Case Study - Photographer Searching for the Light

[Shipwreckgirl]

I've been reading MMM for a while, and finally decided to try and get my act together.  I am 42, self-employed as a photographer, single-ish (going through the breakup) no kids.  I realize that I'm kind of at a turning point here, and I am really trying to figure out the best path to take.  I have read a lot of case studies where it seems the majority are people with full time employers, or couples with one or both employed - I have not seen a lot of case studies by self-employed people.  So, as a rule - being self-employed implies figuring it out yourself, but I thought I could use a bit of extra help.  My parents are both immigrants, so living a good life to them was survival and how to raise a family on as little as possible.  They were Mustachian before I ever heard the term.  They paid cash for everything and are doing ok financially, but I didn't really have a lot (any) financial education growing up.  As an adult, I thought I was doing ok if I had some money in the bank and could pay my bills.  Now, as an adult in mid-life (gulp) that is really freaking me out!  Having learned about FIRE over the last year, this is a new way of thinking for me and I want to give it a shot.

Gross Salary/Wages:  $106,073 - As a photographer, my income is pretty irregular - I could make $1500 one month, or $20,000 the next.  I pay myself $3500 monthly owner's draw to cover my bills.  The rest pretty much stays in the business account to cover business expenses.

Pre-tax Deductions: 

Other Ordinary Income:  None

Taxes:  I pay quarterly estimated taxes of $6K per year Federal, $800 State.  My taxes for this year were $2373 Federal, $339 State.

Personal Expenses that I pay monthly:

Rent:  $975
Health Ins.:  $388
Cooking Gas: $19
Electric:  $79
Phone:  $90 (Iphone on T-mobile plan)
Beauty:  $32 (I am counting 2 yearly haircuts, shampoo, shaving cream, personal care items, etc. in this category)
Car Ins.:  $84
Car Maintenance/Fees:  $134 (repairs and registration fees from the last year)
Renter's Ins.:  $16
Charity:  $6
Christmas/Holidays:  $61
Clothing:  $39
Dentist:  $14
Dining out:  $195
Emergency Fund:  $100
Entertainment:  $17.42 (Netflix & Hulu)
Gas/Transportation:  $112
Groceries:  $415 (my amt from the last year of receipts - this was for 2 people, soon to be just me)
Gym:  $70
Household:  $30 (toilet paper, dish detergeant, etc.)
IRA Contribution:  $100
Pets:  $315 (my amt from the last year of receipts - I have 2 elderly cats, & that amt includes food, litter, & vet) - and no, I am not getting rid of 16 yo cats at this point
Sports/Recreation:  $12
Travel:  $50
Vision:  $39

Assets: 
Roth IRA - $3825.23 - I contribute $100 a month
403B Retirement Plan from when I worked at a university in 1997 - $1952.06 - no contribution
Annuity:  $1491.59 - no contribution
Savings Account:  $1100 - I contribute $100 a month

Liabilities:  None
No student loans, mortgages or credit card debt

These are my goals/what I need help with:

For the budget, I know I can cut the obvious things - food and cell phone.  I am just getting started learning about investing and would like to put some $ in to index funds.  What do I do with the retirement plan from the university?  Do I contribute to it?  Leave it?  I'm assuming I can't just take that money and put it into index funds?  What would be the best way to start investing?  As a photographer, I don't really anticipate 'retiring' per se, but I definitely don't want to be shooting weddings at 67.  I am trying to consider my 'exit plan' strategy right now.  My other goals are to eventually own a cabin somewhere (probably Michigan) and to renovate an Airstream.  Two pretty big projects - I will probably start on the Airstream project within the next three years.  So I know I need to save for these things too. 

Any help/insight would be much appreciated!

[onlykelsey]

Something is missing in your numbers, I think.  IF you make  96,561 post taxes (6800 quarterly payment, plus the 2700 at year end), then you have ~8,047 to spend monthly.

You're spending 3392.42 per your list below, so where is the other 4,654 going? 

[Shipwreckgirl]

I spent about $45K of that total on business expenses.  So I paid myself roughly about $50K to cover my personal expenses.

[onlykelsey]

Ah, that makes more sense.  If you take 3500 a month, then you just have ~108 dollars unaccounted for, which is not too bad.  That would make your savings rate approximately 200 monthly on 3500 you take, or ~5.7%.  Have you played with networthify?  It has a great calculator for showing what effect increases in your savings rate will have: http://networthify.com/calculator/earlyretirement?income=42000&initialBalance=8368&expenses=39600&annualPct=5&withdrawalRate=4 (edited to show the 8300 you have saved already)

I'm a bit confused about whether you took 3500*12 (42K) to cover personal expenses, or 50K, but assumed it was 42K for purposes of that chart.

