Many of us are living close to our financial limit these days. We pay our bills on time, but there’s not a lot left over. That could be a dangerous situation. If things go wrong, your financial situation can change very quickly from adequate to critical. Without a cash reserve, you could find yourself in serious trouble.

It’s important to have a cash reserve of at least three months’ living expenses. Invest your reserve in a safe, liquid account. Consider investments such as a bank CD, a money market fund, or a very short-term bond fund. Make sure you have easy access to the funds without losing too much interest. And once you’ve built your fund, avoid temptations to raid it for non-essentials.

Great, Rex, I get it.  But how the heck do I build that reserve in the first place?

There are only two ways to build up a cash reserve: reduce expenses (decrease outflow) and gain revenue (increase inflow).

I know you’re thinking, “well, duh!”  But it’s important to realize that it really is that simple.  Well, simplistic; not simple.  If it were that simple, you’d probably have that savings account filled up already.

Here’s an no-brainer way to start: A Dartmouth economics professor and three colleagues published a report late last year that found by simply texting people and reminding them to save money increased their savings-account balances by 6%.  The increase was even greater if the message included a reminder of the specific goals customers gave when setting up their savings accounts.

Yes, a simple, daily text message increased savings. One of the authors noted that it’s likely caused by the additional attention it forces you to pay to your savings, rather than a lack of self-control.  In addition to reminders you could set up for yourself via Google or Yahoo, the brains behind SaveEveryWay will do it for you.

Personal finance blog The Simple Dollar offers a step-by-step guide to creating an emergency fund.   Here’s the recap:

• Set your initial target low
• Find your breathing room
• Make it automatic
• Set reasonable milestones along the way

Actually, there are a number of incredible free resources with useful tips to help stretch your dollar in all kinds of ways:

Wise Bread

Get Rich Slowly

Frugal for Life

You can also read Jeff Yaegar’s book The Cheapskate Next Door.

Ultimately, expenses can only be cut so far.  No matter how spartan you’re willing to live, you’ll probably still need to pay for some kind shelter and to feed and clothe yourself.  In another post, we’ll explore some of the ways to increase the inflow of money.

Photo by nieve44

Ahh, the New Year’s Resolution.  So quick we promise, and so soon we forget.  Why?  According to a survey conducted by coaching and training firm Gail Kasper LLC, less than half of those surveyed even bothered making resolutions and of those, only 21% had some kind of plan.  The value of writing down resolutions and a plan to achieve them is clear: research published several years ago in the Journal of Clinical Psychology found that by July, those who made resolutions in January were 10 times more likely than non-resolvers to be successful in achieving what they wanted.

THE BOTTOM LINE – What’s your plan to further your arts business in the New Year?

Not planning

Artists often think of planning as the antithesis of the creative act.  But in practice successful works are seldom, if ever, created without forethought.  Writers go through drafts, jazz musicians rehearse together, visual artists start with sketches and studies, and improv actors have a basic premise and outline of the action.  So should it be with your business.  Written planning provides owners with a map to reach their goal of a successful business.  Yes, your plans should be written down, because the act of writing fixes your often-elusive ideas into a tangible form… and making them solid makes it more likely you’ll achieve your goals and not just endlessly think about them or talk about them with friends.  Sculptor Bruce Beasley said it best, “the artists I have known who have had rewarding and successful careers are those who have been able to make very clear choices about their priorities and expectations.”

But planning doesn’t have to be the anxiety-inspiring ritual we make it out to be.  Write down your answers to these questions and you’ll be 82% better off than someone who dreams big but can’t commit even to a piece of paper.

Core skills – What do you do as an artisan?  What types of projects are you passionate about?

Business skills – What do you know?  What don’t you know?  What don’t you know you don’t know?  What concrete steps can you take to either gain needed skills yourself or properly outsource them to a professional?

Target audience – Which clients offer the best opportunity for business growth?  How do you reach them?  What do they read?  Where do they frequent?

Studio/Office – Where will it be located and how will it be equipped?  What’s the minimum you can get by with in your first year?

Financial Goals – How much income can you realistically expect each month for the first six months?  What expenses do you anticipate over the same time period?