Does Your Money Matter?

As featured in: Performing Songwriter Issue #72, September/October 2003.  Visit performingsongwriter.com to order back issues or subscribe.

By Beverly Bartsch

“Musicians hate money. They think that any thought or concern about the financial aspect of things impedes their creative process.”

If this quote from a working musician/producer is what you believe, I want to help you change your outlook. Money is either something that works for us, or we spend our entire lives working for it. It’s a choice we make. It boils down to knowing ourselves well enough to make a plan, work the plan and enjoy the results. But first, let’s start with where you are living right now in your financial life.

What does your wallet look like? Is your paper money just wadded up in various folds and stuffed in various pockets and corners of your handbag, briefcase, wallet, car console or coat pockets? Or do you line your money up in sequence, all facing forward, same denominations together? Do you record checks and debit card purchases in your check register? This line of questioning may raise the hairs on the back of your neck, thinking it doesn’t matter, but I’d like to argue that it does. I’d bet that your favorite instrument is one that is lovingly cared for after each practice and performance. That guitar or saxophone or keyboard also represents (and costs!) money, and the care you take with it can be translated to financial matters. Dealing with financial matters not as “necessary evils” in this world, but as tools to enhance your trade will assist you as you shift your philosophy.

In the June 2003 issue of Performing Songwriter we discussed the recordkeeping necessary in business. But the same applies to personal finances as well. Are receipts tossed immediately, or are they filed for future reference? Do credit card receipts get matched to the credit card statement? How about debit card purchases being matched to the bank statement? Knowing your personal financial status also requires knowing how much money you spend and why you spend it.

Do you know your net worth? And your liquid net worth? Your net worth is your assets minus your debt, and your liquid net worth is the cash you would have on hand if you had one week to sell assets for cash. This could be the combination of your bank accounts and stocks/bonds/ mutual funds that you could liquidate for cash (although you might have to pay fees for selling shares).

CALCULATE YOUR NET WORTH:
1. Write down all your assets: cash, bank accounts, household furnishings, stocks, bonds, the value of your home and the current value of your car (not what you paid for it).
2. Write down all of your debts: That’s everything you owe to somebody else--not just the monthly payment but the full monty--including mortgage balance, car loan balance, credit card balances, student loans home equity loans, and amounts due friends or family members.
3. Subtract the total debts from the total assets; this is your net worth. Hopefully it’s a positive number.
4. Add up all of your liquid cash, or items convertible to cash in one week. You now know your liquid net worth.

Financial planners tell us to have three to six months of living expenses on hand, in cash. That’s all well and good, but it could be more than you think is required. For a quick total, add up all your checks, debit card and credit card purchases in a month. That’s a pretty good indication of your current spending patterns.

HOW MUCH DEBT DO YOU HAVE?
Americans are swimming in debt. The below statistics on debt came from the following website:
www.newstepsolutions.com/debt-statistics.htm
1. The average American household has 13 payment cards, including credit cards, debit cards and store cards. There are 1.3 billion payment cards in circulation in the United States.
2. Americans made $1.1 trillion worth of credit card purchases in 1999.
3. Americans carry, on average, $5,800 in credit card debt from month to month.
4. On average, the typical credit card purchase is 112 percent higher than if using cash.
5. Over 40 percent of U.S. families spend more than they earn (Federal Reserve).

WHY DO YOU HAVE CONSUMER DEBT?
There are as many responses to this question as there are people reading it. The more in debt you are, the more you are jeopardizing your future. Every dollar you spend on interest is a dollar that you are not saving for retirement. I’m not talking about taking a vow of poverty or never spending any money. Life is meant to be lived, and balancing the present with the future is a very fine line. But think about it, define what life means to you, determine where you want to be when you retire. Retirement should be about living your best life, not scraping by with the leftovers.

By the way, I’m not talking about investment debt for your business or loans for college education; there is some debt that pays off in greater returns than seen on purely economic levels. I’m talking about got-to-have-it, want-it-now consumer debt.

