We’ve talked a lot about how to make money with photography, but saving it is a different matter altogether. It’s something that presents a special challenge for many photographers who don’t collect a regular paycheck or have employer sponsored retirement plans. And it’s made even tougher when there’s always some new piece of equipment, software or marketing directory demanding your hard-earned cash. But saving is essential for anyone interested in owning a home, sending their kids to college or retiring some day.
Saving is something that I’ve been conscious of since I was a little kid watching Wall Street Week with my dad on Friday nights. I can remember learning that there were some people in the world who had saved enough money that they didn’t need to work anymore. They had so much money that they could live off of just the interest and dividends from their investments. I remember thinking that that was a great idea and I was going to try to do that. Though I’ve never made a ton of money as a photographer, I’ve always been able to save; even when I was shooting fifty dollar assignments for the AP. Here are some basic tips that can help you get started:
1) Live within your means. Regardless of how much money you earn, you have to spend less than you make. For some people, that might mean living with their parents or buying a coffee maker instead of going to Starbucks. Being frugal is different from being cheap. Cheap is stiffing the waitress. Frugal is skipping dessert so you can tip the waitress. (Actually frugal is staying at home and cooking for yourself!)
2) Only borrow money to buy things that appreciate in value or generate revenue (like school loans, photographic equipment and home mortgages). Borrowing money to go on vacation is foolish because you’ll be paying for it long after your tan has faded. Borrowing money to buy a car is questionable. It’s a depreciating asset, but if you need it to get to your job, it may be worth it. Just don’t let the “free money” seduce you into buying a more extravagant ride than you can afford.
3) Pay off your credit card bills in full. The easy money of a credit card can be seductive, but it’s a Faustian bargain. It’s like buying all your groceries at 7-eleven. You’ll pay a steep premium for that convenience. Better to borrow a lump sum at a reasonable interest rate that you pay off each month. Even if you borrow money from a relative, write up an agreement with a payback plan and stick to it.
4) Reconcile your credit card and checkbook every month. (See how at the bottom of the page.) The process will not only keep you from overdrawing your accounts, but minding every penny you earn and spend is the first step towards saving. Keep your ATM and credit card receipts and make sure they match up with your statements. Those slips of paper will serve as a reminder to make smart choices all month long. Don’t pay ATM fees. Open an account at a local bank and use their free ATM when you need cash.
5) Be satisfied saving small amounts of money at first. Every journey begins with a single step. Develop a habit of saving each month and then gradually increase it as your income grows. Once you get into the habit, you’ll get as much of a thrill from saving as you do from spending.
6) Learn how compound interest works. Some claim that Albert Einstein said that “compound interest is the most powerful force in the universe.” In the short-term, interest may seem like a very small reward for your efforts. But over decades, it’s the interest on the interest that allows your money to grow exponentially. That’s why they say, “the rich get richer and the poor get poorer.” Over an lifetime of saving, the interest that builds up can be double or triple the principle you’ve saved.
7) Charge as much as possible for your photography. There will certainly be times when you’ll do favors for friends and relatives or for a charitable cause. But everyone else should pay top dollar. Your pricing should be dynamic. Evaluate each assignment and stock sale individually and price it to maximize your income. Learn how licensing works, how to write a licensing agreement and how to charge for it. Share pricing information with other photographers. Ignorance drives prices down, knowledge drives them up.
8) Pay as only much as necessary for all of your business expenses. It’s true that you have to spend money to make money, but you have to do it wisely. Be realistic about what kind of return on investment you’re going to get with every person you hire and each purchase you make.
9) Understand the difference between your business and personal money. For a sole proprietor, it may be overkill to have separate credit cards and bank accounts for your personal and business transactions. The important thing is to keep good records of which is which for tax purposes. Don’t mentally spend money as you make it. A 1000.00 assignment fee shrinks dramatically once you pay for your overhead and taxes.
10) Even the 99% must embrace capitalism. The alternative is even worse.
11) Saving isn’t just green in dollars, it’s green in terms of sustainability too. It’s true that spending helps the economy in the short term. But spending is an economic dead end (both individually and collectively) without a proportional amount of savings to go along with it. (Savings provides capital for individuals to buy homes and companies to grow.)
