Amended Return: Does the IRS Owe You Money?

Introduction

According to the IRS, 5 million people were expected to file amended tax returns for 2014.  Many amended returns actually result in a refund that would have been awarded if the original return had been filed correctly.  If you prepare your own taxes, changed accountants, or had a major life change (such as change in marital status, dependents, or house move), how can you really be sure that you’re not leaving money on the table if by not filing an amended return?  As a real estate agent, how confident are you that your previous year tax returns accurately reflect all the deductions you’re entitled to?  Conversely, you could be waiting for the IRS to find your mistakes and say that you owe more than your tax return indicated.

The IRS rule is that you can to file an amended return for up to 3 years after the original due date (or the file date if the due date was extended).  However, if you missed previous filing or payment deadlines, or are amending a previously amended return, there are additional restrictions that may apply.

Amended return opportunities

If you think you may want to amend a return, below are five places to start:

  1. Change in status

    This can be a move, getting married or divorced, having a baby, or any number of things that you wouldn’t have accounted for the year before.  For example, in light of the Supreme Court decision to legalize same-sex marriages has unleashed a flurry of amended returns to reflect joint filing or married filing separately status.

  2. Math Errors

    In its most recent report, the IRS reported over 2.2 million math errors for 2013 individual tax returns.  Out of approximately 147 million returns, this results in approximately 1.5% of all returns.  The IRS usually will correct math or transposition errors during the initial processing of a filed tax return by comparing the return to supporting documents.  However, it doesn’t hurt to check for errors, particularly on things that the IRS might not be able to see, such as receipts.

  3. Schedule A-Itemized Deductions

    Schedule A contains most of your itemized deductions, including charitable contributions, mortgage interest, and miscellaneous deductions.  If you recently bought or refinanced a house, or you do a lot of charitable work, it may benefit you to take a look at your Schedule A to see whether an amended return is appropriate.

  4. Schedule D-Capital Gains & Losses

    Although tax harvesting seems to be a catch phrase during the end of year, there are a lot of people who make mistakes when recording their capital gains on their tax return.  For example, a common mistake is listing the sale price for a security, but forgetting to note the basis (purchase price + commission).  Not only does this apply to securities such as stocks & mutual funds, but it applies to the sale of your principal residence.  When calculating your home’s basis, don’t forget to add the cost of major improvements, systems & renovations.  Think roof replacement, air conditioners, or kitchen remodeling.  Major projects (not repairs) will increase your basis, therefore lowering your taxable gain.  Also, real estate commissions & closing costs should be considered, as they will lower your taxable gain as well.

  5. Schedule C-Profit or Loss from Business

    Unless you have a separate tax entity for your real estate career, you’re most likely going to be using Schedule C to itemize your business-related deductions.  If you do, but you never filed a Schedule C, you should look a little further to see what you may be able to deduct as a real estate agent.

This article isn’t meant to replace competent tax advice that is tailored to your specific situation, and it definitely is not an all-inclusive list of mistakes that could be in a tax return.  However, as a real estate agent, you should be aware that doing your own taxes or sticking with a bad tax preparer could have you leaving money on the table, or worse, waiting for the IRS to find your mistakes and come after you for the difference (plus interest).  If you’re not sure what to do, you should consult with a fee-only financial planner or tax professional in your area.

3 Tax Concerns When Selling A Home

For real estate agents, this topic might seem like a no brainer.  However, your clients might not know the tax implications of their pending transaction, and this article can be used as a conversation starter with them.  Feel free to use this article to engage your clients in their critical thinking so they can make the right decision.

When a homeowner makes the decision to sell their home, it can be for any number of reasons: relocation, buying a bigger home, downsizing, or because it makes financial sense to do so.  As their real estate agent, you will be the first person your clients turn to when these questions come up.

Whatever the reason for selling a home, there are three tax considerations that warrant a further look.

