And, of course, I had to ask my accountant, when printing out the tax forms to put in the filing cabinet, "do the forms print better on an Epson printer or a Canon printer?" And, "should I use archival ink?"
I think we tend to concentrate on camera gear and photographic experiences on this blog site but we sometimes forget that my original thought in setting this up was to cover all the aspects of being a photographer and also running a photography business. To share what it's been like to go down the pathway of running one's own business. An undertaking that's very much about making and licensing art. Which means it's a business constructed and run to make a profit as well as fun photos.
We generally set aside a full week each year to round up all the 1099 forms, find all the receipts for expenses and cost of goods, go through logs and invoices, etc. We have to be in charge of our own accounting, our marketing, our retirement planning and investment strategies as well as our healthcare costs and every other detail of business existence. It's a totally different mindset than that used to make creative products or to collaborate creatively with our customers and our supporting vendors. It's very much right brain versus left brain. And I'm never sure which brain is winning.
I was joking around with my CPA (he's about my age) and I asked him what sort of accounting formula there is to determine when a person can or should retire. He suggested that as soon as your dividend income exceeded your profit from the business, year to year, that you could bail out without reducing your quality of life. Nice rule of thumb. I'll file that away for future pondering. Of course you could just spend down principal and hope you don't run out of $$$ before you run out of "runway."
Every April I do a "State of the Union" for myself and the business. Our "Union" is strong. We billed more in 2022 than we did in the year before by about 40%. I chalk that up to the overall economy recovering from the Covid epidemic. Our camera purchases were no larger than in 2021. That was a good trend for overall profitability. We underspent on marketing (like, zero) and were still able to increase earnings year over year.
We shed a number of business niches and clients that we deemed not to have a good profit-to-fun ratio (PTF ratio) and replaced those "time slots" with more swimming and strength training (which, incidentally, is paying off in the swimming). We've been studying the market for images and reorienting the business around our current predictions. Our research shows that we have a couple more years of potential, traditional photo market left and we'll work to maximize our profits from the business in those two years. After that we'll shut down.
As a result of long term financial planning we have been able to move all but a small percentage of investments from tax deferred accounts to Roth IRAs, or after tax brokerage accounts which will go a long way to minimizing the effects of RMDs (required minimum distributions) in retirement. We don't talk about things like this nearly as often as we do about lens edge sharpness or smoothness of focusing rings but maybe it's worth sharing for younger photographers who are now navigating the fun puzzle of building wealth. Tedious process but better than the alternative.
Part of the plan was always to enter the last stages of the business with our mortgage paid off, our liabilities at zero and with enough cash in the "bank" to weather just about any foreseeable storms on the horizon. With inflation and down markets it's always a moving target but if you get the windage just right...and lead the economy by just a bit...
Photography has never been a remarkably profitable enterprise, especially on the small scale which we pursued it. We were able to eke out a decent living from the cash flow of the business but the real secret to building wealth is less about making a lot of money than it is about saving a lot of the money you make. And investing it wisely.
Albert Einstein is said to have remarked that “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn't… pays it.” I paid little attention to this reality for the first 40 years of my working life because I have been blessed to have a partner who understood it early in the game and set the right course. I was left to run on autopilot --- as long as I contributed my share. And it's true. If you are well invested and get a 10% return (annually) over time on your money you'll double your net worth every seven to ten years. That's pretty cool. No....that's amazing.
The secret, as explained by my partner, is simple. To quote our in-house expert: "Keep your damn hands off the money." To which I would add: "Always ask for the senior discount..."
I will be officially finished with 2022 taxes on Monday when I transfer a "huge" (all relative) amount of money to pay for the consequences of that darned roll over. After that it's all fun and games until the well runs dry. And by "Until the well runs dry" I mean it metaphorically --- about cash flow.
One of the lovely things about getting older is that you focus more and more on what you consider to be the important things in life rather than the bling. Friendship over prestige. Happy routines over flashy vacations. Shiny cameras instead of mistresses. Swimming over drunken debauchery. And a good night's sleep over bad habits or questionable judgement. Photography over watching sports on TV (which was referred to on a TV documentary about the ancient Greeks as: theater for stupid people).
