If this year has taught us anything it’s this: IT RAINS! Did your mother always tell you to save for a rainy day? Or, maybe it wasn’t your mother – it was your financial planner or a friend or family member? Chances are, someone has always told you to be prepared.
Well, it’s been pouring rain for months, and we’re learning some valuable financial lessons in 2020!
This blog is not about doom and gloom – the real estate industry is doing very well – there is a huge demand for product and many of the top teams I coach are having banner years! This is, in part, because we planned and had a strategy, and we modified early on to review our business plans weekly and monthly. (Want to know more? Keep an eye out for next month’s blog on the top three ways you can adapt to change in the 2020 Real Estate Market.)
Now is when you should be aware of your financial situation to ensure that you are successful long-term. After all, business should fund the life you want to live. Get clarity on what that actually IS, and what it is going to take financially to live it. Below are three rules to keep in mind if you want financial security for both yourself and your business.
It sounds simple, but when I look at many businesses or individuals, they actually don’t have this in place! And don’t say, “Well, I have great equity in my home,” because in down-turn markets or tough times, banks want income verification and may not always allow you to increase your mortgage or loans. It’s best to always have alternate reserves.
Yes, it takes discipline, but the teams and people I coach who did this prior to March and April went into the pandemic in a secure place. They didn’t panic about paying bills and it gave them the freedom to ride out the storm – and, in many cases, grow their businesses. They were even able to keep their staff on, which helped them build great, appreciative teams.
Calculate what you need personally to live monthly, then add the cost of keeping your business running. Multiply this number by 6 or 12 months, and then you’ll have a good gauge on what you should have stashed away. Keep those funds secure for another rainy day, because it always rains eventually.
Have a getaway weekend with your spouse, significant other and family only if appropriate. Look at what your life goals are and where you are currently. I do an annual net worth review with many of the people I coach to ensure that they’re always on track to live the life they want.
Again, let me be incredibly clear: your business should fund the life you want to live. So, you need to see if it’s realistic that the business can provide for your needs. This is about personal income – not business income – so look at your net income AFTER expenses in the business.
For many years, I practiced a concept to build financial security of 1/3rd, 1/3rd, 1/3rd to build myself back from financial disaster. We all make mistakes!
1/3 to Live
This is what your family needs to enjoy the quality of life you want and deserve. Once you set the net income goal, only 1/3rd of this income can go to day-to-day living expenses. Perhaps unsurprisingly, you may have to put yourself on a budget. This may not be realistic for everyone starting on day one, but you should figure out your split to ensure financial security.
I am currently semi-retired working as a real estate coach because I love helping others – not because of the mistakes I made. My ratios have changed. I have no debt, I own two businesses without debt, and I have no mortgage or loan on my home. I am at an age that I no longer need to focus on investing, so I no longer use the ratio of 1/3rd to live. (Although realistically, I live on much less than 1/3rd of my income and live well.)
1/3 to Invest
To build future financial security. I started this plan at 38 years old and was able to retire from selling real estate by 55. I expected to have to wait to retire until I was 62, but my investments performed better than I expected. As a realtor, I invested in what I know best: I bought real estate as the largest part of my portfolio.
Set your own criteria for investing. I blew it once, so I tend to be conservative in my investing – no negative cash flow on properties and my loans had to be paid off by the time I was 62, etc. You can find lots of good reading material on this subject, or you can reach out to a financial planner to get some free advice.
1/3 to Play
Now, this is the most controversial section in this financial lesson, but I believe that if you don’t reward yourself often, or if life isn’t fun, you won’t have the discipline to follow this plan. In the past, I often didn’t use all of my “fun” allocation (investing is fun, too) – but that was a choice. We always made sure to have great vacations, live well, and reward ourselves.
Let me give you an example. In 1995 I had only been in the real estate business for three years. I was just ranked the #1 agent in the company, in our market. So, naturally, I wanted to purchase my first Mercedes Benz! I know – ego. I knew I needed a quality vehicle to keep up image, etc. (no judgements, please) but I could have done that with a much less expensive vehicle. The cost for the less-expensive vehicle would have come out of the “1/3rd to live,” category, whereas the Mercedes differential came out of the “play” budget.
People always say, “but my accountant told me I need write offs!” – let me be clear: the wealthiest people in the world have their money working for them. They don’t have personal debt. They may have business debt, but they are not putting themselves at personal risk. At some point we all have debt, but the goal is to pay it off or create leverage so you can have passive income or a return on your investment.
As a side note, social security is not enough! Develop a plan to reduce all your personal debt before retirement age. Above I mentioned that I planned on doing that by 62, but I was debt free, by choice, at 55. Set your own parameters. Do you really need that 2nd home, boat etc.? Remember your personal residence is an asset but also an expense, it doesn’t generate revenue so if all your wealth is only in your personal residence you have only an expense not income.
To plan for future success, I recommend you develop your own strategy, and work with a financial planner or wealth building coach. These are simply my personal guidelines, and I am not a financial planner, but I have lived through more than one rainy day. It’s pretty simple. Get CLARITY on what you want. For me, that is to have a body that works, real relationships with people, and be financially secure. And that takes DISCIPLINE!
I hope these financial lessons help you have fun, make money and help people – that’s part of my mission every day!
Bill Renaud
Real Estate Business Coach at Renaud Coaching + Consulting
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