Monday, January 23, 2012

Money - Making the Jump to Full Time Writing, Part 2

Personal finance is a huge topic. And when it comes to quitting the day job and becoming a full time writer, it gets very complicated.

I decided to write a slightly different post than I originally intended because of a discussion going on over on The Passive Voice blog. And I realized that the reason it is so hard to talk about money around writers is because there are so many different goals, and so many different experiences, and levels of experience.

Trying to answer the questions that came up over there, AND trying to set up the topic for regular readers of my blog who don't really give a hoot about any of the arguments about valuation of literary properties may be too big of a task for one blog post. Or even a bunch of posts. I hope I don't lose you all....

Financial independence. That's the goal right?


When you get right down to it, when we talk about writing full time, what we really want to do is quit the day job and stop worrying about bills.

Not everybody cares if you achieve this through financial independence. A lot of writers just want to make a living from writing and are perfectly happy with all the struggling and hard work. They're fine with writing being a real job. They just want that job to be viable.

But that's where writers get into trouble. Because writing isn't a salaried position. The economic model isn't even like manufacturing widgets. You aren't making shoes, which will be made, sold, worn and thrown out. Instead, you are creating a capital asset. You write a book, and then it is sold multiple times.

In other words, it's not a product, it's an asset.

Traditional publishing in the past twenty years has broken the relationship writers have with this ongoing income. Writers write a book, sell it, and then write another and sell it, just like shoes. The publisher wears the shoes and gets the good out of them and throws them out. Writers seldom see any ongoing income from a book.

So writers have a tendency to see books like shoes. They think of the money they get up front as the value of the work. And they think of books as expiring when Barnes and Noble's ordering systems get tired of them.

But books are not shoes. Books are more like savings bonds. Sure if you receive a savings bond from Aunt Edna for your birthday, you can sell it at a discount for ready cash, and buy those really spiffy headphones you wanted instead. But that does not lead to financial independence, or being able to quit your day job.

Publishers and agents may try to convince writers that books are like shoes, but they themselves know better, and once they get your book they treat it very differently. For them, the name of the game is acquiring and keeping assets. The individual deals don't matter, they may be good or bad, but the winner in the end is the one with the greatest asset holdings.

Think about how publishers handle the asset once they've got it:

Do they, like bankers with mortgages, package it up and resell it? No, they don't. If a book were the kind of asset where the price is set by what the market will bear (which is a commodity) they would be doing that. But the value of a book is not in the buying and selling. That's a suckers game and they played the author for a sucker in acquiring it, but they're not going to fall for the same schtick themselves.

The value in an asset like a book is in holding it.

You may think your book will no longer be valuable after ten years. If that were so, then why are publishers in a mad scramble to lock up rights in perpetuity? Just try to get your rights back to old out-of-print books. Just try to get a real reversion clause into a contract these days. They won't do it.

Publishers know that it doesn't matter if that book isn't earning much -- it's still an income stream.

Writers get distracted by short term things like the size of the advance, and whether a book hits a best seller list. And yet a publisher is more likely to give you a bigger advance than let go of rights in perpetuity, and they won't let you get back rights to books which never made a best seller list.

If you want to write full time then the first step is to really understand what you've got.

Now, last week, I said you should not count on your writing to rescue you from the day job. It may sound like what I'm saying now goes against that, but actually I'm talking about why you shouldn't see it as a rescue. Your day job provides wages. Writing does not. Writing is an investment, and investments take a heck of a lot of input before things start paying off. It is very much like a retirement account.

How an investment account works is this: you acquire capital -- assets and cash -- and they pay interest, dividends and royalties. That part is income. If the value of your stocks rise, you might sell off a little to "take profits." That can be considered income too -- although you should be careful with that one. The thing you don't want is to lose capital. That's a rule of living off investments, never dip into capital.

That means you do not sell off the assets and spend the money. Your savings won't get anywhere if every time you put money in, you take it out again.

Writers have a fantastic advantage over your everyday schlub. Your everyday schlub can't spare the money to save or invest much, so they seldom have assets. But you, Writer Boy and Writer Girl, you have a freaking drawer full of assets. You have a fully funded IRA in your head!

And yet so many of us are willing to simply cash that out for quick gains. And if they can't get the cash -- because they can't find a buyer, they declare it worthless and throw it in the trash.