Tax concern #1: Your realized gain

When selling any real estate, the IRS definition of realized gain takes into account a lot of things you may not have thought about.  According to the IRS, the basic formula for calculating your realized gain is:  Sale price – selling expenses – adjusted basis.  This means you need to calculate two things:  selling expenses & basis.  Properly calculating these two things could mean the difference of thousands of dollars in tax liability.

Selling expenses include any seller’s closing costs, real estate commissions, and any other related selling costs.  You should comb through your closing documents to make sure you’ve properly accounted for all selling expenses.  Do not include city & county property tax, but do include transfer taxes, if applicable.

Basis includes the original purchase price of your house, plus fees incurred during home closing, such as title insurance, legal & recording fees, or survey fees.  Basis also includes the cost of any major improvements, renovations, or system replacements.  The IRS makes a clear distinction between repairs that are a normal part of keeping a home in good condition (such as repairing leaks), and an improvement (such as replacing the plumbing system).

For a more comprehensive list of what can & cannot be included in selling expenses or basis calculation, you can refer to the IRS Publication 523, ‘Selling Your Home,’ which is user-friendly and available online.  Real estate agents:  Even if you’re not a tax practitioner, you probably are able to help clients figure out what constitutes selling expenses, as well as the difference between repairs and major improvements.

Tax concern #2:  Section 121

Under Section 121, the IRS allows a taxpayer to exclude the first $250,000 of capital gain ($500,000 for married couples filing jointly) on the sale of their primary residence if they meet certain ownership and use requirements.  If you owned the home for at least 24 months of the 5 years leading up to the sale, you meet the ownership requirement.  If the home was your primary residence for at least 730 days of the previous 5 years, you meet the use requirements.  If you’re married filing jointly, you must each meet the use requirement, even if only one person meets the ownership requirement to qualify for the $500,000 exclusion.  If you’re not married, but selling the house with someone else, you may each take the $250,000 exclusion as long as each of you meets the use requirement, and at least one of you meets the ownership requirement.  Even if you do not meet the requirements for a full exclusion, the IRS allows partial exclusions if you sell the home due to work or health related moves, or due to unforeseeable events such as death, divorce, natural disaster, unemployment, or other qualifying reasons.  IRS Publication 523 contains more details.  Real estate agents:  you should have this information at the ready in case someone asks about the tax implications, even if you aren’t prepared to give tax advice.

Tax concern #3: Long Term or Short Term Capital Gain?

If you owned the home for at least a year and a day, any gains are taxed at long-term capital gains rates, which range from 0% to 23.8%.  Otherwise, your gains are taxed at short-term capital gains rates, which are the same as ordinary income rates.  Long term capital gains rates calculations are based upon a taxpayer’s marginal tax bracket, but are more favorable.  For example, a taxpayer in the 15% tax bracket will pay 0% on a long-term capital gain.  If you’re considering the sale of your home at a profit within a year of purchase, you may want to consider whether you can sell it in a manner that qualifies the sale as a long-term gain.  However, if you’re selling your principal residence for a loss, you do not qualify for any type of deductible loss.  For real estate agents, this is worth discussing with your clients if you believe that timing is not on their side and they would be better off waiting.  For example, they may be trying to sell in the middle of winter, when no one likes looking at houses, or you’re trying to recommend some repairs in order to get their selling price.

This article is by no means an adequate substitution for unbiased advice, based upon the unique circumstances of your personal situation.  Before you make any major decisions, you should sit down with a fee-only financial planner in your area so that they can help you take into account all of the other factors that can affect your planning decision.  Having a relationship with a trusted professional who can help account for life’s changes is the best way for you to put together a plan that achieves your retirement goals.

Forrest Baumhover is a fee-only financial planner and the principal of Westchase Financial Planning.  To find out more about Westchase Financial Planning, go to www.westchasefinancialplanning.com.

 

 

Retirement Planning for Real Estate Agents

Retirement planning?
Is this you in retirement?

