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This article is an introduction to investing for creatives.
Investing for Creatives – Why?
This is the first thought entertainers may have with regards to investing. The second thought is likely a fear of investing because it sounds complicated or risky.
As a creative, if your creative product is selling well or you are heavily booked for your creative service, your income stream is constant. And, if you think about how much an entertainer commands a show and compare it to a “normal” working professional who holds a 9 – 5 job, it is a significant amount especially if you count the actual time “working” on stage. Of course, we know it takes a huge of amount of time, money and resources to get a creative product to a level to command a specific fee. Having said that, if you are a busy creative professional and your income flow is consistent, investing is usually the last thing in your mind.
Depending on which stage of your professional career you are at, you might be reinvesting your earnings back in your creative product, marketing, brand and business, spending it on yourself and loved ones or saving your money.
I assume that you save your money by either hiding it underneath your mattress or putting it into a savings account of a bank. I also assume you have reasons for wanting to save your money.
If you keep money in a savings account of a bank, you are technically already an investor because you are getting a return from interest earned from the bank. So, making an investment is not as difficult as you might have first thought!
The reasons you invest are the same reasons you save your money which likely include saving for emergencies or for “rainy days”, having a sum ready for a specific purpose down the road (e.g. buy a house, buy a car or pay for your child’s education) and/ or for retirement.
So, why not just leave all your money in your savings account since you are earning interest every year? The reason is that the current interest rate of a savings account is only about 0.05% – 0.25% a year. That means if you leave $10,000 in the bank, the interest earned after a year will only be $25. Even if you put your money in a fixed deposit account for a fixed period, usually 3 months – 24 months, the interest rate will only be slightly higher, about 0.25% – 0.5% or $50 a year based on a $10,000 deposit.
You might say that you are comfortable with the interest rate that the bank provides so do not need to invest. There would not be a problem if not for… inflation.
What is inflation?
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each dollar buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the currency within the economy. That is why a cup of coffee may have cost $0.50 twenty years ago but the same cup of coffee costs $1.20 now! And, I’m not talking about branded designer coffee.
Since 1990, the average rate of inflation has been relatively low between 2% or 3% per year. However, the total cumulative inflation for the almost 22 years from January 1990 through September 2012 is 81.64%. In other words, something that cost $100 in January of 1990 would cost $181.64 in September of 2012 and that is what happens at “low” inflation rates.
With the rate of inflation at this level, the interest earned in your savings or fixed deposit account will not be enough to beat inflation, not even close. The reality? Keeping your money in a savings account alone will not be enough for you to reach your financial goals or be enough for retirement.
Good Reasons to Invest
Compared to interest rates in a savings/ fixed deposit account, investments can potentially bring you much higher returns. A “safe” investment (such as in bonds and fixed income funds) can give you a return of 3 – 5%. More risky investments like stocks can give you a return of 7 – 10% (or even more).
You can also make money (referred to as capital gain) when an investment provides a return from an increase in value when you sell it. Basically, you make a capital gain when you sell an asset for a price that is higher than the price at which it was originally purchased. This is known as portfolio income.
Investing in a business that generates profits can bring you even greater returns.
Another very important reason for investing is to give you cash flow whether you are performing or not. Certain types of investments can provide a yield through regular interest earned or dividends paid out. This yield from investments can serve as passive income on top of your active income as a performing artiste & entertainer or a stream of income when you retire from the stage.
Investing in property can earn you a regular rental income and also give you a capital gain if you manage to sell the property at a higher price than your purchase price in future.
Finally, there are also skeptics (with good reason) who do not want to leave their money in banks because they do not trust central banks or want to support them in principle.
For example, it was the mismanagement and irresponsibility of the big banks and financial institutions that led to the mortgage burst and subsequent Global Financial Crisis in 2008. In extreme cases, you may even lose your savings if your bank goes bankrupt and collapses. This is not unheard of in today’s current economic climate as it happened with the collapse of Lehman Brothers in the US in 2008, where investors lost most, if not all their principals. In 2013, due to over exposure of lending to Greece, banks in Cypress collapsed, resulting in savers losing up to 10% of their savings.
Low interest rates, inflation, cash flow and mistrust in central banks are all good reasons why, in addition to having savings, you should also start investing with the goal of converting your money to income-earning assets that will provide you a cash flow and/ or grow your money over time.
