The music industry guide to making sound financial decisions

Money trees is the perfect place for shade.

Kendrick Lamar

Listen on: Apple – Spotify – Soundcloud

A sustainable music business requires a stable personal financial plan.

This guide will review how to make sound financial decisions including:

• Cash flow
• Insurance
• Taxes
• Investing
• Retirement
• Estate planning

Cash flow

Cash flow is the movement of money in and out of your possession.

Income flows in from performances, merchandise, sync licensing fees, royalties, teaching, etc.

Expenses flow out from living expenses, mortgage/rent, saving, insurance premiums, debt payments, medical costs, business expenses, travel, food, etc.

Track your cash flow with an income statement to monitor if there is money leftover after expenses (cash flow positive) or you spend more than you earn (cash flow negative).

Net worth

Net worth is the value of your assets minus any liabilities (debt).

It’s typical to have a low or negative net worth early in life as you build capital, expertise and value in your career. Over time it’s important to reduce your liabilities and increase your assets.

Track your net worth annually with a balance sheet to measure your financial progress over time.

Emergency Fund

An emergency fund serves as a financial backstop when things go wrong in life. This is cash in a savings account that turns an emergency into a minor inconvenience.

An emergency fund prevents the need to use credit card debt or high interest loans.

Learn how to save an emergency fund in 4 simple steps.

Insurance

Insurance is a method to transfer risk from yourself to an insurance company. The most important risks to transfer are those that are low frequency (rare) and high severity (devastating).

Health Insurance

At the very minimum health insurance can provide financial relief if you were to suffer a major accident, require a major medical procedure or have an expensive emergency room visit.

Musicians can acquire health insurance from multiple sources:

• AFM (American Federation of Musicians)
• HAAM (Health Alliance for Austin Musicians)
• MHA (Music Health Alliance)
• eHealth
• Affordable Care Act (healthcare.gov)

Auto Insurance

All 50 states require auto insurance except Arizona, New Hampshire and Virginia. But, those three states do have other requirements including proving your ability to pay if you’re in an automobile accident. If you own a car you are legally obligated to have insurance, so get it.

Finder.com gives a list of each state’s minimum auto insurance coverage requirements, but your local insurance agent can easily set you up. Keep in mind the newer and more expensive your vehicle, the higher price premium you will pay for insurance.

Home or Renters Insurance

Home insurance protects against fire, tornado, floods and other unexpected events. You must have at least 80% of the replacement cost of your home for insurance to pay out claims.

Renters insurance provides renter’s financial reimbursement to cover lost or damaged possessions as a result of fire, theft or vandalism. It also covers your liability in the event that a visitor is injured on the premises.

Liability Insurance

Liability insurance covers your risk of being sued. Typically people sue when they are hurt or their property is damaged by someone else. An example might be your drum cymbal falls and breaks the bass player’s foot. In this case you are liable for their medical expenses and potential income loss suffered during recovery.

This is one type of insurance musicians rarely consider, but think about how many opportunities there are to hurt or damage someone else’s property on the job?

Liability insurance is usually attached to other forms of insurance for example you will most likely have it within your home, renters or auto insurance plan but you may need to get additional coverage through an Umbrella policy for personal or Commercial liability for business use.

Disability Insurance

What happens if you break your arm and have a big violin solo the next day? Or you fall extremely ill for 3 months and have to sub out your gigs or can’t show up to work?

This is by far the most underrated form of insurance and the most important. If you are hurt or ill and can’t perform your duties, disability insurance will reimburse a percentage of your income depending on your plan.

There are many variations of disability insurance, read here to learn more.

Instrument Insurance

Another underrated yet extremely important insurance for musicians. With the high cost of instruments comes the high cost to replace or repair them. Instrument insurance is incredibly cheap and you will thank yourself when the dog chews up your Stradivarius.

Providers:

• Clarion
• Music Pro Insurance

Life Insurance

The need for life insurance depends on your age and if you have dependents or children. 

If you’re married and/or have a child and you die unexpectedly your spouse or dependent will have to pay for funeral costs, potential estate/end-of-life proceedings, face the loss of your income and support themselves and the child’s future.

Life insurance relieves the stress and financial pain if the unthinkable happens. It’s an unfortunate subject to discuss, but necessary to the well-being of your family if and when you have one.

