It’s not what you want to hear, but Victoria Gillespie of REALTORS® Federal Credit Union, a division of Northwest Federal Credit Union, recommends you put away half of each commission check for taxes and a short-term reserve account.
In the second video in our series on financial planning for real estate professionals, called Your Money Matters, Gillespie, the credit union’s director of business development and a former banker and real estate practitioner, says smart money managers set aside 30 percent of each commission check for taxes and 20 percent for reserves, with the goal of creating a six-month reserve fund as soon as possible.
That means if you earn $5,000 in commissions on a home sale, you should think of it as $2,500 in commission income. “I know that sounds like a dramatic number, but I think it’s important practitioners see it that way,” says Gillespie in the video.
Thr fact is, you’re going to pay about 30 percent of your income each year in taxes, and it’s a lot easier to pay that by setting aside money each time you get paid so, come tax time, you have the money available. And on the reserve fund, that’s so you have a comfortable cushion of income for those months when you close fewer transactions than you need to pay your bills.
REALTOR® Magazine started its video series a short while ago to help bring you some practical tips from your credit union, whose professionals are familiar with money management best practices.
Although setting aside half of your commission check is easier in theory than in practice, the credit union has some accounts you can set up that take some of the sting out of it, starting with its basic savings account. There’s no minimum balance and the interest you get on your money, although modest in today’s ultra-low interest rate environment, is nevertheless quite a bit higher than what you would get in an equivalent account at a bank. “We shop what banks are paying and the interest on our regular checking is five times higher than other institutions,” she says.
Once you have a six-month reserve built up, you can consider higher-yielding savings products, including certificates of deposit and money market funds, which require you to lock up your money for defined terms.