For those working in the arts, financial planning is artistic freedom. You can be an artist and also eat well if you don’t avoid the subject of financial planning all together. After you have your cash flow and career planning in place, you also need to address your insurance and legal concerns.
First, shop smart for health insurance. Consider opening a Health Savings Account. One of the worries when you are self employed is health care, especially the worry of a medical emergency that will swamp your family’s finances. If you are in relatively good health and you don’t smoke and you don’t abuse alcohol or drugs you should lean toward covering your own medical expenses out of pocket and having a very high deductible health insurance in case of an emergency. This is exactly what a Health Savings Account was designed for.
To protect you against catastrophic medical expenses, Health Savings Accounts are coupled with a High Deductible Health Plan (HDHP). However, to qualify as a HDHP, insurance deductibles must be a minimum of $1,050 for individuals and $2,100 for families.
The good news is HSA-eligible HDHP premiums are only a fraction of the cost of a traditional medical insurance plan. A study by the Galen Institute found that the majority of HSA-eligible plan participants pay premiums of less than $100 per month. Try comparing that to the premiums for most insurance plans which average $335 for individuals and $906 for families – per month.
Qualified expenses may also include items which may or may not count toward your deductible. This means that you may be able to use pre-tax money to pay for vision and dental costs like contact solution and teeth cleanings.
The higher your deductible the less expensive the insurance will cost. I recommend you get as high a deductible as you can, probably in excess of $5,000, and put your savings toward building up the balance of your health savings account until it is larger than your deductible. Anything you don’t spend one year carries over to the next year. You need medical coverage to protect you and your family in an emergency, and a Health Savings Account is the first place to look.
The next step is to get your documents in order. There are five very important documents to make sure that you have readily accessible. First you need a will so that your partner and children are taken care of in the event of your death. Second, you need a living will so that someone else can make decisions about your life if you can’t. Third, you need a power of attorney that authorizes some one to manage your finances if you are sick or disabled. Fourth, you need to compile a directory of basic information for anyone who needs to take over handling your finances in an emergency. And fifth, you need an annual collection of financial statements both for yourself and also for those helping you with financial planning. This collection of documents will help you track your finances.
These yearly financial statements should include a net worth statement, an asset allocation analysis, the cost basis for all taxable investments, the past year’s performance, your current income and a copy of the first two pages of your tax return. Pulling these documents together is difficult the first time, but updating them every year thereafter is much easier and will help you visualize your progress.
Also, if you have children you should have some life insurance. Don’t hesitate to buy the minimum life insurance you need. I recommend that you buy low cost term life insurance and invest the difference. You should also look at disability insurance and an umbrella policy.
You will need to know some tax basics. You also have to understand when taxes and tax reporting is due. If you have income you must make estimated quarterly tax payments. Our tax code is ridiculous, burdensome, and stupid beyond measure. But it doesn’t need to make sense and they will still send you to jail and take away your house for not understanding it.
The IRS also doesn’t care if you send them too much money, so you need to understand how to take every possible deduction. Good record keeping is the key, and potentially your weakness.
The artist can take a number of unique tax deductions. Expenses that are tax deductible are those that are 1) incurred in connection with your trade, business, or profession 2) ordinary and necessary and 3) not lavish or extravagant under the circumstances.
You cannot know what qualifies simply from that description. Only by looking at the actual IRS legal cases can you determine what qualifies and what does not. You need a supportive CPA to help you through this process. More than just helping you fill out the forms, they should be proactive in their tax planning and advice.
Life’s many and varied financial responsibilities put a lot of stress on all of us, but they are easier for the analytic to address than the artist. Hopefully this two part series has given you some practical advice to begin to manage the financial challenges you are facing. Remember, if you need help, ask. The National Association of Personal Financial Advisors is one of many helpful sources of competent fee-only financial advisors.
David John Marotta works at Marotta Asset Management, Inc. of Charlottesville which provides fee-only financial planning and asset management.
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