There’s nothing more thrilling than opening your first royalty check.
The hours and hours of hard work you put into your book are coming to fruition, and now you have a nice juicy deposit for the bank.
But, soon after that excitement, the doubt starts pouring in. How can you live off one or two checks a year? How can you make a plan when you don’t even know how much that check will be until right before it’s in your hand? And all this uncertainty is stopping you from fully celebrating your amazing achievement.
Book royalties don’t mean you have to kiss stability goodbye. With a bit of financial foresight and strategizing, you can still create a solid financial plan.
Set aside money for taxes first
Knowing how to strategically divvy up your royalty check is half the battle when it comes to regaining control and confidence over your financial plan. The right division means you can be covered today while still taking care of tomorrow.
The first step is setting aside some money for taxes. Your taxes are based on whatever your taxable profit is in a year, or your total income minus expenses. Even though the amount on your royalty check won’t be your actual taxable profit, it can still be a useful measure for proactive tax planning, which is why we recommend setting aside 30% of each royalty check into a tax savings account.
If you’re working with a great tax advisor, they’ll likely be able to reduce your tax liabilities based on the legal structure you’re operating out of, expenses, claims, and more. But it’s always better to have set aside too much money for tax than not enough, which is why we recommend 30% as a good blanket rule.
Split the remaining royalties into two pots
With that 30% safely tucked away for taxes, it’s time to split the remaining 70% into two pots:
Living Expenses: your first priority is making sure you have enough money earmarked to sustain you until your next deposit hits. To do this, calculate your living expenses over a six month period. There are a ton of personal budget and expense planning tools out there to help with this, and you now can be confident all the essentials are covered until your next check arrives.
Investments: after taxes and living expenses, anything left over can be put into investments. Exactly what these investments look like is up to you: maybe you’re setting it aside as savings, maybe you’re stashing it into a retirement fund, or maybe you’re investing in currencies or real estate to create more cash flow.
Use the Stack-Attack strategy
Royalties have a reputation for being sparse and unpredictable. In many ways, this is true, but you can transform royalty checks into a reliable income stream by using something we call the Stack-Attack.
Try visualizing cash flow from royalties on a graph, with the Y axis being the amount of money you’re bringing in and the X axis being time. Unless you’re an overnight bestseller, your royalties will take a little bit to get going. They’ll gradually increase over time until they reach a peak level of income that plateaus usually for the equivalent of two to three royalty checks. Then, eventually, your income starts tapering off to lower levels again.
The Stack-Attack strategy is when you plan for and predict that tapering off period so you can have a new release hitting its peak period of royalties at the same time. If you think about the artists you respect and admire in your field, you’ll probably realize they’re following this strategy: when the hype and excitement for one project is wearing off, something new comes out to get buzz (and cash flow) going again.
One stream of royalties will look like a graph of ups and downs. But several streams stacked on top of each other, at strategic levels, will look like a stable line. And that stable line translates to a stable income for you.
Diversify your revenue streams
“Diversified revenue streams” is a phrase you’ve probably heard thrown around a lot, but it’s for good reason. Relying on a single source of income can be unstable, unreliable, or simply not enough to support you. If two royalty checks a year isn’t cutting it, it’s time to start thinking about alternative income streams.
In our Minding Your Business: Mini Course we have a section specifically about creating alternative revenue streams. Through a method called Revenue Storming we help give you at least 30 different ideas for possible ways to diversify your income, and provide the tools so you can prioritize the most profitable and fulfilling ones.
Your creativity is valuable. Your writing is valuable. You deserve to have a stable, reliable income from it and feel excited about the future, not uncertain. For more advice on how to turn your creative passion into the business of your dreams, sign up for our free course here.