News about economic tumult may be making you feel jittery about your finances. A “housing recession,” as National Association of REALTORS® Chief Economist Lawrence Yun characterizes the current market slowdown, may be daunting for real estate pros whose commission checks can vary greatly with the ebbs and flows of the real estate cycle.
After all, 37% of agents last November said they were struggling to pay rent for their offices, according to a poll by Alignable, an online network for small business owners. Real estate professionals, along with other American workers, may not be feeling particularly rich: About six in 10 consumers say they are living paycheck to paycheck—about 45% of whom earn more than $100,000 per year—according to a late November poll from PYMNTS and LendingClub. Further, consider that the median gross income of REALTORS® was $54,330 in 2021, and incomes tend to grow with more years of experience, according to NAR data.
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To weather potential business hiccups, financial experts offer 10 money-saving tips.
- Beef up your reserves. A reserve account consists of savings to cover any unforeseen expenses, which can be crucial during tough financial periods. For the self-employed, a good rule of thumb is to put enough savings to cover six months of expenses into a cash or stable value-type account, advises Brian Wiley, founder of Tree City Advisors in Boise, Idaho, and host of “The Real Money Pros” radio show.
- Revisit your spending habits. Scrutinize your expenses to find ways to reduce or eliminate excess. “This is a good practice in any economy, but it’s even more important when cashflow is limited,” Wiley says. “You might be surprised how much you can save by eliminating extra television services, daily lattes and memberships.” Pay special attention to items like your car or homeowner’s insurance: Drivers who comparison shop on auto insurance, for example, can save an average of $1,127 a year, according to a study from CarInsurance.com. Michael Soon Lee, CRS, GRI, associate broker at Realty ONE Group Future in Dublin, Calif., advised in a Center for REALTOR® Financial wellness webinar to cut at least $1,000 a month in personal expenses, particularly if you lack three or six months’ worth of savings. Cut back on non-critical spending, such as dining out, gym memberships, coffee shop visits and cable TV, and find more ways to save at sites like AmericaSaves.org, he suggests.
- Re-evaluate where you’re investing money. Assess the value of all your accounts like checking, savings, investments, retirement, etc. “Each of these may become critical resources and should be prepared ahead of a need,” Wiley says. “The best practice is to have any money, which might be needed in the next three years, set aside as a ‘cash-like’ investment, such as a CD, money market or short-term government bond.” On the other hand, stocks are often volatile in an economic slowdown and often require a more long-term growth strategy. So, if you have an important savings goal to fund within a year, choose a more stable investment, like CDs or bonds. “Be sure risk investments are purposeful and are given the amount of time needed to recover before the value is needed,” Wiley notes.
- Get smarter about taxes. Work with a qualified tax adviser to ensure you’ve taken advantage of every tax-reducing method available to you and that your business is structured appropriately, Wiley suggests. For example, how much of your income should be designated as W-2 pay (self-employment income)? In some cases, the answer may be all of it, Wiley says. “But in many other cases, the answer is some of it, which leaves the balance to be distributed as a dividend if you are filing as an S-Corporation,” he adds. “This type of strategy could save you lots of tax dollars.” Wiley says the top financial mistake real estate professionals make is not saving enough for taxes and missing out on savings. “If you do not have a good tax plan, then you are likely paying much more in taxes than necessary,” he says. “I have seen many cases where independent contractors pay 50% more in taxes than they should.”
- Create a budget. You’ve heard it before, but now is a good time to have a budget. Too often, “many people discount the concept of making a budget until they find themselves living in lean times,” Wiley says. “It is always better to be prepared—and trained—before you need to adhere to a tight budget.” Have a personal and business budget that estimates your earnings and expenses and breaks down a full list, item by item, of regular expenses. Track how you do and modify when needed. Need help creating one? The Center for REALTOR® Financial Wellness includes budgeting tips and spreadsheets to help. Sites like Mint.com or your bank, credit union or credit card company likely offer budgeting tools as well, Wiley says.
- Open specialized savings accounts. To help stay on budget, financial experts recommend opening multiple, individual savings accounts. For example, pool funds into multiple accounts labeled for emergency/reserves, taxes, retirement and business expenses. Ryan Serhant, CEO of Serhant and equity holder in RLTY Capital, offers tips to independent contractors on financial health. Since the beginning of his real estate career, he has allocated commission checks to separate banking accounts, particularly for taxes, to avoid spending commission money he doesn’t really have. His general rule of thumb: Save one-third of each paycheck for taxes and one-third for living expenses; the rest can go to savings.
- Keep on investing. No matter the market, it’s always smart to continue investing, Wiley says. He recommends a dollar-cost averaging strategy—the practice of investing a fixed dollar amount on a regular basis. In a sluggish market, the lower prices on investments can serve as an advantage in that they likely will increase over time. Also, investing even a little amount could make a significant difference over the long haul. For example, the Acorns app automatically rounds up the price on everyday purchases to the nearest dollar and then places the excess into an investment portfolio. So, if you buy a donut for $2.30, Acorns rounds that to $3 and invests the 70-cent difference on your behalf. Daily spare change like that could amount to $900 per year in investments.
- Consider a side hustle. If you’re especially tight on money, consider a side hustle to supplement your income and leverage your skillsets in other ways. Lee suggests generating extra funds by serving as a notary (which could offer $75 to $200 per appointment), home stager, appraiser or property manager. However, understand that you also likely will need to get extra training or licenses to do many of these jobs. To find opportunities, Lee cites websites like SideHustleNation.com or Upwork.com, which connect professionals to businesses who are seeking specialized services.
- Bank on the future. Retirement savings are often one of the first expenses people nix when finances get lean. Wiley, who hosted a webinar for the Center for REALTOR® Financial Wellness in January called “How Inflation and Market Volatility May Impact Your Plans for Retirement,” says there are many strategies for independent contractors to save for their post-career future. He suggests setting aside at least 10% of gross income for retirement. If you haven’t been doing that, you can still catch up. Most real estate professionals have their biggest earning years in the latter third of their career, he says. This still “presents a great opportunity to save more of their income for retirement and to use the many tax advantages offered to ‘late savers,’ such as catch-up contribution limits in 401(k)s, IRAs and ROTH IRAs,” he adds. “Saving more in these types of retirement plans will not only help the professional have a larger nest egg but will likely also reduce taxes along the way. Consider it more of a ‘snowball’ effect.” Wiley also says ROTH conversions during lower income years could serve as another retirement savings tool.
- Find extra guidance. Financial advisers and tax planners can help you identify ways to meet your savings goals and expand your financial safety nets. Also, sites like financialwellness.realtor, an educational resource for real estate professionals provided by NAR, offers personalized financial planning goals, budgeting tips, tax and retirement planning, and ongoing webinars on various topics. “Get help from an investment professional if you need guidance, and always be sure to only hire an adviser who will work in your best fiduciary interests,” Wiley says.