Happy Closing. Now Set Aside Half of Your Commissions

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.

Watch the second video now.

Go to the first video.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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  1. HAVE ZERO DEBT before you begin any program. The only debt you should have is a mortgage. No lease or car payments, no credit cards only debit.
    This video was good but it was too vague. We need definitive numbers and plans.
    This is the one I use:
    6 months of expenses in your Emergency fund account. Liquid – never to be touched only for emergencies.
    High/Low fund. – to cover how many months you are dry on closings typically each year and have that in a different reserve account. That is the one you touch.
    Once the above accounts are in place THEN:
    15% of your gross income to invest and never touch.
    20 to 30% to the IRS fund
    If you have an HSA account for insurance then allocate monthly what you need to put in the fund.
    At the end of the year if you are fully funded you can use “overage” for house upgrades, vacations or whatever else you are saving for to purchase.
    It’s all in your behavior – so start the shift NOW!

  2. mary holden

    This all sounds wonderful, however, the market hasn’t been good enough for me yet to set aside 50% of my income to all these allocations….just keeping my head above water some months is all I can do. I can’t wait to be “fully funded” in all the necessities of life.

  3. I always tell my students (for the past 35 years) to put 1/3 away.. with the economy now,1/2 isn’t a bad idea! GREAT article!

  4. This is a painful thing to manage, especially when you’re new or the market is slow, but it’s a must if you want to survive. I started this approach about 2 years ago and my business has been transformed as a result.

    I no longer have to steal from Peter to pay Uncle Sam, which is what I had to do in the past, forcing me to pull back on marketing during tax time and making my income more of a roller coaster than this business is naturally. I also no longer have to operate in desperation mode during slower times.

  5. I agree with Geena and Linda here, and the original article.

    It’s so important to have some cash put away, a lot of newbies make the mistake and then they’re out of business as soon as the tax bill shows up.

    Don’t be afraid to pinch pennies at first, don’t go buy a beemer with your first check (I’ve seen so many people do this, I’m sure we all have…)

    Mike from Australia

  6. This would be a lofty goal since sales are down. However, I do think this is an excellent idea. In this tight market, I’ve consistently set aside about 20%. Can up the anty a little but 50% is out of range for me right now. LOL

  7. This is BAD ADVICE. Responsible Realtors are making quarterly payments for taxes. And, the author should understand the target audience. According to NAR, median income for a Realtor working 50 hours a week is: $55,000. See site: http://www.realtor.org/field-guides/field-guide-to-quick-real-estate-statistics . In order to be taxed at 30%, one would have to make over $200,000 a year. See Forbes article here: http://www.forbes.com/sites/moneybuilder/2011/09/30/2012-federal-income-tax-brackets-irs-tax-rates/ . Most of all though, why would a successful Realtor, making in excess of $200K annually invest money in a CD which makes less than one percent in interest when she/he could invest in real estate. In 2013, nationally markets were up around ten percent.

  8. Elizabeth Cline

    How are real estate commissions tracked? For example what is to keep a realtor from not reporting or paying taxes on commissions? Are they somehow reported to the government by the attorneys?? Thanks in advance for your assistance.

  9. Robert Freedman

    You’ll want to get your answer from an accountant or attorney who works on practitioners’ finances, but this information is provided by the brokerage on the 1099 Form, a copy of which is filed with the IRS.