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“Retained Earnings” is a fancy accounting term us nerd tax people like to use. But it’s one with which we business owners all need to get very familiar. In fact, retaining earnings can be the biggest key to your business survival.........
I've been a business owner for over 13 years, so I very well know how difficult it can be to budget an irregular income. As a Realtor, you face a very difficult budgeting dilemma. You can receive income in large waves, followed by several months of nothing.
So how can you budget with this income structure? It’s easy if you follow the guidelines below.
Real estate commissions are unpredictable and can vary significantly from month to month, depending on when sales close. Most Realtors feel it’s impossible to plan ahead and budget. I've seen many make the mistake of spending whatever money they earn, as they earn it. They set their lifestyles according to good income months. Then market swings come along and they starve during these lean months, allowing credit card balances to mount, while hoping and praying for a good month to come bail them out.
Lower The Stress
There’s a much simpler, lower-tension way to handle this irregular income. Realtors must consider themselves company owners. This means you essentially wear two different hats: employee and employer. As the employee, you need to determine the lowest reasonable salary your family can live on based upon your budget. As the employer, you pay yourself exactly that set “salary”, whether business is booming or struggling. Obviously the “salary” must be reasonable for the income you can earn. In other words, if you estimate your yearly income to be $60,000 ($5,000/month); don’t setup your monthly “salary” to be $8,000 per month just because that’s what your over-extended budget needs. In this case, you need to revisit your budget to balance things out so you can take a realistic “salary”.
How You Can Use This
The key is to work toward funding a savings reserve (Retaining Earnings) from which you can draw the steady “salary” income you established above; regardless of whether business profits are plentiful or lean. For example, assume you are able to save $8,000 for this reserve, and your budget requires you draw $5,000 income per month. If you have a month when you earn $2,000, you will need to withdraw $3,000 from your savings reserve to meet that $5,000 draw. Then if you earn $9,000 the next month, still draw only the $5,000 and deposit the other $4,000 into your savings reserve. You are essentially using this savings reserve as a buffer to smooth out your income. So no matter what comes in during any given month, pay yourself only the established salary amount. Allow any overage to sit in reserve, since it might be needed to cover your salary draw and expenses during leaner months. Now you know exactly how much your income will be each month, so you can budget accordingly.
The biggest challenge for Realtors is not to spend everything they earn during higher income months, only to resort to credit cards during lower income months. Using the “draw” method will help smooth out that income. It all depends on your willingness to be disciplined and to exercise restraint when one month it appears your ship has come in. Don’t believe it. Stick to your plan.
**If at some point your savings reserve has a plentiful cushion (6+ months of “salary”), reward yourself by taking an additional draw to fund other goals such as a vacation fund, paying down debt, or saving for your kids’ education.
If you read this article and found yourself saying “wow, that’s a good idea!” then please implement it and share with a friend! Many Realtors go out of business, not because they can’t sell real estate, but because they mismanage the financial aspect of their business.
Feel free to call or email us if you have questions on how to handle your finances with irregular income…we’re here to help!