And when writers are smart about money they tend to focus on being better at selling off the asset. But they still think they are stuck with what the market wil bear, so they tend to take bad deals because it's what is being offered. Meanwhile, publishers don't buy and sell. They just buy.

I was going to talk about investing strategy here, but someone over on Passive Voice wanted specific examples, so I'm going to start with talking about my own situation.

First a little background financially:

I am not rich. Long ago I decided that I wasn't interested in having a lot of money. And I sure didn't want to stop writing just to get money. What I wanted was a sustainable life I could live from now until forever, which involved plenty of free time, plenty of time to write, and a satisfying day job which I liked. My goal is to be financially independent, but not at the expense of my lifestyle. I could be hit by a bus tomorrow, so I live the way I want now.

So before I even consider writing, I deal with my life and money. I have a lifestyle which is easy to maintain on a low income. I've got a healthy IRA, a work-sponsored annuity, a very healthy emergency fund, and my only debt is a low interest mortgage. I'm good for retirement, and I'm now working on early retirement.

And when I look at my writing income, I look at it exactly as I do my IRA.

Around ten years ago or more, I took a look at what was going on in traditional publishing in my genre -- the traditional mystery -- and I saw that it was not financially viable. Advances were appallingly low. But the real issue for me was that you had no opportunity to struggle through on that low income to success later. Every new series I found and loved would be gone within a few books because Barnes and Noble's ordering system didn't like midlist books.

This was particularly devastating for traditional mystery, because the readership in my genre likes LONG series. Most of us like to jump into a series at the fifth or sixth book. Or later. The value of the early books doesn't really take off until the series has gone that far.

So I stepped out of the pool, because it didn't make financial sense at all. I went off and did script reading and screenwriting. I still wrote fiction, but only short fiction for publication. But I really prefer to write mysteries, so I came back to the fold a couple of years ago. I had one mystery in the can, and I was working on another, when indie publishing came along. I thought I was going to save my mysteries for commercial publication, but I started playing with my unpublishable quirky stuff first.

Then I ran the numbers and decided that even an utter failure at self-publishing was better than selling my assets off to publishers.

Have a look:

[Note: I made an entry error in first version of this post -- I said it probably took me 500 hours to write the book, and 500 more to do the rewriting and marketing and such. I meant to say 500 hours total. So I first said I would be better off working the day job, and giving the book away free. With corrected numbers that conclusion is different.]

Have Gun, Will Play might have sold commercially, but the western aspect really turned most publishing professionals off. Odds are it would have taken a heck of a long time and effort to get people to look at it, and when I did finally sell it, I would have been required to revise the heck out of it. I don't remember how long it took me to write it, but since I've been timing myself, I will guess it took 250 hours to write and polish it to my satisfaction. I would expect to put in 250 more on the revisions and marketing and all that.

The average first book advance is $5000. That's ten bucks an hour wages. At the time I was making maybe $17 an hour at the day job. Given that the book was exactly what I wanted after 250 hours of work, I would have had nearly the same result by working the extra 250 hours at the day job and just giving my book away free.

And nowadays I make more money, but the advance is the same, so I would be better off working the day job.

But hey, you can look on a first book as a loss leader. So forget wages. Let's just look at the value of the cash.

Hmmm, before I do that, I have to pay taxes and the agent out of that money. And the publisher will expect me to spend some of that money doing promotional work. So the cash I would get for that book would really be closer to 3000, or even nil. But you know what? I'm going to be generous to the old school thinking and assume that I beat the system and ended up with a full $5000 from the sale of that book.

Remember my goal is to have enough capital to retire early, so I'm going to buy an asset with that money. I'm going to buy half a 30-year treasury bill. T-Bills are not terribly high returns, but they are just about the safest investment, and a good standard for the kind of assets you want in a retirement account. So that's a good baseline to measure an investment by.

The return on a 30-year t-bill right now is about 3 percent or a little higher. The return I'd get on a $5000 investment would be $150-175 a year.

Now let's look at what I've have to do as an indie publisher to make the equivalent return from the asset that is my book.

At the cheapie $2.99 price tag, I'd have to sell about 80 books a year to make that return. If I priced it at $4.99, I'd only have to sell around 50.

