How to Financially Plan as an Author
I work with a lot of authors on a daily basis, and I’ve seen first-hand that being a full-time and even a part-time author is financially significant. So here’s a quick little guide to dealing with money. Your money. I have every belief you’ll achieve financial success!
Exponential Thinking, Budgeting, and Saving
The idea is quite simple here. You need to always keep in mind that money grows and shrinks exponentially. This principle is called compounding: growth on growth, or loss on loss. And because of this principle, small-sounding numbers become ‘life or death’ significant over time. These small numbers can cause you to accidentally get yourself into a deep hole, or help you to build a solid foundation for financial independence in the future. The key here is to take advantage of the power of compounding, because it can make or break your finances over time.
The power of a 50/30/20 budget.
To me, financial planning is about security—being free to make choices based on your passions, and not out of economic necessity. You can be free while making relatively little if you plan carefully—it all starts with getting your monthly budget under control.
Here’s how it should be planned:
Obligations: how much you have to spend (50% of your income).
Discretionary: any time you pay for a thing out in the world (30% of your income). Authors are encouraged to include their professional expenses in this category. Because publishing books is relatively expensive, ngl. And you don’t want to go ‘all-in’ by throwing all of your budget money at some expensive editor or a fancy cover (these are important, but you need to be rational).
Savings: the money that you don’t spend each month, which is building up your financial security (20% of your income).
To make it easier on yourself, I would highly recommend to set up automatic transfers (any online banking service should allow you to do this). Every month, have your bank automatically transfer money to your savings account, and automatically transfer money to your dedicated discretionary account (probably your debit account). This way you won’t spend money you don’t have to spend. Once you’ve done that, really the main thing you need to do is keep an eye on your discretionary spending. Keep that up, and you’re doing great.
Investing isn’t that hard.
Once you’ve gotten rid of high-interest debt and built some cash savings, then it’s time to get the magic of compounding working for you. The good news is that investing has gotten really easy.
I’d recommend you to invest about 20% of your income, or at least something (anything is better than nothing).
Now let’s go deep on some of the nuances of investing:
Stocks are pieces, or shares, of companies. You buy the stock in the hopes that the company will become more valuable and therefore, your shares will be worth more. Stocks can increase in value by a lot. Their worth can also go to nothing if the company goes out of business. In other words, a very risky option.
Bonds are loans to governments or companies in which they promise to pay you a certain amount of money regularly, and then to give you the original loan amount back after a certain amount of time. They don’t pay you a lot, but they tend to be reliable.
Index funds are collections of lots of stocks and lots of bonds, which together provide diversification of your investment portfolio. It’s important to protect yourself because, while any one company might go out of business, the odds are good that most of them won’t.
Making the Jump to a Full-Time Author
When someone decides they want to be a self-employed author, they have to figure out if they can afford to do so. In order to have that knowledge, it’s important to start selling your work now, before you’ve fully committed to earning all your money through your small publishing business. Once you make this jump, your books will be your main source of income and thus, livelihood, so you’re going to need to treat it as such.
To figure out how much money you’ll need to earn through your artwork, take all your personal financial obligations, add them up, and then double that number. (Recall that 50% of your income should be going to obligations, so double that number is what it takes to have some spending money and savings.) Keep in mind: this number is after you’ve paid taxes on your income, and after you’ve paid for any expenses like editors, designers, marketers, ads, etc.
After doing the math, you might be freaking out. It might seem impossible. And yes, it will be hard. But it’s not impossible. Running a small business is hard, trust me, I’m doing it. And, of course, being an indie author is hard, too. Doing both is harder. Use this number to motivate yourself. Start small, and be patient. Remember the power of compounding. Work on keeping your publishing business growing. Keep your expenses under control. You’ll get there.
Some tips on business management.
Most people—hell, most business people—don’t know much about running a business. They just have an idea and they go for it. Do yourself a favor and follow some of the below good business practices.
DBA. Get a “DBA” (doing business as). This is the thing that lets people pay you as something other than your own name. Essentially, it’s your business’ name. Do an online search for DBA registration in your city. It’s easy and cheap.
EIN. You’ll also want to get an EIN (employer-identification number). This is like a social security number, but for businesses. It will come up at some point in the future, so you might as well get one sooner rather than later.
Business accounts & LLCs. Once you have a DBA and an EIN, you can get a business checking account, preferably at your favorite credit union. Start keeping your business money and personal money separate. When you get paid for your work, this is now where that money goes. When you have a business-related expense, use this to pay it. Earn some profit? You can pay yourself, or you can invest it back into the business to get more business-related job done, go to events, or do whatever else your business needs to grow. If you do this, your business is considered a ‘sole proprietorship’. This means you have full ownership, responsibility, and liability. It’s the same if you have a partnership, except you are sharing the liability with someone else, which can be scary. This is because with a partnership, you’re jointly responsible for the things your partner does, and vice-versa. Because of this, you might want to consider setting up an ‘LLC’—a limited-liability corporation. Many authors who I’ve been working with for years now have LLCs, but it doesn’t mean you have to too. Consider what’s best for what you have in mind for your own publishing business and do some thorough research.
Accounting. The short answer to the accounting section is simple: Do it. You can get Quickbooks Self-Employed for a small monthly subscription or Wave which is completely free.
Taxes. Now that you’re running your own business, you need to pay your quarterly taxes! If you don’t do this, you might be subject to fees and interest when you file your yearly return.
Deductions. I’d recommend working with a CPA—a certified public accountant—to help you get all your deductions and file your tax returns properly.
In summary…
The secret to having money is getting organized and doing a little arithmetic. Keep your expenses near 50%. Strive to save about 20% of your money when you get paid. Figure out what your discretionary budget should be, and don’t spend more than that most months.