One of the most common issues for real estate agents is that of retirement planning.  As self-employed individuals, or as owners of closely held companies or partnerships, real estate agents generally do not have access to the types of employer-sponsored retirement plans you normally see in the workplace, such as 401(k) or 403(b) plans.  Or more correctly, real estate agents do have access to retirement plans, but as their own employer, the path is less clear.  This article seeks to show what types of retirement plans are available for real estate agents, specifically as self-employed individuals.

401(k)

Did you know you can set up a 401(k) for yourself as a self-employed individual?  It’s true, and it’s also the option that allows you to set aside the most money into your retirement plan.  Also known as a Solo 401(k), Solo-k, Uni-k, or one-participant k, a one-participant 401(k) allows you to take advantage of the fact that you’re both the employer and employee.  This arrangement enables you to defer up to $53,000 per year:

  • $18,000 in elective deferrals (as the employee)
  • Up to 25% of your compensation as defined by the plan (as the employer)

The total amount of your deferral cannot exceed $53,000 per year, according to Internal Revenue Code 415(c), which applies to all defined contribution plans.  However, if you’re 50 or older, you also allowed a ‘catch-up’ contribution, which is $6,000 for 2016.  The ‘catch-up’ contribution does not count towards the $53,000 limit, but is in addition to it.  Also, a solo-401(k) can be a Roth 401(k), so you can contribute after-tax money and receive the proceeds tax-free under Roth rules.

The individual 401(k) is a great plan for individuals, especially since it’s relatively easy to administer, and there are no Employee Retirement Income Security Act (ERISA) testing requirements to ensure fairness to all employees (if you’re the only employee, the assumption is that you’re fair to all employees!).  Also, you can take out a loan if needed (although there are probably other options you should look into before you do this).

A key feature of solo 401(k) plans is that they are exempt from rules regarding unrelated debt financed income (UDFI).  This means that unlike an individual retirement account (IRA), a 401(k) plan can purchase leveraged real estate and avoid unrelated business income tax (UBIT).  This is a very powerful tool if you are a real estate agent who happens to own some property on the side.

However, once you hire an additional employee (other than your spouse), you no longer have a solo 401(k), you just have a 401(k).  401(k) plans are subject to discrimination testing, which requires more administration & paperwork (which you may not want to take on), or require a certain minimum amount of employer contributions in order to become what is known as a safe harbor 401(k).  In the event that neither of these seem desirable to you, below are a couple of other options if you plan to hire employees.

Simplified Employee Pension (SEP)

A SEP allows an employer to contribute up to $53,000 or 25% of each employee’s compensation, whichever is less.  There are many pros, and a couple of cons, to a SEP.

Pros:

  • Available to any size business
  • Minimal paperwork
  • No annual filing requirement for the employer
  • Low administrative costs
  • Flexible annual contributions – good plan if cash flow is an issue, or is cyclical in nature, as it is for real estate agents

Cons:

  • No loans allowed
  • No elective deferrals allowed. Unlike a 401(k), the employer makes ALL contributions.  Also, since the employer has the option on whether or not to make contributions, employees may find that in financially lean years, zero additions are made to their SEP account.
  • Employers must contribute equally to all eligible employees. This is calculated in terms of percentage of income, not in whole dollars.  For example, an employer making $200,000 and contributing 10% ($20,000) must contribute 10% for his employee making $50,000, or $5,000 – NOT $20,000.
  • Employees are 100% vested immediately, unlike other plans that allow either a graded or cliff vesting schedule.

SIMPLE IRA (Savings Incentive Match Plan for Employees)

For employers who do not want the burden of a 401(k), and who want to enable employee contributions, a SIMPLE IRA may be the way to go.  A SIMPLE plan is available to any small business, is easily adopted (by filing Form 5304-SIMPLE, 5305-SIMPLE, a sample SIMPLE IRA plan, or an individually designed plan document.  Employees are eligible to contribute, and are always vested (to the chagrin of employers who want to use a graded or cliff vesting schedule for retention purposes).  However, the primary limitation is that employers must contribute EITHER:

  • A matching contribution up to 3% of compensation (not limited by the annual compensation limit), OR
  • 2% nonelective contribution for each eligible employee (up to $265,000 for 2016)

The 2% nonelective contribution is an automatic contribution, regardless of whether the employee contributes to the plan, and is immediately 100% vested, meaning the employee can take that money and transfer it when he or she leaves the company.