I can hear non-investors getting antsy. "But but but, what about the $5000? With a t-bill you get it back after the thirty years, and you may not be able to do that with a book!"

The point of investing is not to buy and sell. The point of investing is to create income streams. When a T-bill matures, you don't go spend the money, you roll it right back into another bond.

"But a T-bill has a guaranteed yield!"

That's right. But that's why it's got a relatively low yield. It doesn't appreciate like stocks, and books, do.

Because of the way bookselling has worked over the past couple of years many writers don't realize that books appreciate in value. The past couple of decades of books have been forcibly expired by the book distributors -- who do better with rapid turnover. But though the history of publishing, books have always been steady, long-term sellers as long as the writer keeps writing. While later books might hold steady, earlier books tend to appreciate in value as time goes on. That's the nature of the beast. When someone discovers your twentieth book, they go back and read your earlier ones.

If you don't believe that, just remember what I pointed out earlier: if backlists aren't of value, why are publishers hanging on to them with such ferocity?

There are a lot of different approaches to money, and the ins and outs of every deal are going to have much much more to consider than the relative value of investment instruments. However, when you are valuing your assets, it is extremely important to understand that they are assets. You can treat them as commodities, and manufactured goods, but you are putting yourself at a disadvantage when you do.

Next week I want to talk about how you figure out what you're going to need (financially) in order to quit the day job. It's probably both more and less than you think.

See you in the funny papers.

26 comments:

The Daring Novelist said...

Whoops! Garbage in error!

I grabbed the number from how many hours it took me to write that book from the wrong place. It probably took me 250 minutes. I will have to redo the math. (This changes the outcome of Scenario 1, where I work the day job rather than bother with trad publishing. It does not change Scenario 2, where I invest the take, which is the important one.)

Livia Blackburne said...

Camille -- Now that I read your article, I'm not quite sure what we were disagreeing over. If I understand you correctly, you think writers should evaluate traditional offers, do the math and figure out whether they would do better self publishing long term,is that correct? If I understand you correctly, then I agree.

The Daring Novelist said...

I think where we disagreed was specifically the idea that "what the market will bear" is at all relevant.

That is a conscious pressure technique that any business in an uneven power situation uses to get the other side to knuckle under. It's one thing to try to fool the other side into believing it, but if you tell yourself that, you're being suckered.

The truth is NO offer by a traditional publisher will ever be for what the book is worth as an asset. They have to make a living, and they are not an efficient business, so they have to buy assets at a steep discount.

However, a writer may have reasons aside from money for accepting the offer.

What I really want people to understand is that it's not a wise money move to sell your assets. No matter how wily you are about making a good deal....

However, it may be an expedient move, and it may be a good personal move.

Livia Blackburne said...

Just to clarify, my initial comment on PG's blog about "market price" was simply a statement that when readers (or publishers) are deciding how much to pay for a book, they don't take into account the amount of time that it took to write it. I was talking about how a buyer makes decisions. I wasn't saying that a writer should accept any crappy offer that a buyer makes.

The Daring Novelist said...

Ooooh!

I got it.

However, remember that the price is what the buyer and seller settle on. The buyer may not care of his or her own accord, but it's a critical element to the seller, therefore the buyer must deal with it.

And that's the thing that writers don't understand -- they're the most important person in the deal. What's important to you is important to the deal. If the other person dismisses what matters to you, they actually aren't interested in negotiating. They're just trying to take advantage of you.

Livia Blackburne said...

As I said in my comment, my comment stemmed from my experiences buying art from some visual artist friends. Artists were telling me that I should pay them more because they worked X hours and deserved $ dollars. My response was, "No, I'll pay according to what it's worth to me, not according to how much time you spent on it." Of course, they always have a right to refuse, and I always have a right to go to another vendor. That is what I was refering to, which is why I was a bit surprised at the vehemence of your response.

Livia Blackburne said...

(Just saw your 8:23pm comment. Yes, I agree with you.)

The Daring Novelist said...

I think it's sometimes hard to tell the difference between annoying personality traits and bad business sense.

The artist who whines that they deserve more money is really displaying bad interpersonal skills, which can hurt your business. And yes, even if the demand itself is good business sense, people who whine are actually not using the facts to negotiate, they're using the whining and emotions to bargain, and that isn't good business sense.

azarimba said...