Enough platitudes. Here’s what you actually have to do. Start by finding a no-fee (or very low fee) checking account at a bank near you. (Don’t expect that account to pay any interest.) Once you build up enough of a cushion where you can comfortably pay your bills each month, open an interest-bearing money market account (Vanguard is a good place to do that). Let’s say you decide to keep $5000 in your checking account. Each month, when you balance your checkbook, transfer any excess money to your money market account. Maybe you decide to keep $20,000 in your money market account as a reserve. Every quarter, as that money builds up, transfer it to a long-term (more than 5 years), low-cost index fund that invests in shares of lots of big companies (I recommend the Vanguard 500 Index Fund or Vanguard Total Stock Market Index Fund). That’s where you’ll get (on average) good appreciation in exchange for moderate risk. When you get close to a big purchase that you’re saving for, stop moving money into your long-term account and let it build up in your money market account.
You will want to set up two long-term accounts – one for retirement and one for other long-term goals like buying a home or college for your kids. The advantage of a retirement account like a Simple IRA or SEP IRA is that you don’t have to pay income tax on the money that you put in or on the resulting dividends or capital gains until you start withdrawing that money many years down the line. Consequently, it will grow much faster.
You might wonder how much money you need in order to retire comfortably. Certainly, it depends on the kind of lifestyle you’d like to grow accustomed to. On one hand, the cost of living in retirement can be less because you’ll probably have fewer mouths to feed (with any luck, your kids will be self-sufficient by then) and your house will be paid off and you won’t have to save for retirement anymore because you’re retired. But some things will cost more. Chances are your health will only get worse, which will be expensive. And if you’re lucky enough to stay healthy, you might want to travel and enjoy yourself a little after all of those years of hard work – and that ain’t cheap. So I say it’s a wash. Plan on giving yourself the income that you have towards the end of your career.
At the moment, a modestly middle-class life in America for a family of four will run you about $100k/year before taxes. In order to make that off of interest and dividends, you’ll need 17 times that or $1.7 million. Over the past 100 years, the stock market has provided the best return on investment compared to alternatives like bonds, commodities (like gold, silver, pork bellies) or real estate. Of course unlike putting your money in the bank (or in your mattress), any investment can lose money. But the longer your horizon time, the safer the bet is that you’ll be ahead of the game when it’s time to collect. The U.S. stock market has returned an average of 9% over the past 100 years. Inflation has been on average 3% over that period. So adjusting for inflation, you might reasonably expect to get a 6% appreciation on your money in the long run. (The numbers below allow you to see the appreciation in “today’s dollars,” as though there was no inflation to consider.)
So here’s one way you could map out your route to getting that $1.7 mil:
Of course, you’ll see that even after saving for more than 40 years, you could still come up a little short. I’m assuming that since you’re a sensible person and you’ve saved all along, your parents were probably sensible people too and that they left you a little something in their will (in this case, we’re hoping for $325k). And if not, maybe Social Security will not yet be bankrupt and help out a little. Saving for retirement isn’t easy. But with a little planning and discipline, it’s an attainable goal for most photographers.
How to reconcile your checkbook:
As you make each deposit and write each check, you’ll want to write an entry in your ledger to keep track. At the end of each month, your bank will send you a statement detailing all of the transactions that they’ve recorded. But since the checks you write aren’t necessarily cashed in the order that you write them and since many of them won’t show up on your new statement, you need to reconcile the bank’s records with yours to make sure every transaction eventually turns out the way it should.
If you use Quicken or some other personal bookkeeping application, it will prompt you to balance your account and guide you through the process. If you keep track on paper, you’ll have to reconcile your account manually, but it’s really easy. All you have to do is check off each transaction as it appears on your statement, then check off the corresponding transaction on your ledger. When you get through the whole bank statement, write out this equation, filling in the numbers for the following items:
ending statement balance
+ outstanding deposits
- outstanding withdrawals
- outstanding checks
= ending checkbook balance
If those items add up correctly, you’ve successfully reconciled (some call it “balanced”) your checkbook. If it doesn’t add up, you’ve either made an arithmetic error or you’ve omitted or incorrectly recorded a transaction. On rare occasion I’ve even found errors in my bank’s records. Go through your entries and rework the math until it comes out right. (One common mistake I used to make is putting a deposit in the withdrawal column.) Reconciling your bank account is worth the time and effort because it allows you to know exactly where your money is and it allows you to be decisive about moving your money around to where it needs to go.
How to reconcile your credit card statement:
The credit card statement is a little easier to reconcile. You don’t need to keep your own ledger the way you do with your checking account. You just need to keep all of your credit card slips and then match them up with the list of charges when you get your statement.
This post was created by the fine folks at Wonderful Machine.