An employer who administers a SIMPLE plan cannot offer any other retirement plan.

What about other retirement plans? 

It’s worth briefly mentioning some other plans, just to clarify any stray thoughts you may have seen, either in writing or in conversation.  However, if you’re looking at starting your own plan, you’re probably not going to expand past the options mentioned above, unless you have designs to run a huge ensemble practice, firm, or company.  If that’s the case, you should probably be consulting with a qualified plan administrator to thoroughly discuss your firm’s objectives.

  • Profit-sharing: Allows you to decide how much to contribute on an annual basis, up to 25% of compensation (not including contributions for yourself) or $53,000 for 2015 and 2016.  Great as an employee retention tool, but can be more complex to administer, and is subject to discrimination testing.
  • Money purchase plan: Requires you to contribute a fixed percentage of your income every year, up to 25% of compensation (not including contributions for yourself), according to a formula stated in the plan.
  • Defined benefit plan: Traditional pension plan with a stated annual benefit you will receive at retirement, usually based on salary and years of service.  Note:  It’s rare to see a company offer a traditional pension plan anymore.  Even the military, known as the last bastion of defined benefit plans, is scaling back on its pension plan for future servicemembers.
  • Keogh plan: Keogh plans used to be a much more preferable savings vehicle.  However, since there are many other plans that offer similar contribution limits that are much easier to maintain, Keogh plans have fallen out of favor.

The Bottom Line

For most solo agents, you probably need to look no further than the solo 401(k).  It allows the most flexibility, highest contribution limits, and the least administrative burden.  However, if flying solo is just step 1 of a multi-phase career path, you might want to have a decent idea of what type of business you’re building, so you can implement a retirement plan that allows you to maximize your retirement savings while giving you the flexibility to bring on and retain quality employees in a competitive manner.

 

Five Ways for Real Estate Agents to Maximize Tax Deductions

Tax deductions
How to maximize your tax deductions

Tax liability is one of the most important considerations for real estate agents for several reasons.  First, real estate agents usually operate as sole proprietors or as part of a closely-held LLC or corporation.  That means every dollar that an agent can save is a dollar that contributes to their personal bottom line.  Also, real estate agents are usually responsible for out of pocket expenses that may directly or indirectly improve their business—many of these expenses can be tax deductible.  Finally, not knowing the tax implications of their decisions can set agents back thousands of dollars…this can mean the difference between success or failure in the early years of establishing a successful business.

Let’s look at five ways real estate agents can maximize their deductions and making their business as tax-efficient as possible.  These are not five ‘quick tips,’ but they’re rules of thumb:

  1. Tax Tip #1:  Document every expenditure. 

    When you’re working for an employer, you might be required to document your expenditures.  However, when you’re spending OPM (other people’s money), you don’t really care as much about their money because it’s not yours.  When it’s your money, you’ll want to take care of every dollar to maximize your investment.  You want to document every expenditure, whether or not it’s tax deductible, if nothing more than make sure your books are organized.  Whether you’re audited by the IRS, looking for a loan or line of credit, or simply looking to become part of a larger real estate group, taking the time to document everything & keep a clean set of books will help enhance your professional reputation.  Which leads us to Number 2.

  1. Tax Tip #2:  Treat your business like it’s a business.

    Whether this is part-time work or your full-time career, being a real estate agent is a business, whether you think so or not.  The sooner you recognize this fact, the sooner you can learn how to run your business.  Part of running an effective business is finding the most cost-effective manner to reach your goals and objectives.  This doesn’t mean cutting corners or settling for less.  It simply means clearly identifying your goals, then working to ensure you’re maximizing the efficiency of your processes to get there.  Maximizing your efficiency means maximizing your tax-efficiency as well.

