Are you Making these 6 money mistakes?
As an artist and creative, you know it’s hard to manage your finances. The struggle is real between booking clients and gigs, getting your work into the world, and still managing to pay rent. All my new clients make a few common mistakes when it comes to money – take a look and see if you’re making any of them too!
The six most common money mistakes I see creatives make:
Mixing your business and personal money
Paying yourself (and the government) last
Pulling income goals out of thin air
Not using a budget
Feeling broke during slow months
Going it alone financially
Keep reading to learn more and grab the simple fix for each misstep:
Mixing your business and personal money
You likely started your creative endeavor cobbling together gigs and clients, juggling day jobs, credit cards, and Venmo loans from your sister or mom to make rent. Until one day, you look up, and you’re working on your passion full time, bringing in more income, but you haven’t updated your finances since day one. You’re still tracking jobs in a spreadsheet, and all your money is in one bank account with maybe a linked savings account that has about .48 cents in it.
If you’re making money working for yourself in any creative field, you are running a business, and a business needs its own money. If you worked for someone else and they held your paycheck in their business bank account, that would be weird and wrong, right? The same holds when you work for yourself.
Your business has expenses, and so does your life. Separate them to know how much it costs you to run your business and make sure you have enough left over to pay your rent and keep you in Ben & Jerry’s (or whatever you’re into).
The fix:
Set up a business checking account and business credit card (if you use credit cards). There’s no need for an official “business account” if you’re early in your business, as they usually have minimum balance requirements and fees. Start with a basic personal checking account at the same bank you currently use (assuming you’re a sole proprietor). Another option is an online business bank account – they sometimes have lower minimums and no fees– but make sure that they are FDIC insured.
Once you’ve set up the account, deposit all your income into it and pay all of your business bills out of that account. Set up a transfer of your salary (see mistake #2 for more on this) into your personal account, and use this account to pay your personal obligations.
2. Paying yourself and the government last
Most business owners (not just creatives) handle their money in the wrong order. Traditional accounting tells us Income – Expenses = Profit, so most of us start out trying to do just that. You spend a chunk of money to get your business running, and then you get some income in, use it to cover what you spent, and whatever is leftover pays the rent if you’re lucky). And forget about taxes. Or profit. In his fantastic book, Profit First, author Mike Michalowicz lays out the importance of paying yourself first and making sure the government gets its fair share upfront. I recommend reading the book, but as a starting point, take a look at the fix below to flip traditional accounting on its head.
The fix:
As a self-employed creative, you pay your taxes. They’ll be higher than if you were a w-2 employee in a traditional 9-5, so make sure you are saving for quarterly and end-of-year payments. You should likely be saving between 15-30% of any income you receive in your business, and you can determine that percentage by checking with your CPA (see #6 if you just said – what CPA?). This tax percentage should come out first before you spend anything on your business or your life and should be transferred to a (preferably) high yield savings account at a separate bank from your main accounts so you’re not tempted between tax payments.
You also need to pay yourself regularly. You’re likely both the owner of your business and its only employee. You should receive a salary for working in your business, and it should be paid after taxes but before your operating expenses. Mike Michalowicz’s Profit First Method encourages breaking your income into percentages that allow you to put money aside for taxes, profit, owner’s comp (salary), and operating expenses. This allows you to make sure that you are only spending money on your business that you can afford. For most businesses making under $250,000 per year in revenue, Michalowicz recommends allowing for 50% of your income in owner’s compensation (salary) but see #4 to work backward to get to the right percentage for your business.
3. Pulling an income goal out of thin air
How do you know how much money your business need to make? Often when I ask clients about their income goals, they’ll give me a number like $100,00 or $75,000, but when I ask what brings them to that number, they just..tilt their heads and stare at me. It’s so common just to pick an income goal that sounds good, but the problem with that is it’s completely separated from the reality of your life and your business.
The Fix:
Reverse engineer your income goals. Start with what it costs to live your life (see mistake #4). You’ve got bills to pay, dogs to feed, HBOmax to stream The West Wing over and over and over (just me?), etc. How much does it cost to keep your life running? Look at what your life costs every month (not your business, which you know because you separated your accounts after tip #1, right?) - and double it. That is the amount of money your business should be bringing in as a starting point. 50% of your income should go to pay yourself, and the other 50% should be divvied up amongst operating expenses, tax savings, and profit.
