Our Financial Literacy for Artists series continues with advice on managing uneven income, especially for artists that might be moving from full-time W-2 income to part- or full-time self-employed earnings.
In Southwest Contemporary’s Financial Literacy for Artists series, we bring you financial content that can apply to artists working in any medium and at any career stage.
Over the past three years, Tamara Bates, founder of the fellowship the dots between, has worked with hundreds of artists in the Southwest and across the country. Her articles share information on the core topics she has been asked about and what she learned as a financial advisor. The images in this series are all from previous dots between fellows.
This is the fourth article in a series exploring financial topics pertinent to artists at different career stages. The columns in this series include:
- What You Need to Know as an Emerging Artist
- What Mid-Career Artists Need to Plan For
- What Late-Career Artists Need to Consider
- Basics of Managing Uneven Income
- Protective Factors for Managing Uneven Income
- Aligning Revenue, Time, and Values
- Student Loan Updates
- IRAs Explained
- 401(k) and 403(b) Employer Retirement Plans
- Sandwich Generation Financial Planning and Family Needs
In this article, we examine common pitfalls with uneven income and suggest solutions.
It can be difficult to create a plan for your finances when you are making a different amount each month and/or have multiple streams of revenue. This type of complexity makes planning for the present and future even more necessary.
Before we dive in, I’m going to suggest that if you are transitioning from a full-time W-2 job to a part- or full-time self-employed gig, beginning this journey with six to twelve months of your “needs” number saved can protect you from many of the pitfalls discussed in this piece.
Financial Lifespan of an Artist: Basics of Managing Uneven Income
Pitfall: Not Factoring in the Correct Amount for Taxes
Solution: The general recommendation for self-employed individuals is to save 30 percent of their 1099 income (where employers are not deducting taxes on your behalf). This includes what you may owe for federal, state, and sales/gross receipts tax. Having a separate account where you automatically move 30 percent of your earnings each month will protect you come tax time. Also, remember to add this amount to the base hourly rate you charge to make sure you are earning enough to cover taxes.
But in real life: what if you are not making enough and end up spending the entire amount of your income on living expenses? It’s tempting to push off taxes and hope for the best come tax time. However, doing this can create significant hardship and/or getting into debt to pay your taxes.
I know because it has happened to me!
It may sound counterintuitive, but I recommend paying your taxes more frequently to stay ahead of this issue. Set your gross receipts payments to monthly and pay federal quarterly estimated taxes (which you will need to do anyway if you’re self-employed and owe more than $1,000). There’s a calculator to help you figure out if you owe estimated taxes and an additional explainer via the IRS.
Pitfall: Not Saving for the Future Because You Don’t Know How Much Money You Will Make
Solution: Pushing off taxes is easy to do, but saving and investing money for the long term when you have uneven income is key. To start, pick an amount you can manage to invest in your lowest earning month that will not negatively impact your ability to pay your bills—it could be $25 or $50 a month. Automatically invest this amount monthly in a Roth or regular IRA as year-end approaches, and add more if you have extra. Don’t wait until you have more to invest—starting small and being consistent over years and decades will create a solid nest egg. Do the same thing with adding to your emergency cash savings fund.
Pitfall: Unable to Pay Down Debt Because of Income Uncertainty
Recommendation: Debt can have a big impact on your investing goals. (Student loan debt is a separate topic—today we are specifically looking at reducing credit card debt.)
Typical financial advice says to pay down debt before you start saving or investing.
However, waiting to pay off debt before you save anything can create a scenario where you fail to invest for your future and lose out on decades of compound interest (even though your debt is compounding, too). I recommend that you both pay down debt and invest for the future to the degree that you are able.
Here are two strategies for paying down debt.
Avalanche Method (to pay less interest)
- Make a list of all your debts.
- Put them in order from highest interest rate to lowest.
- Keep paying all the minimum payments.
- Put any extra money you can find toward the debt at the top of the list.
- Keep going until your largest debt is completely paid off and then tackle the next debt and so on.
Snowball Method (to pay off debt faster)
- Same as the avalanche method but order debt from smallest balance to largest. Then follow the rest of the steps the same way.
- Advantage: it may feel better to have debt completely paid off faster.
- Disadvantage: you will pay more in interest with this method.
In the next two articles, we will continue exploring the challenges and nuances of managing uneven income and offer some real-life examples of artists who have created a workable system for managing these issues. Feel free to reach out to email@example.com if you have a financial question or topic you would like to see addressed.
Disclaimer: This information is for educational purposes only and should not be construed as official financial, legal, or tax advice. Please seek specific advice for your situation from authorized individuals.