  1. Tax Tip #3:  Ask yourself, “Is this deductible?” every single time.

    Just get into the mindset that every expenditure could possibly be deductible.  Perhaps not.  But you should ask this question every time you spend money on something.    Obviously, taking a trip out of town for leisure doesn’t count as a deductible expense.  However, taking a trip out of town to check on an investment property you own is related to your business and can be eligible for tax deductions, even if you happen to take some leisure time in association with that trip.  However, the difference between legal tax avoidance and an illegal attempt to evade tax liability can be very subtle, so you should become familiar with the rules before you attempt to take deductions.

  1. Tax Tip #4:  Be familiar with the rules.

    The tax code is complicated.  It’s very difficult.  It’s huge.  However, the IRS expects you to be familiar with the rules that related to your personal situation.  Just like knowing the real estate business, you should know a little bit about how taxes play into your business.  It also wouldn’t hurt to be able to help your clients better understand how taxes play into their transactions.  Section 121 (the ability for taxpayers to exclude up to $250,000 or couples to exclude up to $500,000 of their home sale gain, provided they meet certain ownership and use requirements) should not be a foreign concept to you.  Neither should terms like depreciation, basis, or Section 1250 recapture.   You don’t have to be an expert, but you should be able to answer one or two questions on widely covered topics such as these before you have to punt to a tax professional.  You can always caveat by saying something like:

“I’m not a tax professional, but Section 121 of the Internal Revenue Code does allow you to …. provided you meet certain ownership and use requirements.  However, for your particular situation, you might want to talk to an accountant or other tax professional to make sure you’re taking the right steps.”

Which brings us to the last point:

  1. Tax Tip #5:  Hire an accountant or enrolled agent today.

    Would you rather spend your time and effort being the best real estate agent you can, or would you rather save a few hundred dollars and do your own taxes. Perhaps you can’t afford that few hundred dollars in the first year or two.  Here are a couple of reasons why that might be a very sound investment:

  • You might be saving a few hundred dollars and missing out on tax deductions or credits that could be worth much more.  There is an entire industry dedicated to helping people prepare their tax returns, and another industry dedicated to helping people and companies become more tax efficient.   Let these folks take the work off your hands, and so that you can run your business more efficiency.  If they find that missed deduction and save you a bunch of money, you’ve already recouped that investment.
  • You learn. Knowing more about taxes and how they can impact you will help you build a better business.
  • When you see a client whom you know needs tax help, it’s a lot easier to refer that person to a tax professional you’ve already hired.  Being able to say, “Let me introduce you to my accountant” is just another way to add value to those clients, in the same way you’d refer them to a contractor, mortgage broker, or any number of professionals you’re constantly referring clients to.

In future articles, I’ll go into more detail about expenses and their deductibility.  However, implementing these five steps is the best way for you to quickly develop your business as a real estate agent in the most tax-efficient manner.

As always, please feel free to follow this blog or contact me at:  forrest@westchasefinancialplanning.com, if you like this blog, have concerns or questions, or have a topic that you would like for me to address.  Until next time, take charge of your life!

12 Money Tips to Avoid Going Broke As a Real Estate Agent

Wondering about your cash flow? Money tips will help!
Wondering about your cash flow?  Read this so you don’t have to feel like a starving artist.

That’s a sexy title, huh?  Well, one of the top reasons many real estate agents fail in their first few years is because they don’t have enough money to pay their expenses while building their business.  It takes a lot of time to get to the point where leads come to you, and you’ve got a systematized approach to handle all the business that comes your way.  Until then, you still need to support yourself, and perhaps others, as well as handle business expenses.  I’m not going to tell you how to improve your revenue or increase your client pipeline…finding a real estate mentor is your best bet for that.  However, as a financial planner, I can tell you things you need to consider in order to effectively manage your cash flow as you’re starting out.

