WISDOM WITH FINANCES

Most Agents begin their real estate career with the hope of gaining financial independence. They are attracted by the possibility of earning large sums of money. Even when Agents make more than a six-figure income, the vast majority have not dramatically improved their financial balance sheet. After looking at hundreds of Agents’ Profit and Loss statements and personal spending habits, I’ve determined that real estate Agents are poorly prepared for financial independence. Why should real estate Agents be any different from the American population in general?

According to the Social Security Administration, statistics indicate that out of a randomly selected one thousand people from age twenty-five to age sixty-five:

• 190 would have died—19%

• 150 would have incomes over $30,000—15%

• 660 would have incomes less than $30,000—66%

Let’s look at these numbers. There are more people deceased than earning something close to a decent quality of life. Of the people still alive, 66% of them exist on less than $30,000 per year. My question is: Which group do you want to be in? Which group are you heading for based on your financial plan, investment choices, and savings plan? These are the top three reasons people fail in their finances:

• They never create a financial plan.

• They make poor investment choices.

• They put off starting a savings plan.

Let me share with you a few simple rules that will ensure that you don’t join the 66% of the group. I have used these rules with hundreds of Agents to transform their financial picture in a short period of time.

Rule #1: Track your expenses, both business and personal.

You must know where the money is going. Separate your business from personal expenses. Establish a business checking account and pay all business bills through it. Too many Agents co-mingle their business commission checks and business bills with personal and household expenses. It is more difficult to control your money when you can’t track it. Enter all your expenses and revenue in an accounting software program. I think the easiest is Quicken. Quicken will allow you to accurately track your costs to run the business, then you can run a monthly Profit and Loss statement to see where you are spending your money. The money you earn in real estate can come in bunches. It can become very easy to spend that large commission check that’s burning a hole in your pocket.

When we have money, a want looks like a need because we have the ability to buy it. We begin to rationalize our wants into needs. For most of us, a want that our neighbor already owns becomes a need.

Rule #2: Adjust your Lifestyle.

Spending less than you earn makes up 90% of financial planning. The premise involves saving money and making sacrifices. The ability to pay now in the form of adjusting your lifestyle and saving the difference will allow you to play later. To play later you will need more than the $30,000 per year. Thomas Stanley, who wrote the book, “The Millionaire Next Door”, summed up how the vast majority accumulated their millions: “They lived well below their means.” Living beyond our means is a national epidemic. Consumer credit card debt in the United States is in excess of $528 billion. Roughly two-thirds of Americans who have credit cards do not pay off their monthly balance. We are clearly living beyond our means. Take a close look at your monthly obligations and evaluate where you are spending your money.

Rule #3: Aggressively reduce your debt.

There is an old Proverb that speaks of a borrower being a servant to the lender. The weight and pressure of debt can be crippling. I have seen this happen to Agents for years. I have even seen it manifested in my own life. I have not always made the wisest choices with my money. Fortunately, I have made more wise choices than foolish ones.

If you have credit card debts, make a decision to pay them off. Start with the highest interest rate credit card first. Decide on a monthly amount that you can commit to reducing your debt. If you stretch, you will be able to find a few hundred dollars per month to pay towards your debt. Most credit card companies require you to pay 2% of the balance owed monthly. Let’s look at that practice. Let’s say you have a debt of $2,705 with an interest rate of 18.38%. Your 2% toward the outstanding balance would take you 27 years and 2 months to pay off. You would pay $11,047 of total interest. How do you feel about eating out more often now? If you increased your payment to 8% or to $216.40 per month, it would take 2 years and 1 month to pay it off. You would pay $94.00 in interest. You need to accelerate your payments to reduce your debt. You must adopt a cash mentality. This cash mentality will allow you to charge only what you have funds to pay for.

Rule #4: Create a savings plan now.

The biggest enemy in financial planning is procrastination. People wait too long to start saving. The truth is becoming a millionaire is not very difficult. The power of compounding interest will take care of your needs. According to Investors Business Daily, a 20-year-old person only needs to invest $1,014 per year or $2.78 per day with an annual return of 11% to have $ 1 million saved by the age of 65. Look at the daily number of $2.78. Who couldn’t save that amount per day, even at the age of 20? Even someone working for minimum wage could do that with ease. My mentor, Jim Rohn, used to say, “What is easy to do is also easy not to do”. It’s easy to save the $2.78, but it’s also easy to buy a latte every day at Starbucks instead of saving. That’s all we are talking about here—choosing financial independence planning rather than the latte.

Therefore, we need to create a system to automatically remove the money when we receive it. We need to transform ourselves into savers. Savers pay themselves first. It’s amazing how little you miss money that never comes into your possession. We are not a nation of savers, although we really need to be. On average, Americans save less than 5% of their disposable income. Let’s compare the United States to other countries in regards to income saved:

Germans are saving: 11.5%
Japanese are saving: 12.2%
Belgians are saving: 17.0%

We are behind in our need to pay our savings accounts first.

The secret to saving is writing the check to savings first. Do it before paying other bills and obligations. Savings is a habit to be forged. Here is the formula I used on each of my commission checks for many years:

20% went to a tax account
10% went to a retirement savings account
10% went to a business savings account

These percentages ensured that my taxes were always current and my retirement account was always fully funded. There were also reserves for an investment opportunity or slow closing month. The more you make your money disappear into protected accounts, the more you will have for later.

Creating financial wealth is the process of being diligent with your money. I remember a series of Fram oil filter commercials in the 70’s that were a lot like creating financial independence. The service station attendant, while looking under the hood of the car, was trying to convince the customer to use a Fram oil filter. The premise was that the quality of the Fram filter was better for his engine than the bargain brand. He said to the customer, “You can pay me now or pay me later”. He was implying that the customer could spend a few more dollars now for the Fram oil filter or get the cheaper brand and have his engine rebuilt later. The same is true with your money. You will have to pay either way. The price you pay now is small compared to the price you will have to pay later if you are not diligent in managing your money and financial affairs. Which price do you want to pay?