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How to Survive a Soft Market: Generate Emergency Funds

Sep 24, 2010

Posted by

Rick Salmeron

Rick Salmeron, CFP, CLU, MBA is president of The Salmeron Financial Network, practicing in Dallas. ( He offers financial consulting services as a Registered Representative of Read more


It’s time to get serious about building an emergency fund. Must real estate professionals remember the boom years.  Residential prices hit new highs, condo market soaring, prices-per-foot clocking records around the country.  For many, that market’s fast-and-furious pace resulted in consistent commission checks.  However, it also produced an unfortunate side effect: failure to financially prepare for a soft market.

But now that the market has changed to less than a normal pace, real estate agents — whether experienced or not — need to review their financial circumstances to be certain they can handle a declining pattern of income by creating and building a strong emergency fund.

Cash Is King

Cash is a vital building block of every financial plan.  As they say, “Cash is king.”  But it’s also a component that’s often overlooked.  Every individual requires some sort of cash reserve. A lone breadwinner’s stockpile will generally need a great deal of attention.  On the other hand, a two-income couple, each earning more than enough to cover total monthly expenses, can probably make do with a smaller emergency fund than a couple who rely on one income.

The precise size of a person’s cash holding will vary based on individual circumstances.  But in general, a real estate agent’s emergency fund should hold six months’ worth living expenses.  That’s right, six.  Other financial professionals may encourage a 3-6 month expense range in the bank, but the less stable and diversified your income stream, the larger the emergency fund should be.  Since real estate agents face irregular earnings and (at times) large spending obligations — like E&O insurance, advertising expenses, computer hardware, and others — I suggest 6 months at a minimum.

Stop The Leak

Do you ever feel like there’s a leak in your bank account?  It’s like the sound of water dripping through a tiny crack where money is draining away.  You know it’s there (because the cash isn’t), but you can’t find the source of the seepage.  Where to start?

Whatever financial situation you’re in, the first step is identifying where your money is going.  So pull out the checkbook.  Open up the "Quicken."  Log on to your bank account.  Your credit card account.  This is where the diary of expenses will be found.  This exercise will show where you are spending your hard earned dollars.  Don’t forget your big, non-monthly costs for the year either like client gifts, insurance premiums, property taxes, estimated tax payments, retirement plan contributions ... anything that doesn’t come in regular monthly chunks.

Next, devise a systematic way of setting aside your income.  When a commission check comes in, for example, understand that 30 to 35 percent of it should be lopped off the top for Uncle Sam.  Using a spreadsheet, you can take a commission check and apply ballpark percentages for the other outflows you’ve identified, to pinpoint a net spending amount, aka the money left over for you to live on.  By using a spreadsheet for every closing, you can get a good view of exactly what your business expenses are and what’s left over.  Granted, if you are living on a lean budget it may be tough to set aside money for emergencies.  But if it’s possible to squeeze out another $40 or $50 each month, it’s worth doing. Although this might appear small, you’ll be doing something good for yourself which is always beneficial.  In case you need a list to jump start your imagination on saving suggestions, I’ve listed a few at the end of this article.

The key to an emergency fund is to save your money consistently and then tap it only for urgent situations.  Also remember that the success of any emergency fund savings plan depends far less on rates of return.  Instead, it depends on a consistent pattern of putting money away and leaving it there.  We are all a product of our habits, and this is a good one to adopt.

Hopefully, your emergency fund is not simply sitting in a checking or savings account at your bank.  Those accounts are ideal for regular, everyday home and/or business expenses. But they are easily reachable.  What you want is an account which is liquid enough that you can withdraw the money with relative ease when things are really bad, but not so easily accessible that you tap into it for a trip to the grocery store.

Ten Simple Starters

Are your money habits preventing you from saving?  Then it’s time to freeze some spending and start that emergency fund.  Even doubters on a tight budget can get something started.  Try any (and all) of these ideas on for size:

1.) Start saving something today.  Anything.  It doesn’t have to be a large sum.  Even on a tight budget, a small amount adds up over time.  Depending on the size of your family, skipping a meal out each week could result in a savings deposit of $160 per month.

2.) Treat saving as a bill.  Consider having the amount transferred automatically from your checking account.  You probably have your mortgage payment on automatic draft, yes?  Then do the same for your savings.  Ask if your brokerage agency can create an automatic deposit from your commission checks into your emergency fund.  Pay your account every month or every two weeks.

3.) Tip the waitress, then tip yourself. As you go to lunch and tip the waitress, put an equal amount aside for yourself, and your own tips will add up quickly.

4.) Stash your grocery card savings. As you make grocery purchases using your preferred customer discount card, sock away the amount of savings displayed at the bottom of the receipt.

5.) Continue debt payments. Just paid off a big debt such as a car loan or child’s tuition?  Keep making the payments — this time to yourself.  You’ve been used to the pattern for so long; no reason to stop now!

6.) Bank your higher payout. When you find yourself at a new commission payout level thanks to a strong year’s production, deposit the income difference into your emergency fund.  If you’re not used to the money, you won’t miss it.

7.)  Don’t carry anything smaller than a $5 bill. When you get change, don’t spend the singles.  At the end of the day, put any dollar bills and coins in a jar.  (And please use a coffee can, or some other non-transparent storage device: what you can’t see, you won’t spend.)

8.) Get a library card. Instead of trips to the retail book store, find your next novel at the public library.  After all, once we finish a book we usually give it away, don’t we?  You might be less tempted to buy that $4.50 latte while searching the bestseller shelves, too.  Besides, a library card is free.

9.) Pay cash for your big ticket items. When you pay cash, it hurts.  And you’ll tend to think twice about the purchase.  And remember, sometimes you can negotiate a better deal with cash purchases.  Just like a cash buyer is a more attractive offer to a home seller than an offer with financing.

10.) Earn more than you spend. This is the most obvious suggestion, but also the idea most ignored.  Why?  Because many people believe this emergency fund thing is a matter of cutting back on your current standard of living — a strategy that’s almost impossible for most people.  Sure, you can affect your personal balance sheet by spending less money here and there.  But the big difference is usually made on the income side of the ledger.  And since you’re in real estate, you have as much control over this as you do your expenses.

Does any of this amount to a hill of beans?  You betcha.  Beans you can count as your little pile grows.

Saving money on your own takes discipline but, like most other things, it becomes easier over time.  The peace of mind that comes from knowing you have financial resources for when times are rough can be worth the sacrifices you make now.

Sure, many of us could be doing better on all these fronts.  We could be saving more and spending less.  But in today’s market, the emergency fund is one area where real estate agents must now concentrate.  Let’s hope you never need cash reserves, but if you do, you'll be very happy to have it.