Money Tips

Money Tip #1:  Budget twice before you start. Budget for your business, and for yourself.

It’s not enough to have enough money set aside for start-up expenses, like getting your license, realtor association fees, printing cards, and getting a business phone.  Before you even start working for a broker, you need to have that broker (or several) give you a list of ALL expenses they expect their agents to account for in their first year—things like a computer, advertising expenses, gas, etc.  A good broker should have such a list readily available.

Also, you need to account for your personal situation.  Whether you’ve got a family and a house or you’re living in a one bedroom apartment, you’re going to have to keep paying the bills, even when you’re not receiving a check.

A rule of thumb I’ve seen is 6-12 months of combined living and business expenses.  In the financial planning industry, the rule is more like, “Three years and a working spouse.”  Keep that in mind if you’re taking a huge financial risk to become a real estate agent.

Money Tip #2:  Determine your personal net worth and cash flow before you start.

If you’re a career-changer, hopefully you have some built up assets or an emergency savings account you can tap into.  If you’ve been a stay-at-home spouse and you’re entering (or re-entering) the workforce, you may have that other spouse’s income to rely upon.  If you’re just out of college, you might not have a family that depends on you, so you can afford to cut back on your expenses.  Whatever it is that you can rely upon to keep you afloat during your start-up, you need to quantify & document it.  This isn’t a case where you can just estimate your numbers.  In most cases, you’ll probably end up under-stating your budget and over-stating your available resources, so you need to be conservative

Money Tip #3:  Ask yourself whether your personal net worth can support your two budgets.

If they can’t, don’t start.  Postpone until you can either cut back on your personal expenses or save more.   Just remember, cutting back on your business expenses means you’ll either spend a LOT more time hustling, or you won’t grow as you expect to.  You cannot expect to cut expenses, not hustle, and still grow your business.  Keep in mind you probably won’t be able to over-save for starting your real estate career.

Money Tip #4:  Hire an accountant or a financial planner who specializes in tax planning.

This is one of those expenses that can pay for itself with one brilliant observation.  All it takes is for that professional to find something in your records that you weren’t accounting for, or to ask you a question to properly frame a situation, and you can save thousands of dollars.  Moreover, when you hire someone at the beginning, you’re going to start your real estate career with sound financial advice and tax planning that can save you tens of thousands in over the years.  Not to mention a networking opportunity…financial planners often work with people looking to sell their home and need to refer to a good real estate agent.

Money Tip #5:  Have an expert or mentor look over your budget.

You might have thought of ALMOST everything, but a smart trained eye will be able to help you catch and adjust for an expense you might not have considered.  As a real estate agent, you’re going to share as much as you can with your clients…when starting off, don’t be afraid to share with your mentors as well.

Money Tip #6:  Determine your cash flow needs and adjust as you go.

This sounds repetitive, but it’s not.  Once you’ve established your budget, and you’ve projected what Month 1, Month 2, etc. will look like, then you’re going to start executing.  You’re going to make adjustments based upon the changes you encounter.  Like Mike Tyson once said, “Everyone has a plan until they get punched in the mouth.”  Don’t be afraid to stick to your numbers when you see a lot of distracting, nice-to-have items (like duplicate memberships).  However, be prepared to make adjustments when someone you respect gives you a recommendation (like pay for THIS membership because it’s worth the expense).  Ideally, this would happen before you start, but in your first couple of months you’ll often find things that weren’t accounted for, but should have been.

Money Tip #7:  Celebrate your commissions. Then pay your bills.

