A Conversation with Financial Therapist Elaine Grogan Luttrull
During the debate over the 2017 tax bill earlier this month, I found myself thinking, "Someone should interview a financial professional about the tax implications for writers." Then I realized: "Hey! I could interview a financial professional about the tax implications for writers!" My friend Bess Braswell referred me to Elaine Grogan Luttrull, who runs Minerva Financial Arts, which offers financial consulting for artists and arts organizations. She is also the author of Arts & Numbers, a financial guide specifically for artists, writers, and other creatives. Here we chat about financial avoidance, whether to form an LLC, how to handle a first advance, and planning for the changes in the tax bill, among other topics. Read on to the end for a special offer!
Hi Elaine! I will admit upfront: I often get a little freaked out when dealing with financial stuff related to my creative life -- taxes, deductions, invoices, my 401(K).... Math, in essence, which I wasn't great at even as a kid, and which now comes with penalties if I get the numbers wrong. Is this kind of fear and avoidance common among creative types? How do you help people move past it and engage in a more healthy fashion with their financial lives?
You are in excellent company – and not just among creative individuals! It can be incredibly intimidating to tackle financial matters on your own, especially for those who have uncertain income and complex records of business expenses to track. Add in the idea of developing your client base and marketing effectively, and it’s enough to make even the savviest person crave a day job.
With my clients, we usually start by trying to find the “gaps.” Is there something they need to know (like what records to retain for tax purposes)? Or is there something they need to understand better (like the nuances of a business purpose or certain vocabulary words)? Or is the gap one of implementation–meaning, do they know what to do but struggle to do it? That can be a bit more challenging because the cause can be external (uncertain cash flows, a variable health insurance market, changes to tax law) or internal (“I don’t want to do this!”).
The good news, though, is there are strategies for dealing with all of those gaps – even the ones you can’t control.
On your website, it says you use "Solution-focused Financial Therapy techniques as well as Narrative Financial Therapy techniques." What is "Financial Therapy," and could you tell me more about the narrative techniques in particular? (As a writer, I find just the word "narrative" makes me feel more secure. :-) )
Of course! Financial Therapy is a practice that acknowledges the emotional, cognitive, and behavioral aspects of finance, in addition to the analytical ones. There are researchers and practitioners at a handful of institutions – Kansas State University, the University of Georgia, Texas Tech University – who are doing wonderful things with this emerging field. And it is an emerging field! It draws from financial professionals and mental health professionals, and it’s nice to acknowledge that money is often about much more than dollars and cents. The Financial Therapy Association’s website [https://www.financialtherapyassociation.org/] is a great place to learn more.
Narrative Financial Therapy is an approach pioneered by Megan McCoy and others that draws from Narrative Therapy practices. Many of my clients have a journaling practice already, and sometimes the exercise of noticing feelings, anxieties, and habits related to money can help clients be a bit more mindful and take more control over the financial choices they can make. Keeping a financial journal can be a great way of doing that. The nice thing about a journal, too, especially for my clients, is that the pages are blank. So this practice can work if you express yourself visually or in writing, or in some other way entirely.
Solution Focused Financial Therapy is an approach that focuses on building solutions to reach specific financial goals. There are a handful of practices as part of this technique that I really love – including scaling questions – and because this approach is very systematic and very positive in nature, it’s a nice complement to how I work.
Suppose I'm a new writer who just sold my first manuscript for an advance of $10,000, and I'm getting all of it in one lump sum. Let's say I also have $2000 in ongoing credit-card debt as well as student loans. What would you as a financial professional tell me to do with that money, and why?
Congratulations! I know you are going to hate this answer, but it depends. First, you want to make sure to set aside a bit for taxes. Form 1040-ES helps you calculate the estimated taxes you’ll owe for the year, and an advance on your book is taxable. (Did I mention “Congratulations”?)
Then, what to do with the rest depends on where you are in life and what your goals are. If you have an emergency reserve fund (say 3-6 months worth of expenses) and you feel pretty comfortable when it comes to paying your living expenses, paying down debt is a great option. The general advice is to pay down the debt that carries the highest interest rate first, which is generally credit card debt. If your student loans are federal student loans, I wouldn’t rush to pay those off. Generally, there are competitive interest rates and some flexibility in repayment options. Private student loans are a different story, though. These may carry higher interest rates, so it’s worth understanding the details of your own debt situation.
If you don’t have an emergency reserve fund, you may want to use the rest of your advance to start building one. That way, if you don’t have other sources of income for a period of time (say, if the class you were hoping to teach is cancelled for low enrollment, or if you are laid off from your copywriting job, or even if you aren’t able to tutor students as they prepare for the SAT next year), you’ll have a bit of a financial cushion. And getting a lump sum usually makes it easy to start building that cushion. This cushion is basically your protection against future credit card debt. Because if you have a bit of savings, you don’t have to use your credit card as a “bridge source of income” during tight financial times.
Alternatively, if you have a comfortable emergency reserve fund, and you don’t have credit card debt or private student loans, and your federal student loans are relatively easy to manage, you may want to invest your advance (after taxes) in a retirement account. Depending on your tax status, contributing to a retirement account can be a great way to manage your tax liability as well (not to mention your own future).
