First principles of Finance for Creatives: understanding your cash flow.
The first step in my financial journey was (and still is) getting a hang of managing my cash flow. I think its particularly difficult for creative people because we are often working as freelancers which means each month is different to the last. But wait, what do I mean by cash flow? Cash Flow refers to the money that comes in to your account and the money that goes out of your account. This is different to your profit and also to your overall wealth.
Often people think that if they just had a better salary and got a bigger job then their money problems would be over. I've thought that and sure, when I've had better months maybe I've felt better about myself BUT the big factor on how wealthy you are is whether you know how to manage the flow of money in to your account and out of your account. No matter how much you are earning, if you are spending just as much then you are in exactly the same position as someone who is earning minimum wage and just covering their basics.
So what is the first step in building a sustainable financial habit as a creative?
You need to pull your head out of the sand and do a complete breakdown of what is coming in to your account and what is going out of your account.
This is often something we put off. We're nervous about what it might say about us because we've attributed a value judgement to our income and our spending habits. We need to put this judgement aside. They're just numbers, the numbers tell a story and with knowledge comes power. Perhaps the story is telling you that you have a much more involved relationship with Pret than you were aware of. Maybe you've got enough subscriptions to pay for a series of acting classes? Or, that little purchase here and there on credit has slowly added up and is needing some attention.
So how do we start? Print out a bank statement from the last month. If you want to save some trees, log on to your account, get it up on your phone, whatever, just get yourself a detailed breakdown from your bank of all the transactions on your account of the last month.
Then you're going to get 2 blank pieces of paper, turn them horizontally, create a row on the top for some headings, and at the bottom for some totals, then create a series of columns. I like to do this on a piece of paper but you can also do this on a spreadsheet on your laptop. I have created a template for you which you can download
You will need 12 columns. The first column is 'Income', then the rest are your expenses 'Utilities', 'Groceries', 'Transport', 'Acting(or whatever your art is)', 'Coffee/takeaway', 'Eating out', 'Shopping', 'Subscriptions', 'Savings', 'Bank Charges', 'Medical' and 'Misc'. I include savings as an expense for now but obviously its not. Its simply recording an out-flow of cash from your bank account to 'somewhere else'.
Now, going through your bank statement you start copying the transactions into their relevant columns. Utilities include your rent, electricity, water and phone. The rest is pretty self-explanatory. Under acting I include all the classes, workshops, casting websites, whatever I might consider an acting expense. Once you have found a home for every transaction you add up the numbers in each column and put the total at the bottom.
You should now be able to compare your In-Flows (Income) with your Out-Flows (Expenses). Now you know the financial story of what is happening each month. Perhaps this story is working out great for you and you have more in-flows than out-flows. But maybe you have more out-flows than in-flows, in which case you can look at your columns and begin to pick out where you can shave off some unnecessary spending.
A reminder: now is not the time to pick up the self-flagellating whip. Judging yourself and criticising yourself for your past behaviour is not going to be useful. Rather, look at the numbers in front of you and feel how empowering it is to KNOW what is going on. No more skeletons in the closet, no more hidden financial boogeymen taking up space in your mind.
Now that you know, you can do something about it.
Which will be the topic of my next post! Budgeting.