By Jordan Curnutt, CFP®
You refresh your inbox, and there it is—the email from the closer letting you know your most recent million-dollar listing has closed! It has been a long haul finding the perfect home for your clients transplanting from California, but the job is now done.
You have already hit your breakpoint on your commission split with your designated broker, so in a few days, you will receive a direct deposit in excess of $30,000. This isn’t necessarily unusual for your real estate business, but it also represents a meaningful portion of your income.
But what happens next? How do you use this personal income most effectively? You have many options for utilizing this commission. Do you take a trip to Hawaii? Max out a backdoor Roth IRA? Fund your health savings account (HSA) for the year? Reload your emergency fund? Pay off your car loan? Remodel the kitchen?
Let us emphasize, none of these options is necessarily right or wrong—but which option is most in line with your personal financial goals? We hate to break it to you, but the answer will likely vary with each closing! It may come as a surprise to you, but one of the biggest mistakes we see Top Producers make with their commission income is an overweight to cash that puts a drag on the growth of their net worth.
You have an incredible tool that is your personal income! Since your life is fluid and the “right” use of your commission income will constantly change over time, we advocate for having a proactive cash management plan in place.
We believe that financial success means different things to different people, and the answer to the question of what success means for you will play a large role in your plan for deploying your commission income. Now, this plan can always change and be flexible as your life changes, but it serves as a starting point for making your hard-earned commission income serve you best.
A good place to start is separating out your short-term goals from your long-term goals and working your way down.
Short-Term Financial Planning
Short-term financial goals are all about current financial security and lifestyle. Identifying and planning for your needs in the short term allows you to handle these financial events as they arrive and not have to dip into your emergency fund or take on debt. Addressing your lifestyle is another component of this decision-making tree. Is there a destination on your travel bucket list that this income can provide for you?
Either way, having a short-term plan for your commission income is key.
Here is a list of short-term financial planning themes to consider:
- Pay off any lingering consumer debt. As a Top Producer, your income level is in a place where any lingering consumer debt, such as a credit card that carries a double-digit interest rate, simply has no place in your financial plan.
- Invest back in your business. In most cases, a Top Producer’s highest-valued asset is their personal commission income. As a result, investing back into yourself can be one of your highest returns on investment. Areas such as marketing and coaching, while not cheap, can yield great results for your business.
- Fully fund your emergency fund. Due to the variability of your commission income, we recommend you have at least six months of living expenses in this category. Top Producer tip: This is Step #1 and Step #2 in our Top Producer Cash Management Plan. Make sure you check out a high-yield savings account (HYSA) for a portion of your emergency fund.
- Fund your backup emergency fund. While we always use liquid cash equivalents for an emergency fund, a brokerage account can supplement your cash savings while providing higher expected returns. This account can also be used to fund retirement accounts at year-end when you have more clarity surrounding your maximum contribution limits.
- Planned expenses: Have a vacation coming up? Need to replace a car? Set those dollars aside in cash now in excess of your target emergency fund. This will allow you to avoid dipping below your target when your trip arrives.
- Taxes: If you are having a stellar income year, check in with your CPA to make sure your estimates are still in check and plan accordingly.
Long-Term Financial Planning
Long-term financial goals are all about buying yourself flexibility and lifestyle in the future. If everything is already taken care of in your short-term planning, we now lift our vision to the long term.
The biggest advantage to continuing to add to your long-term financial planning is that you are buying yourself flexibility. The more you save for these types of goals within your net worth, the more options you will have available to you later in life.
Here is a list of long-term financial planning themes to consider:
- Fund your backup emergency fund. Wait, didn’t we already list this on the short-term list? Yes, but a brokerage account can serve as a hybrid to serve your short- and long-term goals. Since you have access to this account type before retirement, it allows for short-term flexibility but can also have the growth potential to be in line with your long-term goals.
- Make your retirement contributions. The earlier you tackle your retirement contribution goals for the year, the more flexibility you give yourself later in the year.
- Max out your HSA. If you are on an HSA-eligible medical plan, max out your contribution each year even if you don’t think you will need the funds. Not only does this serve as a tax deduction, but it can also be invested in the long run if you start accumulating in your health savings account.
- Start a sinking fund. If you have a lifestyle goal you are striving toward, such as a new car, home, or vacation/rental property, start a sinking fund for this goal. A sinking fund is an account earmarked for a particular goal. Depending on your timeline for this goal, this could be a separate HYSA or brokerage account.
- Open a 529 educational savings account. If college planning is a goal for your family, a 529 plan offers great flexibility in the contribution limits. There are a handful of other options when it comes to educational savings, but a 529 plan is worth consideration if funding college for your kids is a goal.
At Quantum, we believe that your financial plan is the intersection of your financial data and your personal financial goals. And the initial step of your comprehensive financial plan is to determine how best you can deploy your commission income.
By first addressing your short-term goals, you set yourself up for financial security, and financial security in the short term allows you a much better chance of not having your long-term goals derailed when “life happens.”
If your short-term goals are in check, move on to your long-term goals, and start buying yourself the flexibility and lifestyle you want for your future self and family.
If you feel you would benefit from implementing a fully personalized cash management plan, we encourage you to schedule an insight meeting with one of our financial planners. This is the first step to evaluate if the Quantum Process for Top Producing Real Estate Professionals is a right fit for you and your family.