Effective Money Management
For
Today’s Realtor
Chris Bird Seminars, Inc.
2906 East Oaks Road N.
Urbana, IL 61802
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Create the proper monitoring and record-keeping systems
Assess current spending habits
Develop a budget
Prepare a net worth statement
Put yourself on the do-not-call list
Purchase Quicken, Quickbooks, or Money for proper control of your finances
Stop the pre-approved credit card applications
888-567-8688
Evaluate Financial Assets
Financial planning is a process. It is the process of evaluating the current financial
position of the person/s, their lifestyle, spending habits, familial responsibilities, and
goals, and then implementing a personalized “plan” to help them to achieve those goals.
I have a saying; Money Gives You Choices, but this point is clearly relative to the
financial strength or weakness of the individual for whom a financial plan is being
created.
There are many best selling books that have been written that deal with the issue of
spending habits, what it takes to get out of debt, and how to become financially
independent. Without doubt, the one book that impressed me early on was the
“Millionaire Next Door”, a book written about the lifestyles of individuals in this
country that have attained a net worth of $1,000,000 or more. The following excerpt from
this book has been quoted in many financial publications
“SUPERIOR OR CHEAP”?
It is unfortunate that some people judge others by their choice in food, beverages, suits,
watches, motor vehicles and such. To them, superior people have excellent tastes in
consumer goods. But it is easier to purchase products that denote superiority than to be
actually superior in economic achievement. Allocating time and money in pursuit of
looking superior often has a predictable outcome: inferior economic achievement.
What are the three words that profile the affluent? Frugal, frugal, frugal.
Excerpt from The Millionaire Next Door, by Thomas J. Stanley, Ph. D., and William D.
Danko, Ph. D.
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Other recommended publications
Kiplinger’s Personal Finance magazine
Nine Steps to Financial Freedom, by Susan Orman
The Courage to be Rich, by Susan Orman
The Great Boom Ahead, by Harry Dent
The Roaring 2000’s, by Harry Dent
Rich Dad, Poor Dad, by Kiyosaki
Millionaire Real Agent, by Keller
Millionaire Real Estate Investor, by Keller
CRS Courses and Manuals
DEFINITION OF FINANCIAL PLANNING
Financial planning is a process. It is the process of evaluating the current financial
position of the person/s, their lifestyle, spending habits, familial responsibilities, and
goals, and then implementing a personalized “plan” to help them to achieve those
goals. It requires a clear look at the elements in order to effectively result in a workable
financial plan. Keep in mind that a financial plan is an ongoing process, that is, that it
must be periodically reviewed and adjusted for changes that occur in and individual’s
life.
Elements of a financial plan:
•
•
•
•
•
•
Developing a budget, calculating net worth, and understanding profit
and loss
Getting in control of finances, including credit issues
Planning for major acquisitions, e.g., a home
Planning for insurance needs
Planning for education
Planning for retirement
Planning for wealth transfers
Organizing Financial Records
1.
Wills, trusts, power of attorney
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2.
3.
4.
5.
6.
7.
8.
9.
Birth and marriage certificates
Income tax returns
Automobile title and registration
Property deeds
All insurance policies
Employee benefit plans and documents
Quicken software (preferably Quicken 2006 Deluxe or Premier, or QB)
Purchase a shredder
Develop a Budget
As painful as it may seem, every business of any size operates on a budget. Federal and
state governments do the same, so there really no reason that you should not do this also.
For some, the obstacle is time, for others, it is possibly the stigma of control, and for
others, a connotation that they are always short on money. It is none of these, moreover a
budget is a means to determine where and when funds are to be received and when and
how those funds are to expended. I keep a budget, both for business and for personal
purposes, primarily for the reason that I then know what funds are available for
investment and what funds are needed for large expenditures like estimated tax payments,
annual real estate tax payments, retirement plan contributions etc. For me, a budget is not
an obstacle, it is a tool that assists me to have financial control of my income, expenses,
assets, and liabilities.
Developing a budget can be very easy, and basically starts with keeping track of your
current expenses for a period of time. This period of time establishes a “base line”
average each month of the types and amounts of both income and expense. From this
average, you can forecast future monthly income and expense and track overages and
underages on a monthly basis. The Quicken programs can be a great help here, in that
after you enter your monthly bank statement and cancelled check information, Quicken
then memorizes those entries, which in turn creates the “base line” averages for the
budget process. One of Quickens features is the Budget program, which will compute the
monthly over/under amounts based on the actual data you enter each month compared to
the historical “base line”averages.
To get you started with this process, I am furnishing a listing of Annual Living Expenses
to complete. Use your checkbook to compile the information, and be aware that this
process is usually an eye-opening experience.
ANNUAL LIVING EXPENSES
Name ___________________________________________________________
Date ____________________________
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The following categories are included to help estimate your annual living expenses.
