Here is a riddle: How does a real estate agent save for the future when not knowing when he or she will get paid next? Three financial advisors from across the country weighed in on the best ways to budget your take home pay when your income schedule is just as unpredictable as the dollar amount. Keep these six tips in mind when budgeting your real estate commissions.
1. Build your cash reserves – Most real estate agents have a “lumpy” income, meaning your income stream does not come in the standard bi-weekly paycheck cycle. Elliott Orsillo, CFA, Season Investments, LLC, encourages real estate agents to focus on building adequate cash reserves – enough for one year’s worth of expenses (which can fluctuate based on the lumpiness of the income stream). Once that goal is met, it is important to start saving for the future.
2. Diversify your savings – Orsillo says the default savings plan for some real estate agents is to invest their savings in real estate. He stresses it is also important to diversify one’s savings across multiple assets by investing in a retirement account such as a Roth IRA and to start investing in publicly traded markets (e.g. stocks, bonds, commodities, currencies).
3. Set a budget and stick to it – Daniel Larsen, Investment Advisor Representative, Larsen Financial Management, can’t stress enough how important it is to set a minimalist budget. Determine the amount of money you require to live on and then subtract a little bit. Once you have decided on that budget, pay yourself each month. Immediately put any additional income you make into a savings account to serve as a cushion for later months. After a substantial cushion has been set up (aim for approximately 18 months of income) and your rolling income has increased, you can begin to increase the amount of money to pay yourself.
4. Live on percentages of each check – Danielle L. Schultz, CFP®, CDFA™, principal of Haven Financial Solutions suggests a specific formula when budgeting each commission check. While the specific formula should be tweaked for each individual, some general guidelines include:
- 15-20% of each check should be designated for income taxes. The easiest way to estimate this is to look at your previous three years of returns and figure out what percentage of your income you paid to taxes.
- 60-65% of your gross income is put into a checking account and this is the amount you have to live on.
- 10% should go into into retirement savings.
- 10% into a short term, goal oriented savings account.
5. Avoid debt at all costs – Larsen advises real estate agents without secure, salaried income to avoid debt at all costs. Credit cards, mortgages, and car payments can hinder financial security when life changes (illness, job loss, growing family) occur.
6. Living in housing below what you qualify for – Schultz advises her real estate clients to select their own home in the opposite way that their clients do. The best way to achieve financial security when buying a house is to purchase below what you qualify for. Home ownership brings unexpected emergency and maintenance costs and generally the lower the home value, the lower the corresponding costs.