Twitter was on fire this week in response to an article about a YA author who mismanaged her advance money and ended up with basically nothing. This is not a critique on the author or the article.
What I will say in regards to my personal reaction to the piece is that like many people who read it, I was struck with a gut-punch of anxiety. See, I have a complicated relationship with money. It wasn’t something I was really aware of when I was a kid but when my father passed away during my teen years, money, or more specifically, the lack of money, was like this big scary monster that followed my mother and I everywhere.
I won’t get into the specifics but the compounding trauma of being broke while also grieving (and all of the scary stressful events that went along with that) solidified in my psyche that money = safety and security and that no money = danger and chaos.
When I found out how much my publisher was going to pay me for my book, one of my first thoughts was–this is more money than my parents ever had. I don’t actually know anyone who has this amount of money. And that’s scary.
As much of a blessing as this is, it’s also scary venturing into this great unknown where no one in my family has been before. It’s scary to think that with the right choices, I could elevate us all and it’s even scarier to think that with the wrong choices, I could destroy everything.
I don’t actually believe that I’m going to choose ignorance, that I’m going to make terrible decisions, or that I’m incapable of controlling this part of my life. I’m a teacher, which means I’m teaching myself new things constantly.
In fact, the first thing I did after getting my deal was begin working with a financial advisor. I also have an accountant who I’ve been working with for several years and who I’ll be meeting with next month to discuss how much I should set aside from this first check for taxes. I recently worked hard to pay off one of my student loans.
I’m doing the right things. And yet, there is still a part of me that worries something will happen, something horrible and catastrophic, and all of the money will suddenly disappear–just like it did when my father got sick–and my life will once again devolve into chaos.
This fear is unlikely to come to fruition but it is not entirely irrational. I suspect that other creatives who’ve had negative experiences involving money might feel the same anxiety upon receiving that first check. What has helped me though, is getting crystal clear about what I value in life so that I can see how my money does or does not honor those things.
In case you’re curious how I’m applying my first royalty check to those values, here’s a breakdown of how I plan to allocate these funds:
1. Financial Planning
Financial planning isn’t free. If someone tries to tell you that it is, making promises that they won’t charge you a cent until your investments with them turn a profit, be wary. Instead, you want to work with a fee-only fiduciary because they actually have ethical standards they must adhere to and instead of selling you investment products, they sell you professional education and advice.
Try to find a CFP who specializes in or is familiar with variable income (bonus points if they’re used to working with creatives like my financial advisors at The Art of Finance in Austin, TX). FYI, the Art of Finance works with clients via Skype as well, so if you’re not able to find someone in your area, feel free to check them out.
6-months of coaching: $1,525 ; 3.5% of 1st advance check
It’s recommended that after securing your deal that you incorporate ASAP. Establishing an LLC through which to process your earnings can help protect you in the case that you’re ever sued, as well as open up your options when it comes to filing your taxes. This can be done by a lawyer (usually for a very expensive fee–I previously paid about $1,800 for this service) or there are online DIY options for much cheaper.
When you meet with your accountant, ask them if filing as an S-Corp may be right for you. This option softens the blow of that 30% self-employment tax by allowing you to designate some of your earnings as dividends, which are not taxed, as opposed to claiming it all as salary. If this isn’t a good option for you, make sure your accountant is at least familiar with all of the deductions available to writers.
Because I’ll be filing as an S-corp this year, my accountant has advised me to set aside $10,000 of my 1st advance check, which is about 24% of the total amount, with the caveat that not all of this will actually go to the IRS. But better safe than sorry, especially since I’m still earning royalties from my self-published books and don’t know how much that’ll total to by the end of the year.
Accounting Services: $1,000-$1,200 ; 3% of 1st advance check
2019 Taxes: $10,000 ; 24% of 1st advance check
3. Student Loans
You better believe I am getting rid of this thing with my very first advance check. If one of my values is financial freedom, being debt-free is a crucial part of that. It’s hard to be creative when you’re worried about paying off loans or credit card debt. Having debt delays so many important financial milestones: saving for retirement, investing in your business, buying a home (if that’s a goal of yours because it totally doesn’t have to be).