Annual Housing Cost
Rent/Mortgage .................................. ____________
Home Owners Insurance................... ____________
Condo/Assoc. Fees............................ ____________
Household ......................................... ____________
Maintenance...................................... ____________
Lawn/Pool Care ................................ ____________
Utilities ............................................. ____________
- Gas/Electricity ................................ ____________
- Cable TV ........................................ ____________
- Telephone ....................................... ____________
- Waste Disposal ............................... ____________
- Water .............................................. ____________
Misc. ................................................. ____________
Other ................................................. ____________
Total.................................................. $___________
Property Taxes
Property ............................................ ____________
Other ................................................. ____________
Total.................................................. $___________
Transportation
Auto Lease/Payments........................ ____________
Insurance.............................................____________
Gasoline ............................................ ____________
Transportation................................... ____________
Parking/Tolls..................................... ____________
Maintenance/Repairs......................... ____________
License Plates/Fees ........................... ____________
Other ................................................. ____________
Total.................................................. $___________
Food
Groceries........................................... ____________
Dining Out ........................................ ____________
Other ................................................. ____________
Clothing
Clothing ............................................ ____________
Total.................................................. $___________
Medical/Dental
Premiums .......................................... ____________
Prescription ....................................... ____________
Doctors/Dentists................................ ____________
Other Basics
Barber....................................____________
Beauty Parlor.........................____________
Professionals .........................____________
Newspapers ...........................____________
Subscriptions .........................____________
Pet Care .................................____________
Domestic Help.......................____________
Child Care .............................____________
Allowances
Children ........................._________
Adult Support ........................____________
Dry Cleaning .........................____________
Cosmetics ..............................____________
Personal Care ........................____________
Misc........................................____________
Other......................................____________
Total ......................................$___________
Charitable Contributions
Cash.......................................____________
Total ......................................$___________
Other Discretionary
Movies...................................____________
Recreation .............................____________
Lessons.................................. ____________
Vacations............................... ____________
Hobbies .................................____________
Country Club.........................____________
Summer Camp.......................____________
Sporting Events .....................____________
Entertaining ...........................____________
Special Occasions..................____________
Birthdays ...............................____________
Christmas...............................____________
Anniversaries.........................____________
Misc.......................................____________
Other......................................____________
Total ......................................$___________
TOTAL......................................$___________
Establish Your Net Worth
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The next step in starting the financial planning process is to compute your net worth. This
is clearly one of the most important elements of a financial plan as the stronger
financially you are at the start, the less you have to save for the future. Most individuals
find themselves on the other end of that issue. I have provided a blank Net Worth
Statement for each of you to complete. Please make additional copies of the blank form,
as you will want to update from time to time, usually at least once a year. Keep in mind
that assets should be valued at conservative fair market values and liabilities at actual
principal owed on the debt at the time the net worth statement is prepared. Use Kelly
Blue Book values for automobiles, boats, and motorcycles, and keep values of personal
property such as furniture, fixtures, and clothing to a minimum.
BALANCE SHEET / STATEMENT OF NET WORTH
ASSETS
Current Assets:
Cash in Bank
Cash on Hand
Accounts Receivable
Reserve for Bad Debts
Loans Receivable
Merchandise Inventory
Prepaid Expenses
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
Total Current Assets
Fixed Assets:
Machinery and Equipment
Autos and Trucks
Office Equipment
Buildings
Accumulated Depreciation
Land
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
Total Fixed Assets
Other Assets:
____________________________
________________
________________
________________
________________
________________
________________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
$ ____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
$ ____________
_____________
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____________________________
____________________________
____________________________
____________________________
Total Other Assets
TOTAL ASSETS
_____________
_____________
_____________
_____________
$ ____________
$___________
LIABILITIES
Current Liabilities
Accounts Payable
Taxes Accrued
Notes Payable
Loans Payable
Federal Income Taxes
____________________________
____________________________
Total Current Liabilities
Long-Term Liabilities
Mortgage Payable
____________________________
____________________________
____________________________
____________________________
Total Long-Term Liabilities____ $
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
TOTAL LIABILITIES____ $___________
Assets minus Liabilities= Net Worth
$
Understand Your Profit and Loss
I have always said that real estate sales is a business which, without careful attention, it is
totally possible to spend the business into oblivion. Many other types of business
experience that same problem. I have seen examples of this many times over the past 18
years, so it goes without saying that a keen eye has to be given to the timing of income
and the timing of expenses, coupled with the fact that controlling the expenses is an
absolute must. Again, a program like Quicken can provide invaluable information, and
only requires approximately one hour per month to input the business bank statement and
cancelled checks. After entering that data, the reports that can be generated to assist you
in managing the cash flow in your business are literally at your fingertips.
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FOR:
INCOME STATEMENT(Profit and Loss)
ID#:
FROM:
TO:
INCOME:
Gross Receipts or Sales..................................................................................$
GROSS PROFIT ......................................................................................................$
Other Income............................................................................................................ _
GROSS INCOME ....................................................................................................$
EXPENSES:
Advertising.............................$
Amortization ..........................
Contract Labor .......................____________
Car & Truck Expenses ...........
Cleaning & Maintenance .......