[tardis]

Nice to see someone with a non-technical job here.  :)  Looking forward to reading more.

Edit:  Oops, though I was in the journals.  Nothing sticks out to me in particular.

[Radagast]

I think the immediate thing is to do whatever it takes to max the IRA every year. $5500/12 per month.

[onlykelsey]

I think the immediate thing is to do whatever it takes to max the IRA every year. $5500/12 per month.

Agreed.  I'm not sure what "early retirement" or semi-retirement means to you, but if you wanted to stop depending on income at ~60, you need realistically to start saving 20K of the 42K you're paying yourself each year, and/or up your net income somehow.  http://networthify.com/calculator/earlyretirement?income=42000&initialBalance=8368&expenses=21500&annualPct=5&withdrawalRate=4  puts you retiring at 60 if you can slash your expenses to 21K and save the other 21K.  There are some great ideas here for side gigs, etc, depending on what you're interested in.  And that's all without saving for a cabin or an airstream.

It seems like you have relatively reasonably expenses (not sure where in the country you are in terms of cost of living), but need to really up your income and savings drastically to reach your goals.  Of course shaving expenses never hurt, either!

[Telecaster]

At some point you will want to open a self-employed 401(k).  That will allow you to stuff more money into tax advantaged accounts.   Have you considered teaching photography classes?  Like hosting photo trips and such.   I understand that's what a lot of photographers do as a side gig that's more lucrative than photography.   

[thedayisbrave]

Do you spend everything else left in the business account on business expenses?

If not, depending on the way the business is set up, you could potentially take it as "profit sharing" (which is taxed lower than a salary). 

But I'd definitely open up a self employed retirement plan of some sort and start stashing the max possible - consult an accountant for the best one in your situation. 

The good thing is, you're making decent money... but if you want to retire you'll need to step up your savings.

Good luck!

[slappy]

From a budget perspective, it looks like your eating out is pretty high. Also, $39 a month for clothing seems high.  Now that your are single, would you be able to get a roommate and split the rent? The could potentially save you enough to max your IRA.  Is that $30 a month in household cleaning expenses? That seems high to me as well. Maybe being newly single will bring that down a bit.  What time of gym membership does the $70 cover? A lot of basic gyms run $15-$20 a month, but I know something like a cross fit or kick boxing membership can be more expensive.

It seems like you are going through a transition right now, so last years numbers may not be as accurate, but I'm impressed that you seem to have your expenses from the last year recorded. 

Also, is it normal to have $45k of business expenses? I know nothing about the photography business, so please forgive my ignorance there. 

[CowboyAndIndian]

How have you set up your business, LLC, S-Corp or just sole proprietor?

My suggestion is to use an LLC and a solo-401k so you can stash more in you retirement fund.

[Shipwreckgirl]

Thank you for all the replies.  I really do appreciate it. 

I will try to answer the questions that were asked here:

onlykelsey - I pay myself $3500 a month, but some months I transfer over a bit more depending on what was going on that month, so it probably is closer to $50K.  Thank you for the link to the savings calculator.

I definitely do need to up my savings rate a lot.

Telecaster - I am working on diversification now.  I have a couple of other ideas in the pipeline.  Yes - the old if you can't do, teach.  I am holding that to a last resort, I like to think of myself as a working photographer and I'm good with shooting now while I still can, and thinking about teaching further down the road.  In my industry, if you aren't shooting and you're just teaching you kind of lose credibility in some respects.

thedayisbrave - yes, pretty much.  Business expenses are pretty high.  Looking to see where I can cut those as well, without sacrificing quality.

slappy - I rent a small two bedroom in a HCOL area - my rent is super cheap for the area since I've lived here for so long.  My office is in the second bedroom, so renting it out would probably only work if I were in a truly dire way.  My gym has a pool - I think that's why it's on the higher side - I'm trying to rehab a back injury from last summer, so the pool gets a lot of use.

CowboyandIndian - I'm a sole prop.  But my accountant just suggested for me to incorporate.  I don't know why he didn't tell me that 15 years ago....grrrr.  I will look into the solo 401K.

Thank you! 

[neo von retorch]

I don't know what your 403B options are. Ideally you can roll them over to a firm like Vanguard, and then choose how the money is invested (ie literally use those funds to buy index funds.)

[minority_finance_mo]

Prior to filing the paperwork for fancy retirement accounts, let's work to get that spending down and max out that IRA! Easy to feel like you're making progress by creating accounts, but at a core you need to work on lowering your spending first.

