There is an art to living for today and planning for tomorrow. How many tomorrows do you have? How much savings is enough? Is there such a thing as saving too much? As always, I’m not qualified to offer any one person specific financial advice. I’m here to give you some things to think about and maybe some of the things I choose to do. Why is this important? Because when you are a real estate agent and you are thinking about retiring one day having your current finances in order seems like a great place to start.
Let me disclose right from the start that I am a fan of Dave Ramsey. I have a couple minor areas where I have my own thoughts and yet following his plan is a PROVEN Plan. If you haven’t yet familiarized yourself with Dave’s Baby Steps, stop reading right now and go there to learn, memorize, internalize and begin to realize.
Now that you are back, let us get specific.
TAXES
Remember, I am writing to real estate agents here. It is a crime how many real estate agents get behind on their taxes. No matter what, take 20% of your commission checks and put in a separate account for taxes. THIS IS NOT YOUR MONEY. And the IRS will remind you of that as soon as they figure out you are making money selling houses. I recommend 30% for most agents. If you are only on track to sell 6-10 houses under $300,000 each you might go with 20%. If you volume has you earning commissions over $100,000/yr you definitely want to go with 30%. Over $500,000 you may wish to do 35% or 40%. Just some guidelines. Listen to your tax professional over me, any day.
PAY YOURSELF FIRST
No ifs, ands or buts about it. Not next year or next month or whatever delay tactic you can use. On your very next payment of any kind, save 10%-15% of those earnings. Heck, if it is all I can get, save 5%. START SOMEWHERE. START TODAY. I wish I had headed my own (now) advice about fifteen years earlier.
This is a non-negotiable to anyone who wants to retire one day. Besides Dave Ramsey, a great source is the book The Richest Man in Babylon.
Now, if you are able to participate in any sort of employer sponsored retirement plan where the employer matches some percentage of your contribution, start there. Save in that plan whatever it is you have to save to get the match. Then take the rest and save in an IRA or, heck, any kind of investment vehicle on Fidelity.com or any others such website.
TITHE
Believe in gravity or not, it still exists. I feel the same way about God. Now, if you feel strongly that God does not exist (and please be sure of your surety) then understand that the Law of Tithing, like gravity, still exists.
It’s the weirdest thing; when you practice giving money away to your favorite church or charity the Law of Abundance will kick in. I have my faith of why it works though I cannot explain it to the uninitiated. Maybe it’s Dianna Kokoszka’s BOLD Law “What you focus on expands.” I don’t know. But it works. Try it. And by the way, it’s the only subject I know of wherein God says “…test me in this.” (Malachi 3:10)
EMERGENCY RESERVE
This is really quite simple and again, I refer you to Dave Ramsey’s Baby Steps. Get an emergency fund of $1,000 and then work your way up. Start.
CASH
Tying in to the Emergency Reserve, sleep tight knowing that you have your Emergency Fund in cash. I like my American Express Personal Savings account for this. Online savings banks tend to pay multiples higher interest rates than your brick and mortar banks. As of this writing I earn 2.0% APR on my Emergency Fund Cash. Yes, I sleep just fine.
DEBT
Get rid of it. However, I know that with some readers I am fighting a losing battle. Further, when I was in debt it used to irritate me when people would say “Get out of debt” like I could just snap my fingers. Frustrating. If you do have debt, figure out your ratios. Here are my thoughts, none entirely unique;
TOTAL DEBT – Keep your debt to income ratio no higher than 34%. Conventional wisdom says 36%. Conventional people are always broke. If like me a while back as I got fed up and realized I was at 46% debt to income (Forty-six percent!!!???!!!) I just had to hunker down and work extra to get that debt down to something manageable, like 34%.
HOUSE – Do not make yourself house poor. 28% is the maximum. IMO
CAR – If you insist on having a car payment do not let the car exceed 15% of your annual income. Some say 10. I’ve heard others at 20. Realtors need reliable cars. I didn’t say new. I said reliable. Until you can afford to pay cash don’t let your car be more than 15%.
I can already hear the groaning on the car. Once you are debt free except maybe your home we can talk. It is my opinion that automobiles are the number one reason people aren’t saving nearly enough. Short term pleasure is traded for long term stability.
CONSUMER DEBT
redit cards. Store cards. Loans from your Dad. None of this is good or acceptable. No excuses. No reasoning. Just get rid of it. Now. I’m not kidding. I lived as a slave to these damn things for too long. Never again.
You simply cannot appreciate how free you will feel when you have an emergency fund, you are saving 15% per month and then only debt you have is your primary home and maybe an investment property. In order to retire one day you have to start today.
VACATIONS
Just a thought…and I need you to breathe through this…you haven’t earned really cool vacations if you have consumer debt. Don’t go! A week at your in-laws? Ok. Day trips throughout the year to relax. Ok. A week in Cozumel charged to the credit card. NO!
START TODAY
One of the coolest things, and largest liabilities, of the real estate agent is that you are in complete control of how much money you make…in any economy. (That is an entirely different conversation.) In my mind, this is the order…
- Don’t take on any new debt. Any.
- Create some sort of Pay-Yourself-First system. I don’t care how little.
- Begin giving to your local church/charity. Something. Systematically.
- Get $1,000 in savings ASAP
Identify your consumer debt and attack it. Use the snowball debt reduction method. FOCUS on this for whatever period of time it takes. Get it done. Sooner is better. Make a game of it. Drop your pride. Your pride got you in to debt.
Jumping ahead to no-debt mode, I’m not so concerned if you have a primary home mortgage and an investment property mortgage or two. Well, not with the following considerations;
Pay down your primary mortgage lickety-split. Pay extra and pay often. Have your primary home on schedule to be paid off before you wish to retire.
Any investment properties must be self-sustaining, have a minimum of a 25% equity position AND have four to six months of PITI + $5,000 in a cash account, per property for when the poop hits the fan.
Am I too conservative for you? Fine. Adjust accordingly. However, use caution. Once we are well on the way to taking care of our personal finances we can now really begin to think about that retirement for real estate agents that I keep teasing. This, in my opinion, is how you enjoy living for today while planning for tomorrow.
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