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Real estate agents face many unique financial planning challenges and opportunities that exist within an industry that constantly ebbs and flows within both the local market and the larger economy.
From managing irregular income streams to tax and retirement planning, financial planning is crucial to the long-term success and stability of agents who want to make a long career outside of real estate. However, many are still lagging behind and/or have no clear direction on what to do next.
This begs the question: Where do real estate professionals start, and what strategies can they use to ensure financial growth and security?
Learn how to navigate informal income
One of the most challenging aspects of being a real estate agent is the unpredictability of income. Your earnings depend largely on commissions, which means some months are booming while others are lean. This irregularity can make financial planning seem daunting, but it’s not at all impossible.
Here are some different strategies and tactics you can use to address income irregularity:
Study your income patterns.
Take the time to understand your income patterns. Look at the past few years and identify peak and off seasons. While real estate markets may be unpredictable, some trends, such as increased activity in the spring and summer, tend to be consistent. Recognizing these patterns can help you anticipate and plan for the younger months.
Plan for a constant lead flow.
Hope is not a strategy. If you want to be successful in this industry, you need to think about long-term lead generation systems that will allow you to enjoy a steady flow of leads, even in down markets. It’s hard to make this on your own, unless you’ve spent years building a large personal network. However, platforms like Housegate It can provide you with a predictable system that may produce a more consistent cash flow for a more predictable long-term income.
Create a basic budget.
Once you have an understanding of your income fluctuations, create a basic budget based on your average income. Start by listing your basic expenses, such as housing, utilities, groceries, and insurance. These are the non-negotiables. Then consider variable expenses, which may include marketing costs, professional development, and discretionary spending. Your basic budget should be conservative, prioritizing essentials and minimizing less important expenses, especially during periods of low income.
Create a financial buffer.
To overcome erratic ups and downs, build a financial buffer. This reserve is essentially an accumulation of surplus income during good months that can be relied upon during slower periods. It differs from an emergency fund, which is intended to cover unexpected expenses, such as major car repairs or medical bills. Think of your financial reserve as a way to “pay yourself” a steady salary, even when commissions are low.
Smart tax planning
As an independent contractor, you are responsible for managing your own taxes, which can be a significant financial burden if not planned properly. Setting aside a portion of each commission check for taxes is crucial to avoiding a last-minute scramble.
As a real estate agent, you have to pay Quarterly estimated tax payments every year. You can work with your tax advisor to figure out how much to pay, but in general, 25 percent of your total income during that period is a good rule of thumb. This will prevent any big surprises come tax filing season.
Consider working with a tax professional who understands the complexities of financial planning in estate and self-employment taxes. They can provide guidance on deductions and tax-saving strategies specific to your profession, ensuring you’re not leaving money on the table.
Intentionally saving for retirement
Retirement planning is another aspect of financial planning that cannot be overlooked. Unfortunately, this is often the case. A recent study indicates 56% of Americans You feel behind on saving for retirement. Even more alarming is the fact that 22 percent of American workers have not made retirement contributions in 12 months or more. Whether you’re behind or on track, you need to prioritize intentional saving for retirement.
Without the benefit of employer-sponsored retirement plans, it’s up to you to secure your retirement nest egg. Exploring retirement savings options such as IRAs or solo 401(k) accounts is a good start. Regular contributions, even in small amounts, can add up over time, resulting in significant growth in your retirement savings.
While there are plenty of self-directed retirement investing options, it’s a good idea to do so Find a financial advisor To help you create a plan centered around your income, life stage, retirement goals, etc.
What to look for in a financial advisor
There are thousands of financial advisors to choose from. However, not everyone is created equal. When you are considering hiring someone, we recommend consulting with at least two to three people whom you have already done some vetting.
Here’s what you want to look for and take into account in your evaluations:
Credentials and experience.
Start by checking their credentials. Look for certifications such as CFP (Certified Financial Planner) or CFA (Chartered Financial Analyst), which indicate a serious commitment to their profession. Also, dive into their experience. How long have they been in the field? What types of clients have they worked with? Experience tailored to your financial situation can make a big difference.
Their approach to financial planning.
You want an advisor who sees the big picture, not just someone who will sell you the most important investment. Your advisor should be concerned about your overall financial health. This means they should ask about your goals, risk tolerance, and life plans.
How they get paid.