Interesting interchange about the art works, particularly as it's coming from both perspectives. Recently, I had to convince a graphic artist of what she was "worth," to persuade her of a negotiating position w.r.t. her major customer. It's hard to avoid the "x hours spent" argument, but the toughest part was convincing her the time spent generating ideas has value and she needs to work it into her pricing model. (This is an artist with a readily marketable product, not someone selling beautiful pictures for the decoration of a home or office.)

Camille, there is one aspect of your model which bothers me. Perhaps it's because you used that term "capital asset" -- if not in this post, perhaps it was in your comments at The Passive Voice. Maybe it's because you're using a financial investing model as your analogy. I'm assuming you're using that term "capital asset" in the sense of the "capital asset pricing model" used in finance; however, it is an ambiguous term.

Your model presupposes a faith in one's creations which many writers -- particularly beginners -- do not have. I realize you're trying to convince such writers they ought to have the self-confidence to value their work as an asset, i.e. "a resource from which future economic benefits are expected to flow to the [writer]" (paraphrases the International Accounting Standards definition of an asset).

If you're going to use this model, I think some preliminary discussions and qualifications regarding the subjective nature of valuing such as asset are essential. Obviously, if some publisher offers a writer a $5K advance for a work, a valuation event has occurred. The subjective nature of this valuation, coupled with the uncertainties (risks) associated with future expected cash flows from this particular work, plus the time value of money, may practically compel the writer of the work to accept the advance. I think that's probably what people are saying who are disagreeing with you about the advisability of hanging onto all rights associated with the work.

I do recognize that today's post is laying the groundwork for your theory of managing one's works. However, at some point you do have to address the concerns I've described in the preceding paragraph (subjective nature of valuation, risk, time value of money...and there may be others).

The Daring Novelist said...

This subject is so big, even the comments are long!

The problem is that I don't know where this blog's audience is in understanding their options. Frankly, there are a lot of people who don't need to be convinced that a slow steady income = good. They may not know the specifics of why, or how to value their work in a specific way, but they understand by instinct that multiple small income streams will set them free.

I don't want to bore those people, but I do want to get the rest of the audience to where they are.

My first goal is not to convince writers of the value of their work, but to ease them into the concepts surrounding financial independence and "retirement" income models.

If you want to quit your day job, you've got to stop thinking about immediate returns.

The Passive Voice discussion kind of threw me off track. Still, I think it makes an interesting side-step into the subject if people can start to grasp that the real value of a literary work is not in the price.

A publisher will offer you $5k only if they are sure they can make $20 wholesale -- to start. The profits come after the $20k.

I do have a post with three ways of valuing your work (market, wages, return, basically), not sure if I will post it next week or the week after.

Livia Blackburne said...

So I'm not quite convinced that slow and steady is always good. You really have to run the numbers and decide in each case.

"If you want to quit your day job, you've got to stop thinking about immediate returns."

I'd say maybe to this one. True for low advance, but if you're getting offered a living wage, you could quit your day job immediately and write full-time. The extra time in turn could be used to write more books, thus generating capital more quickly.

"A publisher will offer you $5k only if they are sure they can make $20 wholesale -- to start. The profits come after the $20k."
It's worth stating here that you can't assume that a publisher's expected income would be the same as your expected income over time. In your model, you're assuming that the publisher adds no value at all to the product. But a good publisher will add value both in the quality of the work and in marketing. So you have to evaluate the publisher and take that into account as well.

To move this into the concrete realm, a 5K advance would be easy to turn down, per your analysis. A 250k advance and a national marketing campaign? I would take the book deal.

The Daring Novelist said...

The 250k advance is a great example!

The problem is that they don't offer that without good evidence of great returns. If you get that offer out of the blue, with no track record, for a pristine work which isn't earning you money yet? It might be worth taking the money and running.

But there will almost always be a lot more evidence of the intrinsic value of the work if they are offering that much to you. You also have to consider what you're actually _selling_ for that. They don't pay that money for just a book. They usually want exclusivity on some other things as well. What else are you going to be obligated to write for them? What do you plan to write?

