Much has been written on the general theme of musicians as entrepreneurs.  In true full circle fashion, the word entrepreneur actually stems from a 19^th century French word that denotes the director of a musical enterprise.  While the pace of change in the modern music business presents challenges that Ravel or Debussy could not have imagined in their most fevered dreams, the need for thoughtful stewardship has never been greater.  Certainly, there’s great appeal to being your own boss and being directly rewarded for your efforts.  Still, the independent contractor nature of today’s music business creates unique financial risks that can derail your career – if you’re not diligent.

The news outlets are filled with anecdotes of musicians suffering from financial woes; Mary J. Blige, Cat Power, and Willie Nelson are just a few examples of musicians who have been dealt major financial setbacks despite successful artistic careers.  Most of these situations are characterized by poor financial decision-making: indiscriminate spending, high debt loads, aggressive tax positions (leading to equally aggressive IRS collection efforts), legal problems arising from failed ventures, and an aversion to planning for the personal and business risks that all freelancers face. 

When combined with today’s complex financial markets and rapidly changing music industry, the challenges of being an entrepreneurial musician creates exposures that can afflict the anonymous and high profile alike.  With some forethought and careful planning, however, many of these pitfalls can be avoided by taking the time to carefully assess your financial situation and goals, often with the help of a financial planner or business manager.

Despite many musicians’ natural aversion to it, financial planning is no more an obstacle to creative freedom than music theory; both provide a structure that supports, rather than detracts from, artistic expression.  By carefully considering their risks and options, musicians who take a holistic and long-term view can often minimize the chaos that comes from facing financial issues as they arise.  A comprehensive financial plan involves budgeting and cash management, tax planning and compliance, risk management, investment planning, retirement planning, and gift and estate planning.

Budgeting and Cash Management:

            Let’s start with the obvious: everyone, from established artists to fledging indie bands, needs to keep detailed track of where their money comes from and how it’s being spent.  Whether it’s keeping records with the assistance of an accountant or bookkeeper, full-featured financial solutions like Quicken, smart-phone money trackers from the App Store, or even a basic spreadsheet, the approach you take is less important than the commitment to starting and maintaining it.  Even a few minutes of recordkeeping a day can provide you with valuable insight into your spending habits and capacity, an especially critical viewpoint when resources are limited.

Tax Planning and Compliance:

Although it may sound needlessly complicated for a creative professional, the business structure chosen for your efforts (e.g., sole proprietorship, partnership, LLC, or corporation) is an important consideration.  It will determine (a) the legal protections available to you in the event of serious financial difficulty, and (b) how the income and losses from the business flow-through to you and your creative partners.  A corporate or LLC structure may also allow you and your band mates to qualify for group health or disability insurance at reduced monthly premiums. 

Here again, maintaining detailed records is critically important.  Like other entrepreneurs, the self-employed are an easy audit target for the IRS.  Many income sources aren’t documented by typical documents like W-2s or 1099s, and tax returns that reflect obviously understated income or inflated or poorly documented deductions can subject you to years of penalties and back taxes. However, with proper documentation, tax compliance need not be overly difficult and can produce substantial and legitimate tax reduction opportunities.  Use TurboTax, a local accountant, or a national tax return preparation service to minimize the risk of inadvertently calling attention to yourself.

Risk Management/Insurance Planning:

Like it or not, every business owner needs to plan for the financial risk of early death, illness, disability, and loss of property.  Some of that protection can come from the structure of the business, but specialized insurance coverage is often needed to prevent the business – and those who depend on it – from failing in the event of a disaster or extended illness:

• • Life insurance (if others are depending on your income for support);
  • Health insurance (to at least partially insulate you from the high cost of medical care);
  • Disability insurance (even though individual policies can be difficult to obtain), and;
  • Equipment insurance (to protect against the theft of or damage to valuable instruments).

Concentrate on those “disastrous” risks you could not afford to cover yourself, as premiums on emotional or mildly bothersome risks often outweigh the long-term benefits that insurance protection will provide. 

Retirement planning:

For many musicians, retirement is a foreign concept.  After all, you’re presumably doing what you love, so why not continue indefinitely?  Don’t think of it as retirement in the traditional sense, but a “freedom fund” that will provide supplemental income when you curtail your performance or work schedule.  There are tax-deferred retirement vehicles available only under a corporate or LLC structure (such as a SEP-IRA) that will allow the investment of amounts considerably larger than what is permissible for the typical individual IRA and Roth accounts available to non-business owners. 

And, yes, you should get started now.  Even if you can’t afford to make large contributions, let the magic of compound interest (i.e., interest earned on interest) work for you.  Investing just $95 a month starting at age 20 can produce a $500,000 tax-deferred retirement account by the time you’re 65 assuming an 8% rate of return (which is approximately the long-term rate of return of the stock market).  Waiting 10 years (i.e., starting at age 30) requires a much larger deposit of $218 a month to accumulate that same $.5 million at age 65.

Investment planning:

Most businesses are self-financed by their owners and profits are typically reinvested.  Any “excess” profits should go first towards building an emergency fund of three to six months of living expenses to protect you from temporary career setbacks.  If you’re able to accumulate additional amounts and build an investment portfolio, that topic deserves a much more in-depth conversation than we’re capable of here.  However, remember that the most critical consideration in allocating those investment resources is to attempt to diversify away from the concentrated risks you’re likely taking in your business.

Gift and estate planning:

If your business grows to produce substantial current or future income, simple wills or family trusts set up for personal affairs may no longer suffice for the transfer of the business.  More sophisticated financial planning techniques will be necessary to ensure that your assets are distributed to the people and causes you choose, reduce estate taxes, and to provide the cash necessary for your heirs to pay those taxes.  A recent prominent example of poor planning was revealed by the tragic death of Phillip Seymour Hoffman.  In a misplaced desire to avoid raising “trust fund kids,” he had apparently subjected his heirs to needless taxes, as well as the expense, aggravation, and vagaries of probate (i.e., the state deciding who gets your money).  Without a clear expression of your wishes, events like marriage, divorce, long-term relationships, or children from multiple relationships can create a contentious battle for control of your remaining assets or royalty streams upon your demise.  Lastly, regardless of age, don’t ignore the need for a health care proxy, which can dramatically ease end-of-life issues for both you and your family.

Unless you’re well versed in financial and legal matters (or enjoy the advice of those who are), the do-it-yourself drive that created your musical works will not serve you well when it comes to managing the many financial issues you will face.  This is where professional expertise often becomes necessary to protect yourself, your business partners or band mates, and your loved ones.

Alan “Al” Reese, CFP, CPA, is a wealth manager and Director of Financial Planning with the Howe Team at U.S. Wealth Management in Braintree, Massachusetts, and a former Trustee of Berklee College of Music.  He can be reached at areese@uswealthhowe.com. Alan Reese is solely an investment advisor representative of US Wealth Management, and not affiliated with LPL Financial. Any opinions or views expressed by Alan Reese are his/her own and are not those of LPL Financial.