Photographers think a lot about how to make money, but saving it (or wealth management) is a different matter altogether. It’s something that presents a unique challenge for many freelance photographers who don’t collect a regular paycheck or have employer-sponsored retirement plans. Saving can be even tougher when there’s always some new piece of equipment, software, or marketing program demanding your hard-earned cash. But saving is essential for anyone interested in owning a home, sending their kids to college, or retiring someday. We discuss the ins and outs of wealth management and financial literacy for photographers to help you set your financial goals.

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 some people in the world 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 what a great idea that was and I was going to try to do it. Though I never made big money as a photographer, I’ve always been able to save. Even when I was shooting fifty-dollar assignments for the Associated Press.

Wealth Management and Financial Literacy Basics

Here are some basic tips that can help you get started. I am not an attorney, accountant, or investment professional. I’m just sharing my own experience.

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 for a while. For others, it may mean buying a coffee maker instead of going to Starbucks. Being frugal is different from being cheap. Cheap is stiffing the waiter. Frugal is skipping dessert so you can tip the waiter. Even better, stay home and cook for yourself!

2) Borrow Wisely

Only borrow money to buy things that appreciate in value or generate revenue. Good examples of this include 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 as 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 Credit Cards in Full Every Month

Credit cards are great because they can streamline your record keeping, and it’s like a free short-term loan. But, if you’re not careful, it can turn into a very expensive long-term loan. Regardless of the credit limit of the card, you have to be aware of your personal credit limit based on your cash flow. That easy loan can be seductive, but it’s a Faustian bargain. Like buying your groceries at 7-Eleven, you’ll pay a premium for the 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. Pay off the debt with the highest interest rate first, then work your way down.

4) Reconcile Statements Every Month

The process will keep you from overdrawing your accounts. Also, 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. Also, some convenience stores like Wawa waive ATM fees.

5) Wealth Management is a Marathon, not a Sprint

Be satisfied with 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) Understand Compound Interest

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. This is why the rich get richer and the poor get poorer. Over a lifetime of saving, the interest that builds up can be double or triple the principal you’ve saved.

7) Value Yourself

Charge as much as possible for your photography. There will certainly be times when you’ll do favors for friends and relatives or charitable causes. 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. You can find lots of examples of photography estimates on our Photographer Blog and aPhotoEditor.

8) Carefully Consider All Business Expenses

Pay only as much as necessary for all of your photography 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. This goes for every person you hire and each purchase you make.

9) Understand Business vs Personal Money

For a sole proprietor just starting out, it might not be worth the trouble of having both personal and business credit cards and bank accounts (though there’s no question that you’ll want to do that eventually). When your business is small, there’s a lot of value in keeping things simple. The important thing is to record each transaction so it’s easy to fill out your tax returns. It will also help you explain yourself in case you get audited by the tax authorities. Also, be careful not to spend money in your head. Know that if you shoot an assignment for 1000.00, you may only have a couple hundred bucks left over after you pay your variable and fixed business expenses and pay your personal income taxes.

10) Create a Bookkeeping Routine

When I was still doing my bookkeeping, every Sunday morning I would put a load of laundry into the washing machine and sit down to do my bookkeeping for the week. I would deposit my checks, pay my bills, and record each transaction on a paper ledger. By doing that work a little bit at a time throughout the year, it saved me the headache of doing it all at once during tax time.

In the United States, the Internal Revenue Service (IRS) will want to see how much money you spent. However, they will also want to see how you spent it. You’ll be required to fill out a Schedule C tax form. This form splits out things like rent, equipment, supplies, insurance, etc. So it will be helpful if you track those categories along the way. QuickBooks is a popular bookkeeping application that will make that process easy for you.

11) Financial Literacy

Young artists are sometimes told not to think about money. Sometimes this comes from teachers who have not found financial success themselves and sometimes it comes from clients who want to drive down their costs. The fashion designer Bill Blass once told me, “Don’t ever let anyone tell you that money isn’t important.” Financial literacy begins with understanding how the basic building blocks of finance fit together and what everything is called. At the very least, you’ll need to track these items so you can pay your taxes. But beyond that, you’ll need to understand these concepts so you can have intelligent conversations with your advisors and business partners (and yourself) so you can grow.