[catccc]

I'm kind of curious to see what your business expenses look like.  I wonder if there are improvements you could make there to lower expenses, or if you could possibly raise prices.  (I would guess that a lot of people that pay for a pro photographer base their decisions on perceived value.)
 

[chesebert]

I would be happy making $1500 a month in photography post FIRE. Please elaborate on the details of your business and the clients that still pay for photography :)

[NoStacheOhio]

I'm kind of curious to see what your business expenses look like.  I wonder if there are improvements you could make there to lower expenses, or if you could possibly raise prices.  (I would guess that a lot of people that pay for a pro photographer base their decisions on perceived value.)

+1, I'm not freelance, but I am a photo/video pro, and $45k seems high at first glance.

[ketchup]

I'm kind of curious to see what your business expenses look like.  I wonder if there are improvements you could make there to lower expenses, or if you could possibly raise prices.  (I would guess that a lot of people that pay for a pro photographer base their decisions on perceived value.)

+1, I'm not freelance, but I am a photo/video pro, and $45k seems high at first glance.

I'd be curious on this too, but depending on your niche, photography expenses can vary a lot.  My GF is a self-employed photographer and travels a lot, so mileage, airfare, and hotels are her biggest costs of doing business.  Before she got some notoriety and punched up her pricing, she wasn't netting much after expenses.

[catccc]

I'm kind of curious to see what your business expenses look like.  I wonder if there are improvements you could make there to lower expenses, or if you could possibly raise prices.  (I would guess that a lot of people that pay for a pro photographer base their decisions on perceived value.)

+1, I'm not freelance, but I am a photo/video pro, and $45k seems high at first glance.

It seems hard to get a profit margin on freelance photography, and like someone else mentioned, costs can vary greatly depending on the type of work you do.  I did find something suggesting that a profit margin of 30-40% is normal for a photographer.  That seems so low to me (just thinking about what kind of overhead they have.  Or don't have, rather.)  But if that is normal, than OP is right there already.

[NoStacheOhio]

I'd be curious on this too, but depending on your niche, photography expenses can vary a lot.  My GF is a self-employed photographer and travels a lot, so mileage, airfare, and hotels are her biggest costs of doing business.  Before she got some notoriety and punched up her pricing, she wasn't netting much after expenses.

To me, that's a problem with pricing. If you're incurring expenses directly related to a specific job, those need to be passed on to the client. We use a lot of freelancers, and things like travel and hotels are totally separate from their rate for doing the work.

[ketchup]

I'd be curious on this too, but depending on your niche, photography expenses can vary a lot.  My GF is a self-employed photographer and travels a lot, so mileage, airfare, and hotels are her biggest costs of doing business.  Before she got some notoriety and punched up her pricing, she wasn't netting much after expenses.

To me, that's a problem with pricing. If you're incurring expenses directly related to a specific job, those need to be passed on to the client. We use a lot of freelancers, and things like travel and hotels are totally separate from their rate for doing the work.

My girlfriend's line of work isn't quite that cut and dry, unfortunately.  She is a showdog photographer and generally won't be traveling for a specific client but to a show where she's booked several clients.  And often she'll get extra clients day-of.  For example, last Thursday she drove to a show, did 6 photoshoots, stayed the night at a hotel, and then did 5 more photoshoots on Friday, driving home that evening to begin editing.  Passing costs directly on to clients doesn't make sense there (but she will do that if she's making a one-off day trip for someone). In her days of very cheap photoshoots, the whole operation would have only netted her a few hundred bucks (and losing money on some trips), but now that people recognizer her as damn close to the best in the business, she can charge a lot more.

[Shipwreckgirl]

A few people have asked about business expenses.  This is a list of everything the business paid for from 2015:

Albums for Clients:  $6660.47
Prints:  $1303.68
Equipment Repair:  $504
Equipment Insurance:  $963.67
Photo Equipment:  $172.48
Wedding Consultants:  $575
Production Assistance/Office:  $4872.50
Photo Assistants:  $4732.80
Client Gifts:  $905.12
Credit Card Finance Charges:  $27.05
Cell Phone:  $1091.34
Classes:  $2831
Memberships:  $335
Web Hosting:  $859.99 - 2 websites I pay yearly for
Office Supplies:  $2723.63
Computer Hardware:  $833.95
Business Meals:  $502.43
Postage:  $520.59
Tax Prep:  $200
Travel Transportation:  $421.20
Tolls:  $200
Bank Fees:  $46.80
Security System:  $619.32
Matting & Framing:  $1344.90
Website:  $150 (hosting)
CC Processing:  $2440.39
Shootq:  $479.40 - client management software.
Internet:  $762.38 - Comcast

I'm a wedding, event, and portrait photographer in the Midwest.