I’m sorry there isn’t a simple answer to this… Lots of factors can change the answer. If I were to simplify the answer, though, I’d say that some combination of these things probably makes sense: Pay your taxes, protect yourself through an emergency reserve fund (and what you know about your own personal situation), and pay down your credit card debt.
With the same situation as above: What other organizational steps should I take to set myself up for a financially stable writing career? [I'm thinking here of stuff like budgeting for such an unpredictable income, finding an accountant, if there are any financial-planning 101 books you recommend besides your own, etc.]
Ooh! I’m so glad you asked. Definitely make use of budgeting and cash flow tools so you can have an idea of when lean (and not-so-lean) times may happen during the year. I love having a separate bank account for professional expenses and income. This makes recordkeeping relatively easy (especially at tax time). Your financial institution can probably help you open a separate (no fee) account for your business, and it probably even has recordkeeping tools built into its website. (This can be as simple as downloading your transactions each month or as complex as using your past data to make projections.) The trick, though, is to find a system that works for you based on your needs. It might be a separate account. It might be investing in a more complex system (like Fresh Books or Quick Books). You know yourself best, though, so you know how you work best and what level of support you need.
When you earn income, make sure to set aside a bit for taxes, set aside a bit more for your emergency reserve fund, and set aside some to reinvest in your business. Then, plan to live on the rest. And this probably means you need to earn more than you thought you did… If you are only living on a small part of your earnings, you have to earn more to make up for it.
As you spend money, for both your writing and in your personal life, make sure to spend with intention, and do your best to have a clear idea of what it costs you to exist (in the way you want to exist) and run your creative business (in the way you want to run it). Once you know those numbers (ish), we can solve the income piece.
Some people love having an accountant to do their taxes and recordkeeping. Other people prefer to do everything themselves with a bit of support (say an annual “financial check-up” to make sure they are on track or a person to go to periodically for questions). There is no one-size-fits-all model for creative professionals. But there is probably a model that works for you.
Don’t forget to make use of existing resources too. Lots of membership groups offer educational opportunities and support for tax, legal, and marketing topics. Take advantage of them! They are a great way to find resources you love. This is true of arts support groups more generally as well, like local or state-level arts councils.
From what I can see on your website, you have a thriving freelance business yourself, with income from coaching, your book and other freelance writing, conference appearances, ongoing classes, and other sources. What software or other system do you use to organize all of your income and expenses? What would you advise for someone like the writer above?
Thank you! I am definitely the luckiest CPA ever. I used an Excel spreadsheet for the first several years of my work, but it finally made sense to switch to QuickBooks. (For me, sending out dozens of invoices a month and being able to accept credit card payments associated with each invoice prompted the switch. It started to be too much time to manage the invoices by hand!) I also use QuickBooks to pay people who work for me, which is really helpful, and QuickBooks talks to TurboTax, which makes it pretty easy at tax time. But QuickBooks isn’t cheap. There is nothing wrong with a nice Excel spreadsheet. Just make sure to record the business purpose for each transaction in some sort of “notes” column. And if you can add categories to your expenses, you can use some fancy formulas (like SUMIF) to summarize the data at the end of the year.
Some people I work with really like Fresh Books, which is also great for freelancers. Other systems like You Need a Budget or Learn Vest are pretty popular as well. As with everything, though, there is a trade off between time and money, so figure out how you value your time and money to see which option is best for you.
I, uh, HAVE a system, or at least a spreadsheet, but I'm unfortunately not at all disciplined about entering my freelance income into it -- I just stuff all my receipts in a file folder and then deal with them at tax time. (See "fear & avoidance," above.) How do you discipline yourself to do this? Or what do you tell clients like me?
That is totally fine! It probably isn’t the most empowered approach to your financial health, but it works. I find it helpful to block out a few hours each month on my calendar to update my books and records. (This works for writing a newsletter, updating your resume/CV, or following up on leads as well.) The trick, though, is to not “sacrifice” this time to other tasks. (And for what it is worth, I am totally guilty of this.) It’s amazing how two hours of “bank reconciliation time” starts to look like “free time” if I have emails to answer, a coffee meeting that runs long, a project that gets delayed, or—ahem—holiday shopping to do.
But perfection isn’t the goal. Staying on track and informed about your financial health is the goal. And you can do that even if you lose track of your finances one month. Or two. Just get back on track, forgive yourself, and move on.
And when it comes to that avoidance issue, it may be interesting to understand why someone is reluctant to look at their finances? In almost all cases, looking at the money isn’t as bad as people think it will be, regardless of what they fear “bad” means. But if we aren’t being honest about what we are afraid of, we may end up solving the wrong problem. Booking time on your calendar is a good habit, but if time isn’t really the problem – fear is – something will always “randomly come up” to take up the time. After all, it is much easier to blame time (or lack thereof) rather than addressing the real matter.
I know some creative professionals form LLCs or S Corps for their writing or artistic business. Could you talk a little bit about what those are, and their advantages and disadvantages for creative types? As they are forms of corporations, will they provide any advantages over sole proprietorship under the new tax law? (Should we all try to create them before 2018?)
