When I talk to realtors about their finances, our conversations typically go one of two ways.
The first is with the realtor that “wants to stop living closing to closing” and is “tired of chasing the next commission” but recognizes that she is not nearly organized enough to make any headway on changing this narrative.
While successful in her own right, she realizes that there is a lot that she has to do in order to meet her lofty career and personal aspirations. The challenge is that she doesn’t know where to start.
On the other hand, I also meet with realtors who “have a handle on their finances” and are generally “ahead of the game”. These realtors are usually highly organized and have a high-level understanding of their finances but recognize that they could be more successful with some changes to how they manage them.
Clearly, there is a correlation between the level of organization that an agent has and how much business they bring in.
The more organized an agent is, the easier it is to track their progress and see where they are going wrong. The less organized someone is with their finances, the harder it will be for them to understand what financial decisions lead to better success in their personal and professional lives.
The problem is that these agents don’t know how to change their behavior without feeling overwhelmed or burdened by all the information out there.
To be fair, most of the education that agents receive is focused on lead generation and sales tactics and when they hear about finances it’s usually related to increasing top-line revenue.
In fact, there is very limited guidance about successfully managing your finances as a real estate agent which results in many believing the fallacy that if they just make more money everything else will take care of itself.
The organizational component is an overlooked aspect of an agent’s business but it provides critical information and the ability to make better business and personal decisions.
This is what I like to call the 4Cs of agent success:
Clarity: Once your finances are properly organized, you can look at your entire financial picture and see exactly where you stand. You will know where your money is going, what expenses are coming up next, and the overall trend of where the numbers are heading.
With clarity, you can make proactive decisions to improve your finances. You will know what needs attention now and in the future so that when something does happen, like an unexpected expense or income interruption, you have taken steps ahead of time to prepare for it.
Control: You will always be one step ahead which makes everything begin to feel more manageable and under control. Once you have clarity about where you are, you can set goals to improve your situation.
For example, you may determine that you need to sell 10 homes a year to maintain your lifestyle. This understanding will lead you to focus your efforts on accomplishing concrete goals.
Consistency: Once clarity is reached on the state of your finances, and you begin to feel in control of things, consistency becomes your new best friend. And with consistency comes the permanent feeling that things are on track and everything will be ok.
If you know what it takes to sell 10 houses you can use this knowledge to take the same actions year after year which will bring stability to your finances and reduce stress. This consistency will also provide you with the confidence to stretch your goals and perhaps push to sell 15 homes instead of 10 further compounding your success.
Certainty: is the holy grail for every agent who forgoes a salary for a commission-based living. While nothing in real estate is completely predictable and ups and downs are part of the real estate market, knowing your business and what it takes to achieve your goals will bring you peace of mind and a sense of predictability.
Now I know what you're probably thinking, "I get it, Ruzanna, organization is the key to my success as a realtor -- but what are some tangible things I should do now to begin the process of organizing my finances?"
1.) Recognize that you run a business and that it needs to be separate from your personal life.
The way that I recommend doing this is by having five separate bank accounts (aka Digital Envelopes) to organize your money. The first is your 'Commission' account. This is where you will deposit all of the money that your real estate career generates.
The second is your 'Business Expenses' account. These are the expenditures that are directly related to the running of your real estate business -- things like, business utilities, supplies, marketing materials, and equipment.
The third is your 'Taxes' account. This is where you will deposit all of your taxes that need to be paid. If you're a sole proprietor or an LLC you can expect that over 90% of your income will be subject to self-employment tax (at a current rate of 15.3% in 2021)
The fourth account is for 'Personal Spending' on household expenses and any other personal expenditures that you may have -- like dining out or a trip to the spa, for example.
The final account is for your 'Cash Reserves'. This is where you'll keep money to cover any possible emergencies or unforeseen events that may happen in the future so make sure it's fully funded.
2.) Put aside money in a tax account from each commission check.
When you get your commission check, deposit a certain amount (ideally at or above the self-employment tax rate of 15.3%) into the tax account. It's best to do this right away so that you don't forget about it and have to pay penalties for late payment when April 15th rolls around.
3.) Build awareness of your business and personal spending
It's important to keep track of your business and personal spending so you can make sure it doesn't exceed the amount that you're bringing in.
Many successful realtors have a tendency to overspend on things like dining out, leisure activities, and other items outside their budget. If this is happening to you, try making note of what those purchases are and start analyzing what you can do to curb them.
4.)Automate business expense tracking with a bookkeeping system
A bookkeeping system can help you automate your business expenses and payments. If you're already using a bookkeeping system, make sure that it is up to date with the latest technology so it can provide accurate reports on both your income and spending.
If not, there are many inexpensive or even free options available for real estate agents like QuickBooks Self-Employed or REPROPHET.
5.) Review your finances monthly
Lastly, it's important to set up a time to thoroughly review your business and personal finances every month. This will help you stay clear on where your money is going and will also allow you to make adjustments when needed.
Most real estate professionals are aware that their finances need to be in order. But, the financial demands of being a successful agent can cause some agents to procrastinate on taking care of important tasks like paying off debt or saving for retirement.
Luckily, there’s a way you can take control and get your finances in shape without sacrificing time with family or work commitments!
We created The Organized Realtor Workbook as an easy-to-use guide that will help you organize your personal finance goals into achievable steps.
Click the link here to download your free copy.