Do you realize that if you can reduce the interest you are paying on a credit card, you are automatically realizing a gain? A 28-percent credit card reduced to 6 percent saves you 22 percent on your debt. Be proactive: Take the time to find a cheaper credit card. Call your credit card company and find out if they will lower the rate for you. Some will, some will not, but don’t be at their mercy just because you’re not taking the initiative.

FACE THE FACTS
When you calculated your net worth, you found out your total debt. Let’s break it down a little further to determine how to reduce that debt overall.

Make a list of your consumer debt, listing the creditor, the account number, the phone number, the total outstanding balance, the interest rate and the monthly payment. If you have access to a spreadsheet program like EXCEL, go ahead and create this list there.

1. Sort the list by interest rate, highest interest rate first.
2. Total up all the debt balances.
3. Total up all the monthly payments.

Now it’s time to pick up the phone, search the Internet and open the junk mail that you are getting. Credit cards are the easiest item to refinance--and they throw themselves at you relentlessly. You may not be able to negotiate a lower rate on your car note or get out of a high interest rate on leased furniture, but the credit card world is ready to negotiate. Start by calling your credit card company. If you’ve been with the company for a while, they may be willing to reduce the rate. You may have to open a new account and transfer your balances to that account, but if it results in a zerointerest rate, it’s what you want. Just make sure to close your old accounts. This is crucial because if you leave yourself the option to use those old accounts, you probably will. Sorry, but it’s human nature.

Now, let’s say you got a 12-month, zeropercent interest rate and you transferred $6,000 in total debt from four different credit cards (that averaged 18-percent interest) to that new account. You now have 12 months to get out of that debt-- interest free. That payment is $500 per month. My guess is that the minimum payments under the old cards, at the old high interest rates, are more than what you are now paying to reduce your debt. It may feel worse because you’re writing a $500 check instead of four $125 checks, but now you’re paying down your debt, not just the high interest. And, by losing the 18- percent interest rate, you’ll save $1,080 in a year. Not shabby!

So you’ve taken that first big step to eliminate your consumer debt. The next step is to create a budget that prevents you from falling back into your old spending patterns.

1. For one week, write down everything you spend. Cash, check, charge, debit card--everything. Get a little notebook, keep it with you and jot down everything. (If a single week isn’t representative of your life, you could extend this exercise to a month.)
2. At the end of the week, review that little log. It will surprise you. Subtotal your list by the following categories: groceries, clothing, auto expenses, eating out, entertainment, kids, household supplies and any other categories that may pertain to your life.
3. Now take a hard look at that list. How many of the expenditures that week were impulsive or for the sake of convenience? Did the grocery purchase on Saturday go to waste because you ate out four nights that week? On some level, you are always aware of when you’re throwing money away, but it’s not a level we often want to acknowledge. Taking the time to quantify it gives you the tools you need to make decisions.
4. Next, quantify the monthly fixed expenses: rent or mortgage, car payment, utilities, insurance, cell phone, cable and the credit card reduction figure you calculated earlier. Make a list, total it up and know it. Unless you are willing to restructure your life rather dramatically, these costs will not change much each month.
5. Whenever you get paid, put aside 10 percent of your net pay in a savings account: Pay yourself first. This is your emergency fund. (Personally, I believe in making charitable contributions of 10 percent as well. There is a principal of giving and receiving that works in our world--I don’t know how or why--but being generous with our resources somehow makes the remaining funds go a lot further.)
6. Pay the fixed living expenses next.
7. Whatever is left is now your discretionary spending money. Reviewing the spending summary completed in steps one and two of this exercise will assist you in determining how much you spend in each category. And since this is discretionary, it’s up to you to not spend any more than this amount each month. Any spending over this amount will get you back in debt.

I won’t kid you--this will be hard. You will have to make choices about how you wish to spend your money, and they may involve saying no to yourself far more often than you would like. If your goal is to be out of debt and to save for emergencies as well as retirement, then you can do it. You now have tools, which have taught you more about yourself and your ability to be creative with your finances, to fund the creativity of your music.