Financial Starting Point
There are two steps necessary to create a financial starting point. The first is to determine your net worth. To arrive at this figure, add up the current dollar value of your assets (what you own, such as a car, home, investments, savings and cash accounts, jewelry, etc.) and subtract your liabilities (what you owe, such as a car loan or mortgage remainder, student loans, credit card debt, etc.).
The next step, calculating your average monthly profit and loss — also referred to as monthly cash flow or P&L — will require more time and effort, but it is a critical element in understanding your financial baseline. In basic terms, your P&L equals your income minus expenses, or the precise amount you earn each month (from acting work, residuals, "job" jobs and/or side businesses) minus what you spend. As an artist, how can you correctly pinpoint your P&L when income arrives from a variety of sources at random intervals and one month may differ wildly from another?
The solution is to average out your earnings and spending habits over a six-month period. This will capture such variations and reflect all those special or unforeseen costs — such as union dues, headshot reprints, and car maintenance — that don't surface every month. Your average P&L will most accurately predict your money lifestyle across all months.
Begin by gathering your receipts and financial records for the past six months. Rather than totaling all your expenses without discrimination, separate expenses into two categories, personal and business, and then into further categories within those. Avoid the common trap of lumping similar groups together. Your food category, for example, might be separated into groceries, dining out, Starbucks, baby food, etc. Simply labeling everything "Food" won't provide an honest assessment of where your money is being spent.
Total your income over a six-month period and then divide by six to determine your average monthly income. Next, total each separate expense category over the same six months and divide by six. For example, if your monthly grocery expenditures were $100, $150, $125, $150, $175, and $125, your average monthly cost for groceries would be $137.50. Now subtract the total of your average monthly expenses from your average monthly income to figure out your P&L. If this number is positive, you're earning more than you're spending; if it's negative, you're in the red.
Your success depends on the clarity of your P&L and net-worth numbers. These numbers represent your financial behavior and will prove very insightful. If you discover you're overspending by hundreds or even thousands of dollars, which is common, celebrate your newfound knowledge. You now have an exact cash-flow gap: the additional amount you must earn each month to meet your lifestyle choices. Once you know what it costs you each month to live, it's within your power to determine how you'll acquire this income consistently.
Armed with your true starting point, you can set concrete goals, determine milestones, and map a course for the future. Follow these steps to clarify what your financial picture looks like today, so that you can begin to take the correct steps toward your oasis.