Taxes

Understanding your taxes is key to achieving artistic freedom. For starters, refer to the IRS (Internal Revenue Service) for all things taxes.

Tax brackets

Tax brackets are confusing.

If you are in the 22% bracket, you do not pay 22% of income in tax.

In this example, a single filer in 2024 earns $115,125 after business expenses:

• The first $14,600 qualifies for the standard deduction.
• The next $11,600 is taxed at 10% = $1,160.
• The next $35,550 is taxed at 12% = $4,266.
• The next $53,375 is taxed at 22% = $11,742.50.

Totaling $17,186.50 of federal tax due.

$17,186.50 divided by $115,125 = 14.91% average tax rate

Deadlines

Deadlines for filing taxes are typically on April 15th unless that day falls on a holiday. There is an option to extend the deadline which would require you to file on October 15th (again unless that day falls on a holiday) however the deadline to pay is still April 15th.

W2 vs 1099

Musicians are typically considered sole proprietor/independent contractors also known as self-employed. When earning income from multiple sources we typically receive one of two forms from each source for tax filing.

• Form W-2
• Form 1099-Misc

W-2 means the employer is withholding a portion of your income for social security, medicare, and income tax.

1099 means the employer does not withhold income and you are responsible for paying taxes on the income.

Most one-time or short-term gigs are 1099 whereas a church or school with a long-term or yearly contracts are W-2.

Deduction vs credit

The difference between a tax deduction and a tax credit is very important. A tax deduction is an item you deduct from your income. 

If you make $100,000 in one year and qualify for deductions totaling $20,000, your year-end income would be $80,000, not $100,000, which would lower your taxes from $20,842.25 to roughly $15,650.

A tax credit subtracts from the amount of taxes you owe. For example, if you owe $15,650 in taxes and qualify for a credit of $1,000, you would only pay $14,650 in taxes that year.

Examples of tax credits:

• Earned Income Credit
• Child and Dependent Care Credit
• Adoption Credit
• Mortgage Interest Credit
• Low-Income Housing Credit
• Premium Tax Credit (Affordable Care Act) Etc.

Examples of tax deductions:

• Mileage or Car Maintenance
• Home Office and Supplies
• Meals (50%)
• Depreciation of Instruments/Equipment
• Student loan interest, Tuition and Fees
• Educational expenses
• Clothing
• Charitable contributions
• Etc.

Investing

Investing is the act of devoting money or capital to earn a return as interest, income, or appreciation. Capital can also take the form of time and energy as well. Investing puts your money to work for you.

There are many ways to invest, but first I recommend educating yourself thoroughly before deploying money into an investment vehicle. 

Ignorant investing is equivalent to drunk driving blindfolded. You will get hurt badly, and may very well hurt your family depending on your choices. Do your research and keep in mind there is always inherent risk in investing.

Below is a list of investment vehicles and a few examples to consider on your path to financial freedom:

• Stocks
• Bonds
• Index funds
• Mutual funds
• Exchange traded funds
• Starting a business
• Real estate
• Commodities

Retirement

Retirement is a strange word for musicians.

Financial freedom – working because you want to, not because you have to – doesn’t work either. Most musicians want to “work” as long as possible.

So what future state are musicians saving towards?

Artistic freedom. Complete control of your creative endeavors. Imagine making art free of financial, contractual, or commercial obligations.

Does that sound like a way of life worth saving for?

There are many accounts to start saving and investing towards artistic freedom including:

• Traditional IRA
• Roth IRA
• SEP IRA
• Solo 401(k)
• HSA
• Taxable Brokerage

Estate planning

Everyone has an estate plan… written by their state of residence.

Does your home state have your best interest in mind?

A proper estate plan includes:

• Will
• Funeral instructions
• Durable power of attorney
• Medical power of attorney
• Living will / medical directives
• HIPAA authorizations
• Trust

These documents dictate your wishes in the event you are incapacitated or die prematurely. An estate plan protects your musical legacy and saves your loved ones from making decisions during an emotional time.

Make sure your taxable assets are titled properly and beneficiary designations are aligned with your wishes.

Examples:

• Checking, savings and taxable brokerage accounts
• Homes, cars and other property
• Life insurance and retirement accounts

Where do I start?

This is a lot of information!

It takes time to implement all the steps toward artistic freedom. Start with your greatest pain point in life and slowly implement the rest over time.

Consider working with a professional so you can stay focused on your passions.