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A Few Critical Money Tips for Real Estate Agents

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When you’re self employed, YOU are responsible for more than you think.  As an employee, which you may have been familiar with up until the point you decided to become self employed, your employer handled your taxes and social security for you.

Now that you’re self employed, you MUST have a simple roadmap to account for what you’ll owe the government simply for doing business.

Tip #1: Taxes and Crap Like That

When you get your first commission check, or your next commission check, for those of you who have not planned well, you will apply the following formula to the check.  As an example, I’ll use a $100,000 sale with a co-broke of 3%, you being the buyer’s representative, without the broker’s cut considered in the calculations to make round numbers and .

On that $100,000 home, you earn a 3% co-broke, which is $3000.00.  You dance your way to the bank, deposit the $3000.00 and have a jolly old time at happy hour with your clients and friends.

Did you really make $3000.00?  No.  You didn’t, because you MUST set aside a portion of that money for self employment tax and income mcc4tax.  So, a basic rule of thumb for a new agent who isn’t sure what their tax bracket will be would be to put 30% of the gross income in a separate basic, plain jane savings account.  So, on your $3000.00 check, you put $900.00 away for the piper…whom you’ll pay…quarterly.  Isn’t that fun?  Look, self employment tax is 15.3% as it is, and that’s on TOP of your tax bracket.  So do yourself a favor.  Plan according to what you think you’ll make.  It’s nearly impossible to calculate exactly what you will owe, but you can get good at estimating, over time.

Tip #2:  Plan for your annual dues on a monthly basis.

You have annual fees that you pay.  You need to determine how much that annual fee costs you monthly.  Add the sum of the monthly calculation of all of your annual dues together to determine what it costs you per month to have all of the compare motor trade insurace business privileges you have.  If you can be billed monthly on anything, it’s easier to manage your monthly cash flow if you switch.  If you cannot, you need to know what an annual fee looks like monthly.  For example, Scottsdale Association of Realtors bills annually, but it can be expressed monthly.  Figure out that number.

Then, using your business checking account, set up an online transfer that happens monthly for the amount you need.  In the case of a single annual expense of $440.00, you would need to transfer roughly $37.00 per month from your business checking account (account used for business purchases) into a plain jane, separate account designated solely for annual dues expenses.  When the bill comes for the annual expense, you will no longer feel like you’re being raped by the system because you will already have grown accustomed to 1/12th of the amount every month being moved into a designated account just for this purpose…and nothing more.  You cannot borrow from your own account to pay for other crap.  This money is considered spent already.

Every year when I get an annual bill, the money is already there because I move it there in little chunks so it doesn’t seem so bad (that includes things like my annual accountant fee for doing taxes.)  And, every quarter, when I estimate that nasty tax bill, I have the money to cover it and if I’m short, it’s not by very much.

Be smart as an agent and a self-employed person and put money that you earn away or they’ll come get it from you, and that will suck.

Eighteen Thousand Dollars to See a Movie?

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Yes, believe it or not, in order for you and your spouse to see a movie and have a soda every week, it will cost you $18,200.00.  Keep reading, and you’ll see how.

How you look at life does not determine whether or not something is wrong or right.  Although, when I consider financial matters, since money and math are synonymous with each other, and math doesn’t lie, the application of a “philosophy” to the way you manage your money doesn’t make sense to me.  I think that any philosophy that gets creative in the spirit of proving math wrong is a flawed philosophy.

One plus one is two.  That’s it.  Just two.  Math doesn’t lie.

Sometimes I like to look at things on a micro scale in order to grab hold of the big picture.  In fact, since I’m surrounded by my world and not outside of it, looking at the big picture sometimes requires an extrapolation of the micro details.

Take the concept of financial security.  In line with everything that I have ever thought, but never applied until recently, financial security means you can cover all of your living expenses using the investment income from the money you have saved.  Financial security does not mean you make enough money every year, because “enough” is relative to how much you are able to live on.  So, enough doesn’t mean anything.  It doesn’t mean that you have $100,000 or $200,000 or $1,000,000 in the bank, although that would be helpful, of course.

Financial security means you can successfully live, all expenses paid (remember, expenses being relative) on 8% of your nest egg (thanks Dave Ramsey.)  By the way, I dont consider Dave Ramsey to be another one of those financial gurus that has a “philosophy.”  I consider him down to earth, mathematically conscious, and full of uncommon sense.  Some of you might say, “old school.”  As far as I can tell, math hasn’t changed over time even though we try to make it change.

So what does living on 8% of your nest egg mean?  It means after you invest your savings in various investment vehicles, predominantly growth stock mutual funds, some of which have a proven long term performance record of around 12% annually, and you adjust for the average 4% annual inflation rate, you end up with somewhere around 8% on the average.  This is a long term plan.  There is no get rich quick without massive risk.

If you live your financial life applying basic formulas to how you manage money, it doesn’t matter whether you have a million dollars or a thousand dollars.  8% is 8% and if you can live off of 8% then you’re doing what you need to do to be financially secure.  Can someone live off of 8% of $1000.00?  Not likely.  That’s only $80.00/year.  So there is a level of realism that you need to incorporate.  But who knows, a majority of the world lives on less than a dollar a day.

On a micro scale, if you apply this nest egg rule to your money before you spend it, you can figure out how much you need to put away so you can continue your habits without needing to work.  What do you mean?  Let’s go uber micro.  Let’s say you and your wife enjoyed going to a movie once per week.  Your ticket price is $9.50 each, and you both slurp down a large, overpriced concession each time, at a cost of $4.50 each.  Your total cost to see that movie is $28.00, plus the ignored costs of time and gas to get to the movie.

So now you can ask yourself, “eight percent of what equals $28.00?”  The answer?  $350.00.  Eight percent of $350.00 is $28.00.  Since you go to the movies once per week, in order to be financially secure in this transaction, in other words, in order to see that movie “free of charge,” as your money works for you, you’d need to have a total of $18,200.00 invested in growth stock mutual funds averaging 12% over time.

It’s interesting to look at what you’re spending, then determine how much you’d need to have to cover that expense without working.  We will so often look at how much we have and then wonder what happened to it after it’s gone.  Start looking forward with your finances.  Considering that you’d need $18,200 in the bank to cover this one single activity may help you make some changes in how you spend.

The Myth of Tax Deductions

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Math doesn’t lie. When you add 1 + 1 you get 2. Subtract 1 from 2 and you get 1. Big surprise right? One of the most common things that I hear people mention when it comes to owning real estate is how important tax deductions are to their financial health. If you employ simple mathematics to this myth, you’ll see how ridiculous the logic is that tell you tax deductions make sense, because they don’t.

Let’s say you owe the bank $100,000.00 with an annual interest rate of 5%, and your income is $30,000/year. 5% of $100,000.00 is $5,000.00. That means at the end of the year, when you file your taxes, you’ll be able to reduce your taxable income from $30,000.00 to $25,000.00.

On a $30,000.00 annual income, you fall in the 15% tax bracket. $5,000.00 of your annual income was paid to the bank, and you’ll never see it again. The real savings to you in this example, since your tax bracket is 15%, is 15% of $5,000.00 which is $750.00.

In short, you spent $5000.00 to save $750.00. Your net result is a loss of $4250.00 in real cash. If you think that keeping your home mortgage means that you’ll benefit because you’ll be able to take a write-off, I’d be happy to pay you $750.00 as soon as your check to me for $5000.00 clears the bank.