4. Having no budget
I know, the dreaded B word. If the idea of a budget makes you want to rock back and forth in a corner sucking your thumb, you’re not alone. But if you don’t know what you’re spending, you can’t know what you need to bring in, right? Don’t worry, this isn’t some Dave Ramsey-style shaming session about eating in restaurants (seriously, fuck that guy) – truthfully, I don’t care what you spend your money on. I care that YOU know what you’re spending, and you feel good about those choices. Most importantly, to set income goals in your business, you need to know a) what your life costs and b) what your business costs.
The fix:
Create a spending plan. See? No B words anywhere here. A spending plan is simply a list of what you spend money on. It doesn’t have to be painful- start with your personal life and then move on to your business.
Ways to do this:
1) Use budget software – YNAB.com is my favorite, but there are many others. If you hate apps and technology, see below.
2) Limit your spending to one account for a few months (i.e., your checking account instead of a credit card). Use only cash, and then use the allocation software built into most online banking to understand better what you’re spending and where.
After three months, you should be able to take the average and have a solid understanding of the average cost of your life. You can go back to tip #3 and reverse engineer your income goals.
5. Splurging in the good months, starving in the slow months
If you’re like most creatives and artists I know, you make great money some months and barely scrape by others. This might be THE most painful part of undertaking a creative life, and if you’re not tracking your income or spending, it can be hard to know a great month from an average month. It becomes oh so tempting to blow a good month with that piece of equipment you’ve had your eye on because you feel flush. Then two months later, things slow down, and you’re waiting on grandma’s $15 birthday check to afford dinner. It’s brutal, and there is another way. You’ll hear in any financial advice anywhere about the necessity of an emergency fund – and that’s true; you do need emergency savings, preferably 3-6 months’ worth of basic living expenses (but start with one so you don’t get overwhelmed). But emergency savings isn’t the whole story – because it’s supposed to be for just that – a severe and unexpected emergency, like a health problem or car trouble or severe loss of income (like, say, due to some kind of pandemic). You’re not supposed to touch that money. When you have a slow month, and you have to pull from that emergency money, it feels gross, like you’re betraying yourself in danger in the event of an actual emergency.
The fix:
A float fund! This is a separate savings account, outside of emergency savings, that exists ONLY to cover slow months. A float fund is not to pay for a vacation or save up for a new computer; its only job is to help you out. The concept is simple – take your average monthly income for the last 12 months, and fund a savings account in that amount. Any time you make less, cover it with the float fund. Anytime you make more than your average, fund your float account. This will give you the illusion of consistent income while allowing your emergency savings to stay safe.
6) Going it alone
”I don’t work with a CPA because they won’t be as aggressive as I am with my deductions” – every creative I’ve worked with, ever.
When you’re new in business or your business is small, it’s good practice to bootstrap as much as possible – don’t outsource your copywriting or production, etc., to keep your costs low. But bootstrapping it with your finances can be trouble, especially when it comes to taxes. So many creatives torture themselves with a messy spreadsheet and TurboTax, desperately calculating the home office deduction, thinking they’re doing the right thing. More often than not, you’re overpaying in taxes and putting yourself at great personal risk.
The Fix:
Build a financial team, starting with a CPA. A CPA is an invaluable resource at all stages of your business, and the yearly fee (which is tax-deductible) is worth both the peace of mind that you’ve maximized your take-home income and the advice you’ll get as your business grows. After you’ve got a CPA you like, try working with a coach or consultant - you can book a free call with me by clicking the button below!
There you have it! We’ve just covered six money mistakes most creatives make, and you’ve got the fix for each. Give your business its own money, pay yourself first, create a spending plan, and reverse engineer your income goals. You’ll make it through lean months with a float fund and wrap up your year by working with a CPA on your taxes and business planning.
Grab my free PDF – Six Money Moves for Creatives, a handy reference tool you can hang on your office wall. Please reach out on Instagram @kacyjrice or email at hello@kacyrice.com if you have questions or thoughts! I would love to hear from you.