You’re going to celebrate milestones, like your first commission, your first $5,000 commission, your first $10,000 commission, and so on.  You should do so.  But you also need to pay your bills, because you don’t know when your next commission will come in.  If you must, buy yourself something modest to celebrate each new milestone (no more than $50, and no celebrating the same milestone twice).  Buy a decent bottle of wine, get a pedicure or massage, or whatever doesn’t cost more than $50.  Then get back to work.  Don’t even think about replacing that 5-year old laptop or upgrading your phone.  If that laptop or phone is what you started with, and you didn’t budget for a new one, now is not the time to replace it.  You can replace it when cash flow is no longer your top concern.

Money Tip #8: Estimated taxes

If you’re not a W-2 employee, you are responsible for paying estimated taxes.  In fact, you should treat them like your first bill.  For every commission you receive, you need to calculate estimated taxes, and set them aside for the IRS.  If you’re not familiar with the concept of estimated taxes, you need to learn.  The IRS rule is that unless you have sufficient employer withholdings throughout the year, you need to make estimated payments.  If you do not, you can owe a penalty for underpayment of the estimated tax.  Estimated tax payments are due by the 15th (or following working day) of each month according to the following schedule:

Jan. 1 – March 31 April
April 1 – May 31 June
June 1 – Aug. 31 Sept.
Sept. 1 – Dec. 31 Jan. next year

Money Tip #9:  Don’t forget self-employment tax.

If you’re not an employee, you’re responsible for self-employment tax.  Don’t know what that is?  Self-employment tax is the other half of the Medicare & Social Security tax, also known as Federal Insurance Contributions Act (FICA) tax.  When you’re a W-2 employee, you’ll see Social Security and Medicare withholdings under FICA, which are set at 6.2% for Social Security (up to $118,500 for 2016), and 1.45% for Medicare (no limit), for a total of 7.65%.  Your employer pays a matching amount, which never shows up on your W-2 statement or your pay stubs.  However, as a self-employed individual, you pay both ends of this, or 15.3%.  Additionally, as the employee, you’ll pay an additional 0.9% Medicare tax on any income above $200,000 (no employer contribution).

Note:  It doesn’t matter if you’re a sole proprietor, LLC, or S-corporation…the IRS treats single-member LLCs and S-corporations as disregarded entities for tax purposes.  There are some things you can do as an S-corporation to shelter some of your income, but when you’re first starting out, you need to just budget for estimated taxes and self-employment tax.   The good news is that the employer portion of your self-employment tax is tax deductible.

Money Tip #10:  Your good times should support your bad times.

You might have that month where three commissions come in.  Then you’ll have three months in a row without a sale.  Make sure that any additional income gets set aside for budgeted expenses and for estimated taxes.  Until you get to the point where you have to hire people to help you handling client transactions, you should keep budgeting as if your next commission isn’t coming for a while.

Money Tip #11:  Establish an emergency fund

You might have already had an emergency fund set up for your personal expenses and expected startup costs.  However, this emergency fund is strictly for your business expenses.  Just like the recommendation for a personal fund (generally 3-6 months’ living expenses), you should keep setting aside money until you have a business account with 3-6 months’ business expenses.  You might not get there for a while, but you need to keep in the habit of putting money aside until you do.

Money Tip #12:  Don’t celebrate your business success too early.

Like my last point, people think they’re over the hump, then hit a really long dry spell.  You should keep budgeting and saving until you’re at the point where you:

  1. Have emergency funds for both your business and personal accounts
  2. Have sufficient cash flow to adequately pay business expenses and a regular (modest) salary
  3. Have an established client pipeline and a systematized process that ensures a steady flow of commissions over the next 6-9 months

Once you’ve gotten to this point, congratulations!  Doesn’t mean that you should run right out and buy that celebration Mercedes just yet.  It means that you’ve graduated to the point where generating income is not your primary concern.  At this point, you should set your eye on managing your business and putting your cash flow where it can best work for you.  One of the best ways to do that is to look into establishing your own retirement plan, which you can learn more about here.

As always, please feel free to follow this blog or contact me at:  forrest@westchasefinancialplanning.com, if you like this blog, have concerns or questions, or have a topic that you would like for me to address.  Until next time, take charge of your life!