12) Learn Basic Terminology

• Revenue is the money you receive for performing services for customers.
• Expenses are items that you pay for to conduct your business.
• Profit is Revenue minus Expenses. This is what becomes personal money after you pay your taxes.
• Cash Flow is the money going in and out of your business. You may have recurring revenue from retainer agreements or regular customers and you may have one-off projects. Either way, to pay rent, loans, or salaries, you’ll need a good sense of what you can “afford.”
• Fixed vs. Variable Expenses. Variable expenses are tied to an individual project, like travel. Fixed expenses are something you have to pay regardless of how many assignments you do (like your camera insurance).
• Markup is a fee that you add to certain expenses to pay for the cost of running those expenses through your business.
• Net Revenue. Photographers often bill for retouching, equipment and studio rental, and markup in addition to their photographic fee. So think of net revenue as the gross revenue from a particular project minus the variable expenses. The tax collector doesn’t care about this either.
• ROI (Return on Investment) is the idea that when you’re running a business, everything you spend money on needs to provide some benefit that justifies the cost. Risk is part of any investment, so you should think in terms of the probability that a particular investment will yield a positive return.
• Interest is what banks pay on your deposits or what you pay to a bank when you borrow money.
• Dividends is what stocks or mutual funds (sometimes) pay to their investors.
• Capital Gains (or Loss) is the money that you gain or lose when you sell an investment.

13) Saving is Green in Dollars and Sustainability

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 for companies to grow. It leads to long-term tax revenue that supports the physical and institutional structure of our society.

Wealth Management and Financial Literacy in Practice

Enough platitudes. Here’s an actual system you can put in place to start saving.

Divide Accounts According to Financial Goals

Open Short-Term, Medium-Term, and Long-Term Savings Accounts

• You’ll use your short-term account to receive payments and to pay out routine expenses.
• You’ll use your medium-term account to save for medium-sized purchases like photo equipment or for paying your quarterly estimated income taxes.
• You’ll use your long-term account to save for large purchases like real estate and/or for retirement.

Know the Differences Between Your Accounts

Each of these accounts is structured a little differently

• A short-term account won’t pay interest, but if you keep enough of a balance, you’ll get low-cost or no-cost transaction fees (for payments, and ATM withdrawals) and your balance will be insured by the federal government (if you have a U.S. bank).
• A medium-term account will pay a small amount of interest, but you won’t want to use it to pay your routine bills because the transaction costs will be high or because there will be a minimum amount for each payment you have to make through that account.
• A long-term account won’t be insured and it won’t pay interest, and you won’t be able to make payments to third parties, but there’s a good chance (in the long run) that your principal will grow much faster than in an interest-bearing account (if you don’t mind the short-term risk of your investment going down in value).

One Strategy for Saving

Step One

Make a list of all the banks that have physical branches near you. Find out what types of checking accounts they offer, what the fees are for buying checks, writing checks, making ATM withdrawals, and for other transactions and services. Find out what the minimum average balance requirements are in order to avoid some or all of those fees. Open an account at the bank that gives you the best deal.

Step Two

Practice being frugal and always living within your means (this can still include being generous when appropriate). Practice negotiating and learning how to read and write contracts. Be strategic about how you budget your money, thinking about all the different things you need and spending on different things in proportion to their importance.

Step Three

Once you build up a cushion equal to about 3 months of your average expenses, open an interest-bearing money market account (this is your medium-term account) where you can put any excess money. Vanguard is an example of good place to do this. Because there’s less activity on the account and you will probably maintain a higher balance, you’ll be able to earn interest on your money.

Step Four

Each month, when you balance your checkbook, transfer any excess money to your money market account. When you decide to make an equipment purchase or pay your estimated taxes, move money back into your checking account if necessary so that all of your expenses come out of that account (which will simplify your record-keeping for tax purposes).

Step Five

At the end of each quarter, after you have paid your estimated taxes, transfer the excess money to your long-term account. A good place to start if you don’t have a lot of investing experience is a low-cost stock index fund. Index funds invest in shares of lots of big companies (I like the Vanguard 500 Index Fund). That’s where you’ll get, on average, good long-term appreciation (and low fund expenses) in exchange for moderate risk. When you get close to a big purchase that you’ve been saving for, stop moving money into your long-term account because it will be too risky in the short term.

