December 2023

6 ways to manage the ebb and flow of your real estate income

As a real estate agent, you’re essentially an independent contractor with earnings based solely on your sales and commissions. Your hard work provides you with personal freedom, but your profession also requires you to bear the weight of greater financial responsibility.

Unlike the steady stream of income enjoyed by a nine-to-five employee, you have to ride out financial fluctuations that may come seasonally, as expected, or out of the blue and for an unknown duration. Consequently, disciplined budgeting and financial planning are needed to help you spend wisely, save for leaner times and maintain your peace of mind.

Diligently track your business expenses.

Start by financially separating your work life from your personal life. Create separate bank accounts for your business and personal use. Carry separate credit and debit cards. Keep track of everything you spend on your business — from the obvious real estate expenses to your mileage, postage, subscriptions, gifts, home office and so on. Some of these will have to be divvied up, like the percentage of your home's square footage dedicated to your home office and car usage for work.

Even if you use a spreadsheet or bookkeeping software, save every receipt. These can also be uploaded to organize purchases by category and to save your receipts from fading or getting lost. Conscientiously collecting and deducting your work receipts could conceivably save you tons on taxes. Plus, should an audit ever occur, you’ll be ready.

Prepare a comprehensive, evolving budget.

Budgeting is the cornerstone of allocating income from fluctuating sales and commissions. Develop a budget that covers both fixed and variable expenses. Allot funds first for set bills such as insurance, phone, auto and professional fees, leaving room for more flexible expenses like marketing, new software and career development.

After you've produced a budget, continue to track cash flow to spot trends, make adjustments and distribute funds more efficiently. The more detailed and up-to-date your budget, the better. This plan will provide you with a greater understanding of your financial obligations in relation to your resources and a working tool that becomes more robust and useful over time.

Explore budgeting apps.

While some agents still prefer to set up budgets in Excel, many others are opting for apps. These run the gamut from tracking spending to putting aside or investing funds to creating a complete financial picture on a single dashboard.

Apps tend to have offbeat names: Albert, Digit, Goodbudget, Mint, Qapital and You Need a Budget are just a few of the more highly rated apps available for mobile or laptop use.Footnote1 We also recommend visiting Better Money Habits® for a host of personal financial-planning tips.

Save for seasonal and unforeseen downturns.

To protect yourself during lean times, you'll want to build an adequate emergency fund. Start by putting aside an affordable percentage of every commission check each month, especially when business is strong. Keep saving until you've created a three- to six- month financial reserve. This fund, held in its own savings vehicle, will help cover your living expenses and reduce stress when the market is tight. Replenish if necessary.

Put money aside for taxes.

As an independent contractor, you’re responsible for paying income and self-employment taxes on your commissions, based on your net earnings. It’s critical that you put aside substantial funds specifically for taxes, including your estimated quarterly tax payments.

You’ll want to speak with a certified tax professional experienced in real estate — presumably your accountant. But a good starting point would be to put 20% of each commission check into a savings account exclusively for this purpose.

Don't neglect providing for your future.

It’s never too soon, or too late, to build retirement savings into your budget. As one example, a Roth IRA is an easy way to contribute after-tax income, from a few dollars each week up to $6,500 a year in 2023 if you’re under 50; if you're 50 or older, you can contribute $7,500 this year. Any funds you eventually withdraw after age 59½ — including capital gains — are tax- and penalty-free.

In real estate, the ebb and flow of sales is an essential part of your adventure. Navigating through these challenges requires disciplined planning with the goal of achieving and maintaining financial stability. These practical strategies are designed to help you manage your fluctuating income and expenses through lean stretches and boom times.

A note from your lending specialist

Whether your clients want to explore home loan options or you're looking to collaborate on your clients' behalf — I’m always here for your clients and you.

1 Review: The best budgeting apps and services in 2023, Haven Life, Nicole Dieker, January 12, 2023.

MAP5979022 | 10/2023

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