You’ve heard the standard financial advice, that everyone should build up an emergency fund of 3-6 months of expenses. But how true is this?
For my clients who have steady, 9-to-5 jobs, this rule of thumb often works out to be reasonably accurate. Many of my clients don’t fit that description, though. My focus on working with artists means that I build spending plans for actors, dancers, musicians, and singers. And the standard “rules of thumb” don’t always work as well for performing artists in creative fields.
One of the first things I work on with clients is building a personalized spending plan. One that accounts for all the specific circumstances you face.
Why? It mostly comes down to income variability. Experienced performers know that they often don’t know when the next job will materialize. This is one reason that so many artists have “day jobs” to help smooth out their income.
Build A Buffer Fund
I prefer building a “buffer fund” instead using the more common term, “emergency fund”. For many clients this funds fills a role much more valuable than simply being a reserve for unforeseen catastrophes.
I call it a “buffer fund” because it provides a buffer between income and expenses. For performers, these don’t always occur with the same regularity.
Performing artists like actors and dancers are often sporadically or seasonally employed, so having a large buffer fund is crucial. And it is more than just a safety net: it is a professional necessity because it enables you to be much more strategic about the roles you take and the ones you reject. Few things are more liberating than having the power to not take a job simply because you “need the money”.
When it comes to personal finance, my approach is to rely on evidence and data.
In order to answer the question of how large the buffer fund should be for performing artists, I conducted an analysis of more than 700 different occupations using income data collected by the Census Bureau as part of the American Community Survey (ACS) and tabulated by the Bureau of Labor Statistics. Using both hourly and annual income data, I was able to construct a measure of income variability for each occupation. Occupations with more income variability need a bigger buffer fund.
Unsurprisingly the data revealed that actors, musicians, singers, music directors, composers, and dancers experience some of the most variable income among the 700 occupations and occupation groups I examined. It’s no surprise that they feel less stressed when they have an emergency fund.
It might seem like an impossible goal, but my advice is that most performing artists should aim to build up a buffer fund equal to between 18 to 24 months of expenses.
It’s a big number, but don’t be discouraged. You can always schedule a free call with us to see whether we can help you make a plan to get there.
Everyone’s situation is different, but the key steps to building a buffer fund are entirely doable.
- First, if you have ANY credit card debt you probably want to get rid of that first. The interest rates on credit card balances are scarily high and paying those debts off fast is often the smartest first step you can take.
- Second, this is likely already second nature to you, but you want to cut your expenses to the bare minimum. It may sound trite, but it’s true: the key to saving is not spending.
- Third, do your best to build up at least one- or two-months’ worth of expenses in your buffer fund. I usually recommend opening a high-yield savings account at a bank DIFFERENT from the bank you normally use for checking or day-to-day expenses. This is not “let’s order pizza” money.
- Fourth, do an analysis of any other debts you might have. Some student loans and consumer debts will need to be paid off ASAP. Other debts can be maintained as long as you stay current on your payments. Just take a close look at the interest rates and forgiveness plans you have available. We can help with this on a project or hourly basis, so reach out if you don’t know how to do this.
- Fifth, I suggest building up the next rung of your buffer fund in a Roth IRA if you can. This is a retirement account, but a Roth IRA can do double-duty as a buffer fund. This is because you can always withdraw your contributions without taxes or penalty. Any growth in the account must stay in, though, unless you are prepared to pay a penalty.
You can contribute up to $6,000 a year to a Roth IRA from earned income and starting early is a great way to build a nest egg.
After maximizing your Roth IRA contribution, deciding where to place the rest of your buffer fund depends on your circumstances. Contributing to a 401k plan (or, if you’re self-employed, a solo 401k plan) can make sense since you can take a “loan” from yourself in an emergency.
Normally, though, I suggest keeping at least half of your buffer fund in a normal brokerage account for easier access. Despite conventional wisdom, it’s entirely appropriate to invest the fund in a conservative allocation of stocks and bonds. Typically, I suggest using a single asset-allocation fund like DFA Global Allocation 25/75 Fund (DGTSX), Vanguard LifeStrategy Income Fund (VASIX), or iShares Core Conservative Allocation ETF (AOK) to ensure the buffer fund is growing enough to keep up with inflation.
Building up a buffer fund isn’t something anyone does overnight.
Even if you’re not battling student loans, saving up 24 to 36 months’ worth of expenses is going to take even the most ambitious and frugal actor or dancer several years.
Having an appropriately large emergency fund or cash buffer will provide peace of mind, and fiduciary financial planner like Denouement Financial can help. Schedule a call with us today to see how.