Jordan Curnutt, CFP®
Let me start by saying there is nothing wrong with having a budget. In fact, according to Dave Ramsey, the king of all things budgeting-related, a budget is simply defined as “a written plan for your money.”
Since I’m a CERTIFIED FINANCIAL PLANNER™ professional by trade, you would think this definition would resonate with me. And it did! When I was a recent college graduate seeking my first “real job” after school with a load of what is now standard student loan debt, budgeting was a regular part of my life. I had to ensure that every dollar went where it could be best utilized to achieve my goals.
But at some point, life changed. Student loans got paid off. Income went up. And eventually, budgeting just wasn’t a priority anymore.
According to a recent study, 65% of Americans have absolutely no idea how much they spent last month. Now, before you start to think I am giving you a free pass to be financially immature and throw caution to the wind with your hard-earned commission income, think again. But what I am here to advocate for is that as a Top Producing Real Estate Professional, you no longer need to budget in the traditional sense to be financially successful.
Given your high commission income, you should be easily covering your basic expenses, which allows you to implement the concept of “backwards budgeting” into your financial habits.
Then, with the time you have freed up by ditching your traditional budget, you can shift your focus to your highest priority and best use of your time: building your business and managing the more complex intricacies of your financial life that come with your high commission income.
Lastly, we recommend implementing data aggregation software to track your spending over time. This gives you the information you need to make confident and informed decisions about your spending habits and allows you to live life with intentionality in your spending.
If you find yourself spending countless hours each month budgeting every dollar of your projected GCI (gross commission income) and then adjusting for your brokers commission split and then deducting your projected business expenses for the month and then setting aside your estimated tax and then FINALLY getting your actual personal expenses mapped out (just typing that all out was exhausting), this strategy is for you.
And if you haven’t budgeted a single line item in the last 20 years, this is for you too.
At its highest level, backwards budgeting suggests that as long as you are accomplishing all of your financial goals, how you spend the rest is irrelevant.
Given this definition, the first step of the backwards-budgeting process would be evaluating what actions are needed today to put yourself in a place in the future where your long-term financial goals are achieved. Here are a few examples:
- Maxing out your solo 401(k) each year
- Maxing out your backdoor Roth IRA each year
- Maxing out your health savings account (HSA) each year
- Contributing to a sinking fund to purchase a lake place in the future
- Contributing to your kids’ 529 college savings plans
- Paying the premium on your term life insurance
- Paying off any lingering consumer debt
Now, I won’t sugarcoat the fact that identifying the correct amount to fund each of these goals can take some work. That said, once you have put a plan in place to systematically work toward these goals, you can become laser-focused on just a handful of other financial factors that deserve your attention and stop attempting to manage a full-fledged budgeting program.
Now that you have identified what you need to be doing each month to achieve your financial success and have committed to achieving those things first, the residual income becomes completely discretionary.
Put another way: Since your goals are already on track, you are free to release yourself from the stress of tracking the movement of every dollar in a traditional budget because how you spend the rest is irrelevant.
Shift Your Focus to Your Highest and Best Use of Time
As I alluded to earlier, the biggest reason Top Producers shouldn’t be budgeting is the sheer amount of time and bandwidth it takes to complete a proper monthly budget. Let’s be honest, real estate is a tough industry. And given the fact that 80% of agents are out of the business within two years, you didn’t achieve the success you have today by wasting time.
Instead, we recommend refocusing the energy spent on budgeting to the places where you are receiving your highest and best use of your time, which for Top Producers, is focusing on building their business. Whether it is marketing, nurturing your referral relationships, or building out your processes for your business, we believe that in the long run, your time is better spent on these tasks.
But just because you shouldn’t focus your time on balancing your budget doesn’t mean you should ignore your finances altogether.
Top Producers and the high commission income they generate create their own unique set of complex financial intricacies. And because of this, there are items in your financial life that simply cannot be ignored.
As a Top Producer, here are a few items you should focus on in your finances:
- Managing your cash balances vs. investment balances
- Accruing tax savings through small business retirement plan contributions
- Evaluating your future tax status and planning accordingly
- Managing your risk by purchasing only the insurance policies that you need
- Incorporating your rental income into your personal financial plan
- Verifying that your debt usage is optimized and in line with your goals
- Reviewing your estate planning for tax-efficient asset transfer at your death
As you can see, the reality isn’t that Top Producers don’t need to care about their personal finances. Rather, what actually matters in their finances is different than an agent just getting started in the business or the average corporate employee.
While we do feel that the efficiency and long-term view of a backwards-budgeting strategy make the most sense for Top Producers, there is one important area that backwards budgeting leaves out: knowledge.
Earlier, I flippantly referred to the residual balance of your monthly income after all of your financial goals are paid for as “irrelevant,” but I am going to go back on that statement and argue that it is actually pretty important.
Although the individual categories of where your residual money is being spent are “irrelevant” to the probability of your financial plan’s overall success, they certainly are not “irrelevant” for how you live your life.
I remember as a teenager my dad telling me: “If you want to know what is important to someone, look where they spend their time and their money.”
So, what is important to you? Where do you want your money to go?
Thankfully, technology has allowed for a way to track your spending without all of the headaches that come with building out a detailed budget each month. The solution to the knowledge problem is to run data aggregation software in tandem with your backwards-budgeting strategy.
Let me be clear, downloading your transactions does not equate to having a budget. The key difference here is that budgeting is forward-looking, while downloading your transaction to one central location is retrospective.
But what data aggregation software can provide is the knowledge of how much of your money is going where, and along with it, the ability to act intentionally in your spending.
At Quantum, we have our own financial planning software that allows us to track spending into categories over time while still allowing our Top Producer clients the ability to keep individual transaction details private. And with the backwards-budgeting strategy in place, we can come alongside our clients without them experiencing any guilt over where their money is being spent. Instead, we can help guide them to keeping their spending habits in line with their goals and values.
If you aren’t working with a financial planner, here are a couple of options for data aggregation software that are available to the general public:
So, there you have it. This CFP® practitioner doesn’t believe you need a budget—at least not in the traditional sense. The value of your efforts as a Top Producer has put you in a position to where it just doesn’t make financial sense to be tracking every dollar.
Instead, we recommend implementing a backwards-budgeting strategy to free up your time and brain space.
With this increased capacity, we recommend you shift your focus to where the highest and best use of your time is spent: building your business and the more important areas of your finances.
And finally, we advocate for living with intention in the dollars you spend from your discretionary income. We believe the only way to live with intentionality in your spending is to have the data available for you to make confident and informed decisions about your consumer habits.