial world, royalties would be thought of as an annuity; some passive income you receive on a regular basis. Because royalties can be flexible, unless you have a very good idea about how much the royalties are, with a consistent track record, it’s probably safest to leave it out of your retirement calculations.
As you get closer to retirement, and the payments are better understood, you might want to factor those in. It might vary or decrease for reasons outside your control, so it’s best to keep that in mind when figuring how they fit into your overall financial life.
It also depends on your how your royalty income is structured. If you are getting small royalties from a whole bunch of different placements, that may be more reliable than if you get the bulk of your royalties from just one or two shows, which might be suddenly cancelled or just become less popular. Plus, there is the long-term risk of royalties diminishing over time because of more systemic industry changes like streaming or buyouts. So even if you’ve got a hit show and royalties are pouring in today, I wouldn’t necessarily factor them in for, say, as part of my retirement plan for 25 years from now.
What is one of the most boring, uninteresting, but very important things that a composer should make sure they don’t overlook?
[JS] Insurance. Disability insurance in particular, is pretty much the most boring, complicated but important thing.
As a self-employed composer, there are a lot of benefits do you not get as a normal employee, and a lot of them have to do with insurance. Life insurance, health insurance. But for a composer one of the most important might be disability insurance. You are more likely to become disabled before you are age 65 than you are to die, which is why disability insurance is so much more expensive than life insurance.
You know, I remember a guy who had to quit the commodities trading business. He lost his voice. He just couldn't yell anymore. The commodities market is an open outcry system where you literally had to yell across the room to do your job. He went from making hundreds and hundreds of thousands of dollars every year to zero in an instant.
You should ask yourself “What would happen if I could no longer do this thing that I love?” If the answer is “I’d be s**t out of luck” then you need to look at disability insurance.
I can't let you go before we get to a couple of specific questions, stonks and crypto. That seems to be the thing people are talking about. Where does that figure into somebody financial life these days?
[JS] Whether it’s individual stocks, crypto or any other highly volatile asset class, keep the amount of money you invest in those to no more than 5-10% of your total invested assets. The amount of money you have in these highly volatile, though potentially lucrative areas should be limited so that if you lost it all, it wouldn’t devastate you; it’s ok if it hurts, but don’t let it wipe you out. If you have more than that, take some money off the table
Any other final words of advice?
[JS] Regardless of what you do, have some plan in place. Sticking to that plan and keeping the costs low, that's going to be your friend over time.
Thank you for your advice and your time!
You can find Jill Schlesinger’s podcast, Jill on Money, on your favorite podcast app, and at www.jillonmoney.com. Her book, “The Dumb Things Smart People Do with Their Money” is available on Amazon or a bookseller near you