You will eventually want to have two long-term accounts — one for other long-term goals like buying a house and a separate one for retirement savings. The advantage of a retirement account (like a SEP IRA) is that you won’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 in the future. Consequently, it will grow much faster. If you make a lot of money, it might make sense to open both accounts right away. But for most people, unless you have an employer matching your retirement contribution, it might make sense to first save for your house down payment, then once you’ve bought your house, start saving for retirement.

Calculating Your Savings Goals

You might wonder how much money you need to retire comfortably. Certainly, it depends on the kind of lifestyle you’d like to “grow accustomed to” as my dad used to say. 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), your house will be paid off, and you won’t have to save for retirement anymore because you’re already retired. But some things will cost more. Chances are your health will decline, 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. So all things considered, your post-retirement life might only be slightly less expensive than your pre-retirement life.

The Current Market

At the moment, modest, middle-class life in America for a small family will run you about $100k/year before taxes (as long as you don’t live in cities like New York or San Francisco). To make that off of dividends from your investments (from which you could count on 5% per year), you’ll need 20 times that (100% divided by 5%) or $2 million.

Over the past century, the stock market has provided the best return on investment compared to interest-bearing bank accounts, bonds, or commodities (like gold). 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 effectively get a 6% appreciation on your money in the long run. The following numbers allow you to see the appreciation in “today’s dollars,” as though there was no inflation to consider.

Strategy Breakdown

So here’s one way you could map out your route to getting that $2M (it says interest, but what I really mean to say is appreciation):

Note the fact that your overall investment has nearly tripled in value.

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 wise person and you’ve saved all along, your parents were probably sensible people too and that they left you a little something (in this case, we’re hoping for $600k). And if not, maybe Social Security will make up some of the difference.

Saving for retirement isn’t easy. But with a little planning and discipline, it’s an attainable goal for most photographers.

What About Commercial Real Estate?

Another important investment approach to consider is commercial real estate. One of the ways photographers and other artists have accumulated wealth is by buying studios or houses that they can both live and work in and perhaps share with roommates or other artists. Especially if you’re handy with carpentry, electrical work, and plumbing, if you don’t mind being a landlord, and if you’re savvy about building equity and then buying additional properties, real estate can be a great investment.

Reconciling Your Accounts

Reconciling your accounts is an important part of financial literacy. There are two parts to this process – bank statements and credit card statements. Bank statements are often more difficult to reconcile than credit card statements. Even as banking becomes more digital and physical checks become less common, the process of reconciling your bank statement is still important. Not every payment you make or receive is instantly registered with all the parties involved. Of course, your bank keeps a record of your transactions, but it’s important for you to keep your own set of records and compare them to your bank’s records at the end of each month.

Reconciling Bank Statements

As you make each deposit and write each check (or make an electronic payment), record it in your ledger. At the end of each month, your bank will send you a statement detailing all of the transactions that they’ve recorded. But the checks you write aren’t necessarily cashed in the order that you write them and some of them won’t show up on your new statement. So you need to reconcile the bank’s records with yours. This ensures that 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. To do so, 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
+ deposits outstanding
– withdrawals outstanding
– checks outstanding
= 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 made an error or you’ve omitted or incorrectly recorded a transaction. On rare occasions, I’ve even found errors in my bank’s records. Go through your entries and rework the math until it comes out correctly. 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.

Reconciling Credit Card Statements

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. Keep all of your credit card slips and then match them up with the list of charges on your statement. Then keep those slips with the statement in that envelope so you have a record of that purchase that you can go back to if necessary. When you make the payment to your credit card company, separate out the expenses into the different categories that the IRS (or your taxing authority) requires.

It can seem complicated and intimidating at first, especially for photographers who have creative tendencies rather than mathematical or financial. However, by learning about it little by little, you can become more proficient and comfortable in earning and saving. In summary, there are many different ways to manage your finances.

About the Author

Prior to dreaming up Wonderful Machine, Bill Cramer spent 20 years working as a commercial photographer – first as a photojournalist, then later doing conceptual portraits for magazines, corporations, and institutions. When he isn’t busy working with his staff or talking with photographers and clients, you can find him at the creek with Tilly, reading historical biographies, or relaxing with his wife Adrienne and their daughters Helen and Sarah. You can find Bill’s work on his website and connect with him via LinkedIn. This article was originally published here and shared with permission.