I worked hard to pay off one of my loans this past spring and I’m definitely going to celebrate once I finally knock out the other two because it means that money can now go towards reaching other, more important, goals.
Student Loans: $8,600 ; 20% of 1st advance check
4. Roth IRA
Putting some money towards retirement might not be the first thing that comes to mind when you get your first advance check. But it should be. Living paycheck to paycheck is stressful and scary and you don’t want to still be stuck in that cycle when you’re finally at retirement age.
Sometimes creative risks are only possible once you’ve mitigated your financial risks. In other words, you’ll be able to work longer in the creative industry of your choosing if you don’t have to choose between your art and a corporate 401k. Look out for you now by setting money aside for your future self.
I recommend stashing that money in a Roth IRA because it grows tax free (you pay taxes in the present to avoid paying them in the future), which means you’ll have more buying power later even after inflation. Also, if you’re an investment newbie, stick to index funds that are tried and true like the S&P 500 through Vanguard (they have super reasonable fees).
*If you’re not sure what I’m even talking about, ask your financial advisor.
Roth IRA: $6,000 (this is the maximum contribution you can make per year) ; 14% of 1st advance check
5. Emergency Fund
To summarize, an Emergency Fund is not for “true expenses” or the things we pay regularly but not frequently enough to show up on our monthly budget and therefore have a tendency to slip our minds (i.e. semi-annual vet bills, scheduled car maintenance, annual doctor’s visits, etc.). The Emergency Fund is for just that, emergencies (i.e. layoffs, trips to the emergency room, roof replacement after a hail storm).
Some people advise starting with a 1-month Emergency Fund. Others advise 3 to 6 months. I already have a 1-month Emergency Fund built up and my goal is 12 (my risk tolerance is low and since it takes me about 8 months to write a book, I want to have plenty of cushion built in to develop something and go on sub with it). With this first check, I’m contributing what I can while also leaving some room for writing-related expenses and a few *fun* things (see below).
3-Month Emergency Fund: $8,500 ; 20% of 1st advance check
6. Writing Expenses
I know some people actually warn against paying to attend conferences and writing retreats because the cost can be ridiculously high but next year AWP will be in San Antonio, which makes it much more accessible to me this time around than probably any other. I can drive instead of fly and split hotel or Airbnb accommodations with family. Being a debut, I’m pretty certain I’ll find value in so many of the sessions offered and I look forward to learning as much as I possibly can about the industry.
AWP Registration: $250
7. What’s Left
After all of the above expenses, I’ll have $6,000 left, which will be deposited into my checking account in $800 intervals over the course of nine months. Month to month, I’ll decide how much of this to put towards the following: my HSA account, a vacation fund, self-care activities, clothing, and household remodeling/repairs.
These are technically low priority items because they’re not necessities. Are they important to some degree? Yes and I’m grateful that I will have some extra money to prioritize them in a way I haven’t been able to pretty much…ever. I’m especially looking forward to how some of these things will help me stay healthy and balanced while writing under contract for the first time. But if I was in a pinch and that money needed to be used elsewhere, it wouldn’t be the end of the world.
Also, those four months will bring me pretty close to my second advance check (I hope) so if I need to make adjustments at that point, I can.
Miscellaneous: $6,000 ; 14% of 1st advance check
Please keep in mind that I am not a CFP and I don’t have a degree in finance. Everything I know about handling finances as a freelancer I learned through self-publishing, which is just as unpredictable as traditional publishing, if not more so. There were some months when I made close to $7,000 and some months when I barely made $20.
When I first started making consistent money, I absolutely made some rookie mistakes but I also did some smart things too. This time around, I’m grateful that those hard lessons are behind me and that I have an opportunity to make even more smart choices that will hopefully allow me to create a sustainable career in this industry.
The categories above are by no means an exact template for you to follow. You have to think about your values and what’s right for you and your family. But if you’re feeling any anxiety or apprehension about what to do with your advance, I hope my examples and explanations above are helpful in some way. Maybe they’ll help you realize that some of those things are your values too. Or maybe they’ll help you realize that you value something totally different and that’s okay.
The most important thing is that you take the time to really listen to yourself so that you can make the kinds of decisions that will safeguard your creative life rather than put it at risk.
*Stay tuned for what I’m prioritizing with advance check #2!