Eugene is the Founder of The Litvak Team @ Compass — one of the top producing and largest teams at Compass.
Financial planning is crucial to every real estate entrepreneur’s success. It sets your finances on firm footing, which empowers you to make bold moves to grow your business and investments. While everyone’s circumstances are different, I’ve fine-tuned my “money machine” — an automatic system of saving and investing — to ensure that all my financial targets are met every month.
I didn’t come to this method by being naturally great with money. I came to it by making some brutal mistakes that put my business in serious jeopardy. I decided then that I never wanted to be in that position again and made conscious moves to educate myself and reinvent how I was handling money. In addition to formulating a firm budget for monthly business and personal expenses, I created a multi-pronged safety net of savings in my money machine. Here’s what my plan looks like today:
Bucket 1: Pay the tax man first.
If you are a 1099 earner (as many real estate agents are), meaning your taxes aren’t deducted from a paycheck, you’ve likely experienced the panic that comes with not having enough money for your quarterly or year-end taxes. Trust me, I have. That’s why I always pay the tax man first. Look at your top-line gross earnings (before expenses) and put 10%–20% in savings that you don’t touch until tax payments are due.
Bucket 2: Save some dry powder for a rainy day.
Dry powder, also known as an emergency fund, is meant to keep you afloat if all of your income evaporated tomorrow. Experts recommend you have at least three to six months’ worth of savings on hand. Calculate all of your critical expenses for both your business and household and keep separate dry powder accounts for each. Fund this bucket by saving 10%–20% of your income every month until you’ve reached your three- to six-month goal.
Bucket 3: Save money to make money.
The last bucket is where the money machine’s engine starts revving. I try to set aside 20%–40% of earnings into a separate account that I call my monthly savings tax. The funds here are used for investments ranging from low-risk indexes, bonds and mutual funds to higher-risk instruments like cryptocurrency.
Once you start up your money machine, it takes on an exciting life of its own. Returns from the third bucket are reinvested. When you reach your emergency savings goals, that money can also be diverted to investments. At the end of the tax year, any money left over from the first tax savings bucket can be spent on splurges. But, if you’re like me, you’ll have so much fun watching your money grow that you’ll likely invest some of those proceeds as well, whether that’s in your portfolio or by scaling up your real estate business or other venture.
If you’re used to spending everything you bring in, the idea of even starting a money machine like this will seem overwhelming. I’d suggest that the more overwhelming it feels, the more critical it is for you to start. Here are a few tips to get you on the money machine path.
1. Know that starting is hard. The first step is the most challenging and most important. You can’t begin this process unless you’re willing to shine a very real, very honest light on what money is coming in and where it’s going out. Start by analyzing your income and expenses over the last six to 12 months. Pour through your bank and credit card statements and consider using budgeting software to organize the data.
2. Trim the fat. If you’ve never tracked your expenses closely, you’re going to be shocked by what you find. (Man, do those Uber charges add up!) Unsubscribe to the services you no longer need, put limits on spending in key categories and divert that cash to your money machine.
3. Don’t think all or nothing. You don’t have to fund the three buckets I’ve outlined above at the same time or at the maximum levels. Start with your tax savings. If 10% is too high at first, start with 5%, or even 2%. Just get started.
4. Automate everything. The more you can automate your savings for taxes, emergencies and investments, the easier it is. Look for bank accounts that allow you to set up automatic transfers so you never see the money in your checking account.
5. Assess your investment risk. To properly plan your investments in bucket No. 3, you have to know a little about your risk tolerance and goals. That’s largely determined by how close you are to retirement, but other factors come into play as well. Whether risk-averse or risk-tolerant, all investors should work toward a diversified portfolio that includes investments across asset classes.
6. Call a professional. If you’re stuck on how to get started or want to fine-tune your investments, reach out to a professional financial planner.
Above all, don’t let fear and avoidance ruin the hard work you’ve put into your business or profession. Turn on your money machine today. Your future self will thank you for it.