Sure! When it comes to thinking about entity types, usually we think about the tax implications, the inherent liability protection each type provides, and how easy it is to form (and maintain) each type. Sole proprietors (what you are if you run a business, but you don’t actively form an entity) and single-member LLCs are taxed in the exact same way on Schedule C. Multiple-member LLCs or S Corporations are “pass through” entities as well (meaning there is no extra tax at the entity level), but you have to file an extra tax return each year.
Sole proprietorships don’t have any inherent liability protection, so if you are going to operate as a sole proprietor (one person doing business for herself), make sure you have insurance to protect yourself and your assets. LLCs and S Corporations, because they are separate entities, do provide a bit of liability protection as long as you keep your personal expenses separate from your business expenses. (Remember that separate account I mentioned? Have one.)
LLCs are generally pretty easy to form; S Corporations are a bit more complex (and expensive). S Corporations can take advantage of some payroll tax benefits that start to make sense if you earn several hundred thousand dollars a year. Up to that point, an LLC accomplishes many of the same benefits for less cost. You certainly do not have to form an entity (even to take advantage of the tax law changes… Sole proprietorships benefit from the pass-through benefits). But you may want to, especially for the liability protection.
As with everything, though, someone who is familiar with your own facts and circumstances can help you weigh the pros and cons.
Along similar lines: What are some things you as a creative-small-business entrepreneur and financial professional are watching in the new tax law? Based on what you see so far, how should freelancers prepare for the changes it brings?
The most important thing is to be patient. There will be changes (and more changes after that), but creative individuals have been figuring out how to make things work since the beginning of time. No amount of tax law changes can change the perseverance and grit that comes with being a creative person. So don’t panic.
If you have W-2 income (i.e., you work for someone else), you may be losing some of the deductions you were able to take advantage of previously. But if your business reports income and expenses on Schedule C, there are no major changes for your business taxes. (They may even go down, depending on your current tax bracket.)
If you itemize your taxes (you have Schedule A), you may find yourself claiming the standard deduction next year instead. If you already claim the standard deduction, your deduction is going up next year. If you have several people listed on your tax return (kids, other dependents), you may find yourself paying more next year since you will no longer have “exemptions” to reduce your taxable income. There are caps to the state and local taxes you can deduct, and some changes around the edges to other deductions as well.
Here’s what you need to know: Try to save. There will be fluctuations in the withholding amounts from paychecks, especially early in 2018, so if you have a bit more in your emergency reserve fund, you won’t need to panic if you end up owing money at tax time in 2019. If you don’t have a regular paycheck, you should still save for the same reasons (just in case). The details will work themselves out during the year and if you have a bit of savings, those details won’t bother you as much.
Also, the individual mandate to purchase insurance is going away in 2019, so you may see your insurance premiums go up because of the uncertainty. This is particularly true if you purchase insurance through the exchange, but we may see the effects in other insurance options as well. So what can you do? Set aside a bit more in savings to help you weather the storm of uncertainty.
Oh, and call your elected officials and make sure to vote in the midterm elections next year to ensure your voice is heard and represented.
Tell me more about your book and other services you offer. Where can people find you?
You can find me online at MinervaFinancialArts.com or on Facebook (Minerva Financial Arts) or Twitter (@egluttrull). I’m on LinkedIn too, if that’s your jam. I have a monthly newsletter with tips and monthly tasks to keep you on track, and I post the tips on Facebook, Twitter, and my website.
I’m also happy to offer a special “financial check-up” for your readers… I’ll offer a two-session package for $150 (instead of $180). You can book your first session here, and note “Asterisk” when you book the session to get the discount.
Thank you, Elaine! And everyone else: Write & save well in the new year.
With best wishes,
Cheryl
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"Everything You Ever Wanted to Know
about Submissions & Acquisitions" . . .
You Can Still Find Out!
Last month, I gave a webinar for the benefit of my dear church, Park Slope United Methodist. The 90-minute session covered how to write a good query letter, what motivates the decisions made by agents and editors (and why responses can take so long), the differences between editorial and acquisitions meetings, and how to help your manuscript break through. If you missed it, you can now purchase the recording, still for the benefit of PSUMC. Go to this link for the church's online giving page, make a $40 donation in the category of your choice*, screenshot the donation receipt, and e-mail the screenshot to me at asterisk.bks@gmail.com. Within 24 hours, I'll send you the link and password for the recording. Thank you for your interest and support!
* The General Operating Budget covers church expenses; the Pastor's Discretionary Fund offers pecuniary assistance to people in need; the Capital Campaign is our effort to make our 106-year-old church building accessible for people with disabilities; Sunday Dinner is our weekly meal for the hungry; UMCOR is the United Methodist Committee on Relief, which helps people around the world. All donations are tax deductible, I believe, though I am no expert on taxes, as the rest of this newsletter showed.
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Cat Picture of the Month
This video was taken in July, and it shows one of my favorite things Marley does -- making a difficult crossing (four feet!) look graceful and effortless. May we all leap into 2018 with such alacrity, and have such soft landings.
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