An introductory note here: If you’re going to be a self-employed musician, you better find a way to put some money aside for your future or for when you might not be working enough. Financial advisors tell us that we should have six months of expenses saved for rainy days. But even more importantly, if you put a few dollars aside from every gig, even a small amount of money each time, those savings will grow over time to a substantial amount of money.
Financial professionals refer to it as the “power of compounding,” and, more technically, “the rule of 72.” Compounding refers to how returns on your investments, like stocks and bonds, but even interest-earning investments, generate additional money over time. In essence, the interest or your investments are earning returns themselves. For example, if you invest $10,000 in an account that earns a 6 percent annual return, your investment grows to $10,600 after the first year, then in year two, it would grow to $11,236. The longer you stay invested, the more substantial the annual return.
The Rule of 72 refers to the amount of time it takes to double your money. This is how it works: Take the number 72 and divide it by your anticipated annual rate of return. The result gives you an approximate number of years it takes to double your investment in value. For the example above, that means it would take you 12 years to double your money.
If you don’t have a bunch of money to start with, investing small amounts as you go is easier and serves you well. If you are employed you might have a employer-sponsored 401(k) plan where you put aside something out of each paycheck and your employer matches it up to a point. But as a self-employed musician you can start your own plan, like an IRA (there are several types of IRAs available to self-employed individuals.).
As a musician, you might never want to or need to retire, but having a retirement account that will pay money to you later in life will give you peace of mind. You know you’ll have money to live on no matter how long you live.