That's the "State of the Union" for my small business as I see it today. And I'm pretty happy with the results.
Hope you are barreling into tax day with huge profits and a better talent for organization than I possess.
No April Fool's messages this year. Look elsewhere.
4 comments:
It’s always good when a plan is on track and end is in sight. Especially one such as significant as retirement.
Quick Q on the financial front.
I’ve grown up with the basic financial advice re domestic affairs that one should keep about 3 months worth of living costs in the bank, in case something goes wrong. It tides you over until any insurance kicks in.
I recently leant that when in retirement, once should keep approx 3 years of living costs in the bank account, in case financial markets tank and dividend income isn’t enough. And one should spend one’s final years of work building that buffer. At least this applies in Australia, based on how our pension schemes work, and social welfare (age pension)
Is it similar in North America, or is the idea of a financial buffer approached differently?
In the gap for some people in the USA between retiring earlier but waiting and signing up for Social Security at 70 years old (maximum monthly benefit payments) it makes good sense to have something like two or three years in unencumbered cash in readily available savings. That way, if the stock market plunges you aren't taking out money at a loss nor would you be missing out on the subsequent market recovery. In fact, during the stock market drop in 2020 it was a good time to move some extra cash from the sidelines into solid investments because you were buying equities at, basically, a 20-35% discount. But even if you weren't interested in "buying into the chasm" you would not have had to liquidate investments at a loss if you had extra cash set aside.
For a couple with a hypothetical lifestyle spend of $100K per year it would make sense to have between $250,000 and $300,000 to live on, in readily available cash, for three years until the markets recover.
I have a friend here in Austin who invested well over the years and has ample savings but he and his wife are experimenting with living on just the income from Social Security. A couple earning well for 30-40 years, having waited until 70 years of age to start collecting monthly payments from SSI would be looking at an income between $7,000 and $8,000 per month. If you've paid off your house and you have no other debt I can't imagine a burn rate that would ever require that couple to hit their savings to "survive." Vacations and new car purchases might be the exceptions.
I calculated our typical domestic burn rate while doing the tax round-up last week. We spend less than $5,000 per month. Our biggest single expense is property tax, followed by food, followed by utilities. If we manage our expenses like monks or the most frugal people imaginable we would be able to do well on SS and never touch the money we've actually saved for retirement. Medicare really helps in this regard. Our private health insurance back at age 64 was nearly $20,000 a year but now our payments to Medicare are around $4,800 per year. I pay extra for my private practice, concierge physician but I only do so because French fashion photographer, Guy Bourdin had his own physician and I thought that was pretty darn cool. But again, that only adds $1650 a year for "All you can eat, same day appointment" medical care.
As a family with a history of being self-employed we always had the strategy for keeping at least a year's worth of living expenses in savings for stuff like the financial hellscape of 2008-2009, the long drought of work after 9/11 and the recent total and abrupt stop to work in 2020. It helps freelancers sleep at night knowing they won't fall off the edge.
As a side note, I've been hearing about the imminent death of the social security program since I was in high school nearly 50 years ago. Old people vote. I predict the program will go on for at least as long as I'm alive....
Substitute the term solo legal practitioner for photographer and your post rings absolutely on point for this reader as well. It’s pretty much the same for any small professional services business as retirement approaches.
Saving up a buffer of about a year's worth of living expenses. Combined with saving hard early on to be able to run my business on current year cash flow, while saving for next year all of the draw/profit that I sporadically took out, enabled me to soldier on in self employment. Especially through 08/09 when corporate work crashed. So basically 2 years of living expenses in the bank. The pandemic seriously tested the reserves for the second time in recent memory. But they largely held. Earlier retirement would have been on the horizon if not for that 2 year pandemic drain. Though for me "retirement" means continuing on with photography at a slower pace for the fun-er clients. And fewer Hampton Inn breakfasts.
A working career of that savings + living below one's means + buying used equipment from time to time + compound interest = for me the sort of "contentment" described in the NYT article that describes why the Finn's are called the happiest people on earth. Security in knowing your basic needs are met produces that contentment.
Good food made yourself, and wine, with friend adds immeasurably too.
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