Most people are in great need of financial planning. Musicians are no different. In general, the process and application of financial planning differs very little from individual to individualeveryone should at least consider the following process: set objectives, develop a plan, implement the plan, and then periodically review the plan. Typically, those working for a school or institution and those members of active unions are provided reasonably good tools with which to apply the planning process; however, the free-lance, independently contracted musician faces the daunting challenge of assessing and acquiring all the same benefits for themselves. As an opera singer for fifteen years, no one ever helped me identify, let alone understand, the need for financial planning. I hope this article will provide at least a starting point for those interested in planning their financial future.

Personal Financial Planning

Personal financial planning is the development and implementation of total, coordinated plans for the achievement of ones overall financial objectives. The essential elements of this concept are the development of coordinated plans for a persons overall financial affairs based on his or her total financial objectives.

Most people use a variety of financial instruments before they can achieve all their objectives. Thus, such basic financial tools as common stock, bonds, mutual funds, insurance, fixed and variable annuities, money markets accounts, certificates of deposit, savings accounts, individual retirement accounts, personal trusts, and real estate are essential elements of many, if not most, soundly conceived financial plans.

Also involved in the planning process is the development of personal financial policies to help guide a persons financial operations. An example of such policies in investments would be deciding what percentage of an investment portfolio is to go into bonds (or otherfixed dollar securities) and what percentage into common stocks (or other equity-type investments), or deciding to invest primarily in growth-type common stocks to be held for the long pull. Another example involving life insurance is that a consumer may want to purchase mainly cash-value life insurance, or he or she may decide to buy mostly term insurance and place the savings elsewhere.

Unfortunately, many people do not follow consistent policies in making these decisions. One of the most important functions of financial planners is to help their clients develop sound financial policies.

In financial planning, people consciously or unconsciously make assumptions about the current economic climate and what they think the economy holds for the future. A commonly held view, for example, has been that the U.S. economy will experience long-term growth, accompanied by at least some price inflation, for the indefinite future. On the other hand, others may fear that economic conditions will change at some point, and they may plan their affairs accordingly.

Focus on Objectives

Each persons financial objectives may differ in terms of individual circumstances, goals, attitude, and needs. However, the objectives of most people can be classified as follows:

1. Protection against the personal risks of
   1. Premature death
   2. Vocal disability
   3. Medical care expenses
   4. Custodial care expenses (or long-term care expenses)
   5. Property and liability losses (instrument damage)
   6. Unemployment (inconsistencies of a free-lance career)
2. Capital accumulation for
   1. Emergency fund purposes
   2. Family purposes
   3. Educational needs (often life long costs for coaching and lessons)
   4. General investment portfolio
3. Provision for retirement income
4. Reduction of the tax burden
   1. During lifetime
   2. At death
5. Planning for ones heirs (estate planning)
6. Investment and property management (including planning for the property management in the event of disability or incapacity)

Need for Personal Financial Planning

Who Should Plan?
Most people find themselves in need of financial planning to some degree. Some of the more sophisticated techniques tend to be used mainly by those with large incomes and large property or business interests, but partly this is so because less wealthy persons lack information about financial planning. If they knew the techniques, they would use them more. Interestingly, given economic growth, a complex tax structure, two-income-earner families, and other social and economic changes, the need for, and the complexity of, financial planning has increased dramatically.

Why Planning May Be Neglected
People fail to plan for a host of reasons. They often feel they do not have sufficient assets or income to need planning, or that their affairs are already in good order. Both of these assumptions are frequently wrong. There also is the natural tendency for busy people to procrastinate with respect to planning. Some people actually may fear planning, since part of it involves consideration of unpleasant events such as death, disability, unemployment, property losses, and possible incapacity. Finally, people may be deterred by what they consider the high cost of planning services.

Knowledgeable consumers can secure some valuable planning services without additional cost. For example, stock brokers, trust officers, insurance agents and brokers, and others stand ready to give advice in the areas of their specialties without extra cost to consumers beyond that already built into the cost of their services. Of course, consumers must evaluate carefully the advice they receive in light of the advisors experience, knowledge of the field, and objectivity.

Remember, too, that fees charged for some planning services may be deductible for federal income tax purposes. The tax law permits the deduction of expenses, in excess of a certain limit, incurred for the management, conservation, or maintenance of property held for the production of income, except to the extent that such expenses are incurred in earning tax-exempt interest or income. An income tax deduction also may be taken for expenses incurred in connection with the determination, collection, or refund of any tax (including gift and estate taxes). However, such itemized deductions, as well as most employee business expenses, are considered as a single category of itemized deductions and are deductible only to the extent that, combined, they exceed 2 percent of the taxpayers adjusted gross income.

Costs of Failure to Plan While there may be understandable human reasons why people neglect to plan, the costs of failing to do so can be high indeed. A family may be unprotected or inadequately protected in the event of personal catastrophes such as death, disability, a serious illness, an automobile accident, prolonged unemployment, incapacity to manage ones property, confinement in a custodial care facility, or similar risks of life. There may not be enough money set aside for education and retirement. Failure to plan also can result in higher-that-necessary income, estate, gift, and perhaps generation-skipping transfer taxation.

When there is a closely held business interest in the family, failure to plan for the future disposition or retention of this interest can result in several problems in the event of death, disability, or retirement of one of the owners.

In the same vein, failure to engage in proper estate planning not only can result in higher-than-necessary death taxation and estate settlement costs but, perhaps more importantly, can also cause disputes and harsh discord within the family, resulting in unhappiness for the very person the estate owner wishes to benefit.

Another important cost of failure to plan is that a persons own objectives in life may not be realized. Because so much of our financial security can be tied to a particular employer, failure to plan can result in an employee having to stay in an unsatisfying job. Similarly, people may have to keep on working beyond when they would have liked to retire because they just did not start thinking about retirement soon enough.

Many tools are available to musicians for financial planning. I encourage all musiciansat all ages and career levelsto think carefully about their financial futures and to discover the tools that will be most appropriate to their unique professional circumstances.