Financial Literacy for Creatives

The patterns & habits of your life determine your experience and results.

Picture two different creators:

One is pure artist – they create in bursts when the muse inspires them. Their passion attracts many people to follow them. They believe that money devalues art so they don’t charge for their work, ever. They have no regular income, no savings or investments, and at some point find it hard to grow past their current circumstances.

The other creator shows up every day and puts in the time to work on their craft. They know everything they make isn’t going to be their best, but they believe that they have to show up every day to get to their best work. They have systems in place to consistently grow their following and customer base. It’s slow, but steady. They believe that what they create has value, and that value can be exchanged for money. While their income is also irregular, there’s at least some consistent amount coming in every month, and it grows over time. They set aside profit for growth and investing in themselves, have money saved, and feel that their potential to contribute doing what they love is limitless.

Now, there’s not a ton of difference from the outside looking in. Both are creators, and in some ways the “pure artist” is the more desired path – more followers, a true artist mindset, etc.

There isn’t a “better” path, but it’s easy to see how certain habits, mindsets, and patterns compounded over days, weeks, months, and years will lead to a different experience.

Where are your patterns leading you?

How much should you pay yourself? How much should you set aside for taxes? How much does your business actually need to make to be profitable?

A few years ago I read the book Profit First by Mike Michalowicz, and it outlines a great starting point for thinking about your business budget.

Since most solo-creatives are making between $0-$250k per year, we’ll just use that breakdown, but you can look at budgets for $250-500, $1M, $5M, and $10M per year as well in the book.

Here’s a starting point for a solo creative business:

5% – Profit (Hence the title Profit First
50% – Owner’s Compensation
15% – Taxes
30% – Operating Expenses

Take a look at your current budget? Where can you make adjustments to ensure that you have more profit, are setting aside money for taxes, and can pay yourself what you need to.

Now, if you’re creating digital products and have super low overhead, you can certainly drop that Operating Expenses budget down to 20% or even 10%, and shift more into Owner’s Compensation or Profit.

But having a very clear “job” for every single dollar that you bring into your business is an essential business practice. The alternative is having money coming into your business bank account (or worse, your personal account) and then spending if there’s money to spend.

Create a budget, set aside money for profit and taxes first, and then if you find yourself short then take the opportunity to figure out how to either cut expenses or make more money by generating more sales.

If you don’t plan for profit at the start, it’s harder to try and create it later.

Profit, as mentioned in an earlier essay, is what’s left between what you sell something for and what it costs to make it.

If you sell a physical album recording for $15 and it cost you $5 to create the CD and the packaging, then your profit is $10.

However, you have to think of all of the costs, not just the costs to produce the physical product.

My wife is selling these great art pieces of butterflies encased in reclaimed wood and glass frames.

Her hard costs are only about $6 per frame, so in one way she could charge $10 and be “profitable”.

However, that’s not taking into account the ~30 mins or so it takes to cut the wood, assemble the frame, and glue in the butterfly.

If she values her time at $40/hour, then she would need to charge an extra $20/frame to truly be “profitable”, but even then she would only have a profit of $4 per frame. That doesn’t even pay for another piece!

So, to be profitable from the start, she would need to account for the cost to make the product, the time it takes to make it, and profit.

$6 cost + $20 labor = $26. To have a profit of 30%, she would need to charge $37.

So, from the onset, she decided to price the pieces based on size and type of butterfly, and they range from $40-$100 each. She created a very profitable (and fun!) business from the start.

If you’re struggling to have any money at the end of each month, look at your pricing and determine how you can create more profit in the work that you’re creating and selling.

Simple answer: charge enough to make enough to have the kind of life you want to have.

Longer answer: there are a few ways to think about this – Hourly, Project Based, and Ownership.

To work out an hourly rate, you can figure out what the industry rate is for your type of work in your area, and charge somewhere around there. You’ll likely end up at around $25/hr on the low end, and $100/hr or more on the higher end.

In order to make a professional salary doing that ($75k/year or more), you’ll need to work a certain number of hours every week that turns into ~$1,500. So $50/hr x 30 hours, or $100/hr x 15 hours.

Project based is simpler than hourly, and potentially more profitable if you do it right. Figure out how much the project is worth to your client, and that’s how much you should charge. That is a longer conversation than “I charge $35/hour”, but it also is the next level up where they’re hiring you for your experience as much or more than they’re hiring you for your skills.

If you can charge $1,500 or more per project, you could do 4 projects a month and make ~$75k/year. Then it’s a matter of building a system that can generate at least one project per week, from finding the client, onboarding them, doing the work, and delivering the project.

Lastly is equity/ownership. Owning an asset that compounds or a part of a business that pays dividends can allow you to make money without trading your time for that money.

Record an album, put it up on iTunes for people to purchase, make money while you sleep.

Make enough records and sell enough copies, you’ll make even more. Find other ways to make money from that album, like licensing the music for a fee, and your ownership of that recording is worth even more.

The “right” answer of what to charge will be different for everyone, and may even include a combination of all three. But think about how you want to make your money and change accordingly.

Take profit FIRST and then pay everything else, or else you won’t have any profit left.

Profit is often defined as what’s left when you subtract your expenses from your revenue. Say you make $10,000 in a month, and then spend $9,000. You’d have $1,000 left, or a 10% profit margin.

In theory that works great, but in practice, that profit margin can often get spent because it’s there to spend.

Instead, it is important to take the profit out first for your business, just as it is important to pay yourself first in your personal finances by saving and investing.

Why? Because profit leads to growth. If you take the profit first and put it in a separate account where it can’t be spent, then it starts to accrue. You then have cash available to invest in the business or pay yourself dividends.

Yes, even small businesses can pay dividends to their owners!

It also means that being profitable is a priority for you and your business. Being profitable means you’re more resilient when things get bad, like the last year with the uncertainty of the pandemic. It means that you’ll be around to serve your clients in deeper ways over a longer period of time.

Start small. Take 1% of what you make as profit and put it aside. Then adjust every quarter and increase that percentage little by little. It adds up slowly, then less slowly, then a lot over time.

Choose to be profitable, then prioritize taking profit first.