One important investment principle that should give you even more motivation to invest is the power of “compounding”. Compounding (sometimes called “compound interest”) is the process of generating earnings on an asset’s reinvested earnings. Albert Einstein called compound interest “the greatest mathematical discovery of all time”.
To work, it requires two things: the re-investment of earnings and time. The more time you give your investments, the more you are able to accelerate the income potential of your original investment, which takes the pressure off of you.
Here is an example:
If you invest $10,000 today and assume you will get a 6% return, you will have $10,600 in one year ($10,000 x 1.06). Now let’s say that rather than withdraw the $600 dividends, you reinvest the dividends, along with your principal sum, for another year. If you continue to earn the same rate of 6%, your investment will grow to $11,236.00 ($10,600 x 1.06) by the end of the second year. If you reinvest the compounded earnings from the first two years, along with your principal sum, for a third year, your investment will grow once again.
This increase in the amount made each year is compounding in action: earnings growing on reinvested earnings, growing on reinvesting and so on. This will continue as long as you keep reinvesting and earning. The longer money compounds, the faster it grows. Money growing at 6 percent per year will double in about 12 years, but it will be worth four times as much in 24 years.
So, each additional percentage point in returns on your investment will improve your returns on investment significantly over time. That is why, even though you will earn compounded interest with your banks savings account, you will earn drastically more with the same amount even if you choose a very safe investment with just a 1% better return. But remember, because time and reinvesting make compounding work, you must keep reinvesting the principal and earnings.
Hopefully, this article has given you some convincing arguments on why you should invest. If you are considering starting to invest, here are some things to do first:
The first thing you should do is to educate yourself by reading books and searching the Internet for information. Some recommended “first” books to get you started that are easy-reads and not intimidating include:
“Investing for Dummies” by Eric Tyson. This book covers a wide range of alternatives and teaches you how to protect yourself from many of the biggest mistakes investors make.
“The Intelligent Investor” by Ben Graham. This is perhaps the most important and influential book ever written about value investing. It presents two types of investing styles – one for every day people who don’t want to think about their portfolios (“defensive”) and the business man or woman who wants to enjoy maximum returns (“enterprising”).
“Rich Dad, Poor Dad” by Robert Kiyosaki. This classic is a must-read for young investors and stresses the importance of financial literacy and investing in income-generating assets.
“The Cashflow Quadrant” by Robert Kiyosaki. Particularly suited for performing artistes & entertainers, who tend to be self-employed as well as business owners who often work for employers on extended contracts, this sequel to “Rich Dad, Poor Dad” discusses the tools an individual needs to become a successful business owner and investor.
Save Up an Emergency Fund before Investing
It is often advised that you should have at least 3 – 6 months of cash savings before you invest your first dollar. This is excellent advice as any money you invest should be money you can afford to “put away” for an extended period of time. Your investments should be the last things you “cash out” if you want to ensure healthy returns over the long run.
As performing artistes & entertainers, I strongly suggest having at least four months of cash funds on hand before you start to invest. As an artiste, any form of physical injury or prolonged illness may keep you from performing your art and earning active income. A four-month emergency fund that you can draw from so that you can still cover all your expenses while recovering is essential.
Pay Off Credit Card Debt before Investing
If you have money in your savings account and you have revolving debt on your credit card, pay it off. Many credit cards have an annual interest rate of 18% or more.
Let’s say you have $5,000 to invest, but you also have $5,000 debt on your credit cards with an average annual interest rate of 18%. If you choose to invest this $5000, you will have to get an almost-impossible 18% return after you pay taxes, within a year, just to break even on that $5,000. So, pay the credit card debt off first before you think about investing.
Do Not Wait for the Right Time or Perfect Investment
There is no guarantee that the market will go up the first day, month, or even year that you invest in it. But there is one guarantee: Doing nothing at all will not provide any form of return to achieve your financial goals, whatever they might be.
The power of compounding is one good reason to start as soon as you can as growth in your investment requires time. So, the later you start, the longer it will take for your investment to grow.
Invest for the Long Term
While there are shorter term investment vehicles that are safe but give lower returns such as short duration bonds, Certificate of Deposits or money market funds, you should invest with a long term horizon.
Investing long term will also allow you to take on investments with higher risks but greater returns. Give your investments some time. Don’t invest in equities (stocks) with the intention to pull the money in weeks, months or even less than five years. Having a long term horizon will also ensure short-terms fluctuations will not affect you.
In Part 2: Introduction to Investing for Creatives, we will explore the type of investments that are available to you.