The other problem? 250k is not actually that much money in life terms. You can't retire on it, and you can't count on getting it again. As a matter of fact, the odds are very much against getting a paydate like that more than once or twice. (or getting it at all)

This is where I figure I did this series a little bass-ackwards. You really can't value your writing until you've valued your life. You need to know your number. Actually, most of us have several numbers, but the key number people neglect is how much you actually need to be "set for life"? Or alternatively, to make a true lasting change in your life.

You can't evaluate an offer of $250,000 until you know what it will actually do for you.
Most people treat a $250,000 windfall as like a cooler version of a $250 windfall.

Livia Blackburne said...

You're absolutely right that you need a plan for the $250,000. An author might choose to use the marketing power to build a fan mailing list, and the extra time to write extra novels. This buys you more freedom and options for your future books.

And minor quibble -- I also realize that we've been talking about publishing deals as if they were work for hire arrangements, and that's not quite true. A traditionally royalty arrangement is actually the same payment model as a self published arrangement -- a slow a steady income. The difference is in the percentages, and the fact that the publishing house affords you the first X years of royalties in advance. But this is a minor quibble because most books don't earn out-- though if you have a good out of print clause, you could get your rights back once sales slow.

The Daring Novelist said...

yes, and publishing is in flux, so some things are getting better and some worse -- and some genres are getting better and worse.

I'm not actually addressing those at all in this, though. Whether you should self-publish or not has a whole lot of different aspects.

The reason I've been talking about traditional pub as if it were "work for hire" at the moment is because right now, at this snapshot time in publishing, most books are not earning out advances and reversion clauses are not only disappearing, but writers are finding that publishers are fighting them tooth and nail on the clauses that do exist.

But yes, anything where you get a royalty is an income stream.

Lee said...

I have thoroughly enjoyed your lively discussion on this topic here and over on the Passive Voice. I'm glad you seem to have reached some sort of consensus :-) and I'm eagerly anticipating further verbal ping-pong between you both as the topic series continues...

The Daring Novelist said...

Thanks, Lee.

Although Livia and I are not actually that far apart on anything, so I'm not sure if you'll see such liveliness on everything -- however I'll be glad if she keeps commenting.

azarimba said...

Nothing I've read on this topic deals adequately with the risk evaluation inherent in deciding whether to take a lump sum now, or go for an uncertain future stream of payments of ill defined size, but your comment about figuring out what your number is (or your numbers are) comes closest to acknowledging that truth.

While I accept that the analysis is -- in the final analysis -- heavily weighted toward the subjective, nevertheless I believe more attention could be paid by **all** (not picking on you in particular, Camille! I just get generally frustrated with the gurus preaching to the neophytes...) those attempting to help and advise writers who are trying to break in, to the details of how one can avoid an either/or situation in negotiating a traditional deal. I do believe there are ways, and I think the canny old hands make use of them. Unfortunately, these boring details often seem to get lost in the arguments, which do tend to extremes (e.g. take the book deal, never go with a traditional publisher).

The Daring Novelist said...

Here's the place where I think a lot of people miss my points (not that I think you did):

My big argument is that money wounds aren't fatal. When somebody says "you've got to do THIS!" I will generally tell them, "um, no you don't." People often take this as a "you must not do X." But really what I'm saying is "don't be scared of the alternatives -- they're great."

To me, the issue of signing a publishing contract right now is not the money. The problem is with these horrible, draconian clauses that are often very nasty traps for those who trust their agents and don't get a real lawyer to look at them. (And even when they do, the publishers keep trying to slip the clauses back in after they've been removed!)

And I don't know a cozy mystery writer who hasn't had series killed off by the publisher. (Often at the behest of B&N or the marketing department.) This should not be such a problem with ebooks -- however, the biggest reason for signing with a publisher is the paper side.

Publishing contracts are really not sales contracts, they're partnership contracts. It's not sign it and you're done. It's sign it and you're stuck.

Given the high level of uncertainty in publishing these days, I think it's a bad idea to lock up your rights in any way before this is settled. However, as long as you have good legal advice and know what you could be giving up, then whether to take the money on a contract really depends on your situations and needs.

Livia Blackburne said...

azarimba -- I know what you mean. When I was trying to decide whether to go traditional or indie, I was frustrated at the glossing over of risk and uncertainty as well. It's easiest if you already have books self published, but if you don't, it's alot of guesswork. I ended up talking to lots of indie friends, getting their sales numbers, and making rough estimates based on theirs sales, their genre, their platform, compared to mine. It's a bit like voodoo, and gave me a lot more sympathy for the oft criticized P&L statements used by publishers to estimate how well book will do.