This is Biggie. Financial advisors can be paid through fees (a flat fee, an hourly rate, or a percentage of your assets that they manage), commissions (for the products they sell you), or a combination of both. Each model has its pros and cons, but the key is transparency. You want an advisor who is upfront about how they will be compensated so you can be sure their advice is in your best interest.
Their investment philosophy.
Does their investment philosophy align with yours? If your goal is slow and steady growth but they are promoting high-risk projects, there is a mismatch. Your financial advisor should have an investment strategy that matches your goals and risk tolerance.
Availability and communication.
Think about how easy it is to grab it. Your financial advisor should be accessible and responsive. Check if they have a limit on meetings or calls with you. Also consider their communication style. Do they explain things in a way you understand, or do they feel like they are speaking another language? You want someone who makes the complex world of finance clear and understandable.
If possible, find a financial advisor who specializes in working with real estate agents. This is not a requirement, but it is definitely an advantage. When you find an advisor who has a lot of other real estate clients, it ensures that they understand who you are and roughly what your financial planning goals are.
How much should you save for retirement?
Anyone who tells you they know exactly how much you need to save for retirement is lying. It’s impossible to predict how much you’ll need when you don’t know how long you’ll live, what inflation will do, what kind of unexpected medical expenses you’ll incur, etc. However, there are some general rules of thumb that you can use.
the 25x base It is one of the most widely used “back-of-the-napkin” mathematical formulas for retirement. It basically says that you need to have saved 25 times your planned annual expenses by the time you retire. This means that if you plan to spend $8,000 a month — $96,000 a year — you need to save $2.4 million.
This rule is actually just a simple twist on the classic 4 percent rule, which retirement planners have used for years as a useful rule of thumb. (The idea is that you can withdraw four percent from your retirement portfolio each year, adjusted for inflation, and have a high probability that the money will last at least 30 years.)
The useful thing about using the 25x rule or the 4 percent rule is that you can gauge where you are on your retirement saving journey. For example, if you know you need to save $2.4 million for retirement, and your income is currently $1.9 million, you know you need to save another $500,000. If you’re able to save roughly $50,000 a year, that means you need to work for another 7 to 10 years (depending on how well your investments are).
If you’re not sure how much money you’ll need to live on during retirement, experts generally suggest 80 percent of your pre-retirement income. (This could be much less, however, if you’re a frugal person who already lives on much less than you make.) Using this rule of thumb, someone making $150,000 a year will likely need to replace $120,000 in income in retirement. This can come from any combination of Social Security, 401k/IRA withdrawals, investment income, annuities, etc.
Financial planning mistakes to avoid
As a real estate agent with unpredictable income, you need to be very proactive in your financial planning. Failure to get ahead of things could result in you falling behind and having to work an additional five or ten years longer than you originally planned.
For starters, you need to be very strict about high-interest debt, in particular Credit card debt. This is one of the biggest things that can stifle your ability to save for retirement.
Another big mistake is relying too much on Social Security. While it’s certainly nice to know that you have some guaranteed income that will come in during retirement, these benefits won’t be enough to get you through your life. On average, Social Security covers approx 40 percent Of someone’s ideal retirement fund. (And to be honest, if you have expectations of being able to travel, buy a second home, or enjoy a carefree lifestyle, Social Security may only fund 10 to 20 percent of that budget.)
Finally, you must avoid falling into the trap of living beyond your means. According to a 2023 study by Bankrate, nearly half of U.S. adults have less or no savings compared to the previous year. In other countries, half of Americans spend more than they earn. This makes them go in the opposite direction instead of forward.
Although easier said than done, you must find a way to live below your means and save at least 15 percent of your income each month for retirement. In fact, you should go ahead and “tax” yourself 15 percent of every commission check you receive. This means that if you sell a $500,000 home and get a $15,000 commission check, you should automatically roll $2,250 of that check into your 401k or other retirement investment accounts.
When you create rules for how you approach retirement savings, it takes the guesswork out of it. Instead, it becomes a priority and you don’t have to use a lot of willpower to make it happen.
Make financial planning a priority
The key to financial planning as a real estate agent is to (a) smooth out erratic income cycles and create more predictable deal flows, and (b) have a documented retirement savings/investing strategy that you intentionally and systematically follow over 10, 20, and 30+ years. .
Small steps repeated consistently over time are the key to success.
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