I also talked to many older writers, and my experience has been that even the self pub the gurus don't actually have as extreme of opinions as it might seem just from their blog entries. They gave me some really good, well balanced advice, the main ones being running the numbers, deciding how much you need frontloaded vs. backloaded income, and being careful regarding options/noncompetes, and the number of years you will remain under contract.

The Daring Novelist said...

That brings up one of the other reasons there will always be a bit of a war between groups -- their perspective on risk.

One side is very oriented toward defining and measuring relative safety and risk. The other side sees "safety" as an illusion. And so both sides will always use arguments that don't apply at all to the other's point of view.

The more experienced and sophisticated the person, though, the more they can encompass both sides.

On the other end of the spectrum, the least sophisticated proponents of each side tend to reduce it to an argument between the upside and the downside. One side is ready to sacrifice everything for a shot at the gold, the other side is willing to sacrifice to avoid the pits.

For me the question has always been (as a writer, an investor, and as a coordinating tech) - What's the worst case scenario and how do we recover from that? If the recovery plan/result is acceptable, then the risks are irrelevant and I go forward with the plan I like best. If it's not acceptable, reject the plan out of hand.

But I myself feel that outside of that, angsting over relative merits of plans will make you crazy. You don't have to pick the best plan. You only have to pick a plan that works for your criteria.

Livia Blackburne said...

I see it as a preference for different types of risk and uncertainty. Traditional authors see a risk in spending ones' own money and turning down a sure advance. On the other hand, DWS advises authors to avoid traditional houses for now, because it's too risky to sign over rights in such an uncertain time in the industry.

The Daring Novelist said...

True. Which is partly why I've gone totally indie. The consequences of of signing a contract right now are more dire than just slowing income.

And there's actually another place where different groups have completely different situations:

Unlike some, I am a believer in protecting "sunk costs." If you already have a foothold in traditional publishing, you should consider that your relationships and assets there do have value. You may want to make more commitments because those existing elements give you leverage.

An unpublished writer, on the other hand, is looking at two big unknowns. And every choice seems like a HUGE risk, because they don't have much leverage in any way at all. They may have only one book. If they sign away rights, they could lose the only thing they have! (Ignoring the fact that they will write more books and you have to let your baby go.) If they self-publish, they may not earn anything or even learn anything and they'll just embarrass themselves for nothing! (Ignoring the fact that they are bound to earn something, and you'll only be embarrassed if you actually learn something. And if they don't learn anything, then they probably aren't ready for publishing anyway.)

Livia Blackburne said...

There is also the cost of time as well, for writers pursuing the traditional path. It goes quickly for some, but others spend years on the query trail. Sometimes the time is good for improving the book/gaining perspective. Other times, the writer may not wish to delay.

The Daring Novelist said...

I think the time issue is especially important for those with confidence.

Those who aren't sure they're ready, and want to take more time to figure things out and discuss them will be helped by the, er, graceful pace of traditional publishing. That's why I firmly recommended traditional publishing to beginners -- before I started seeing what was going on with contracts and rights.

As a matter of fact, I still think that beginning writers should go after short fiction markets the same way as always. Consider it an apprenticeship.

On the other hand, if you have a lot of confidence in your work (and perhaps lost confidence in the publishing professionals you deal with) you may feel it's a complete waste of time to jump through the hoops of traditional publishing.

Edward H. Carpenter said...

Camille, great post... I found your site through the ROW80 blog hop, but this post caught my eye, so this is where my comment for the week is going!

I like the way you've explained the subject, and hope more authors will come to understand the financial piece in these terms. I approached the same subject from a slightly different angle with this post on my blog earlier in the month - http://read-write-listen.blogspot.com/2012/01/wednesday-blog-hop-topic-99-cent.html

Again, kudos for a great post, and best of luck with your ROW80 goals in the coming week.

Best,
Edward
http://read-write-listen.blogspot.com

The Daring Novelist said...

Thanks, Edward. The truth is, I think more writers should be looking at personal finance blogs and books. They're never going to have a good relationship with making money with books if they don't first have a good relationship with money and their life.