Commissions..........................
Depreciation & Sect. 179.......
Employee Benefits .................
Freight ....................................
Insurance ................................
Interest (Mortgage) ................
Interest (Other).......................
Legal & Professional..............
Rent (Other) ...............$
Repairs .......................
Supplies......................
Taxes ..........................
Travel .........................
Meals/Ent (50%) ........
Utilities.......................
Telephone...................
Wages.........................
Office Expense ..........................
Pension/Profit Sharing ...........
Rent (Machinery/Equip) ........
TOTAL EXPENSES......................................................................................$
NET PROFIT OR LOSS................................................................................$
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Create an Investment Strategy
Where do we put our money? This is the age-old question for which an answer is
never easy to find. It is one thing to save money, it is another to invest it wisely.
The investor needs to review the choices of alternative investments that await
their hard earned dollars, with the emphasis on keeping the review as simple and
interesting as possible. Before I begin, however, we must come to a “meeting of
the minds” as to who is responsible for the success of our investments, our
financial future. Do we trust another person to make these choices for us, or do
we take at least a watchful role in minding the store? Do we invest in thing totally
foreign to us or do we take the time to gain some familiarity with the investment.
Do we invest in things we have totally no control over, or do we make ourselves
take part in some type of selection/management role.
Select the Right Advisors
Accountant
Attorney
Financial Planner
Choice of Entity-which one is best for you
A.
Proprietorships
B.
General Partnerships
C.
Limited Partnerships
D.
Corporations
E.
S Corporations
F.
Limited Liability Companies
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Business Record-keeping
Travel and entertainment requirements of the internal revenue code — Section 162
and Section 274
Specific and comprehensive, and enforced actively by the IRS personnel:
date, time, amount, place, relationship and purpose
$75.00 rule, meaning no receipt required if a given meal <$75.00
50% deductibility rule
Need for daily schedule or log book — completed at or near the time of the use
or expenditure — some pointers
Name of person/company the appointment is with
Location of appointment
Note mileage incurred or odometer readings
Request a receipt at every possible opportunity
Retain every receipt for year end tax purposes
Use sampling techniques to your advantage
Establish a separate business checking account
To the extent it is practical, set up a business credit card
How Long To Keep Records??????????
Period of Limitations
IF...
THEN the period of limitations is:
1. You owe additional tax and situations (2), (3), and (4),
below, do not apply to you
3 years
2. You do not report income that you should report,
and it is more than 25% of the gross income shown on the return 6 years
3. You file a fraudulent income tax return
No limit
4. You do not file a return
No limit
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Put more of your hard earned money away for later
INCREASE IN RETIREMENT PLAN CONTRIBUTION LIMITS
The limits on contributions to retirement plans are increased as shown on the following
table.
Stock bonus
and profit
sharing &
SEP
Year
IRAs
SIMPLE
401(k)
Defined
contribution
plan
2001
2002
2003
2004
$2,000
$3,000
$3,000
$3,000
$6,500
$7,000
$8,000
$9,000
$10,500
$11,000
$12,000
$13,000
$35,000
$40,000
$40,000
$41,000
13/15%
20/25%
20/25%
20/25%
2005
2006
$4,000
$10,000
$14,000
$15,000
$42,000
$44,000
20/25%
Additional catch-up contributions. The Act allows individuals who have attained age
50 to make additional catch-up contributions to retirement plans as follows.
CATCH-UP CONTRIBUTION LIMITS:
Year
2004
2005
2006 and after
IRA
$500
$500
$1,000
SIMPLE
$1,500
$2,000
$2,500
401(k); 403(b);
457
$3,000
$4,000
$5,000
Given the alternatives in retirement plan choices, the best advice I can give is for each
Realtor to seek the counsel of a retirement plan specialist to determine which specific
retirement plan is best suited for you.
SEP IRA
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SIMPLE PLANS
MONEY PURCHASE/PROFIT SHARING
EZ-K
DEFINED BENEFIT
The Health Savings Account (HSA)
A.
What is an HSA?
1.
An HSA is an innovative approach to health insurance signed into
law in December of 2003, made available January 1st 2004
2.
An HSA plan has 2 components:
a.
A qualified high deductible health insurance plan
b.
An Individual Tax-exempt Trust (savings/investments)
3.
The trust account is designed to pay for routine medical
expenses/and or provide savings for the future. Money put into the
account can be used either during the year or accumulated in the account.
Allowable medical expenses are defined by the IRS, and are much broader
than most insurance carriers (i.e. includes dental, vision). Individuals can
deduct dollars contributed to the HSA account from their gross income,
resulting in tax-free medical dollars. The account is similar to an IRA
account, however it is for qualified medical expenses
a.
HSA premiums are lower than other fully-insured plans
with co-pays.
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B.
C.
b.
In theory, the funding of the health savings account comes
from the dollars not being spent on a plan which "pays" for
the privilege of co-pays and lower deductibles.
c.
By allowing individuals to keep the money in the account
not used, the government reintroduces the consumer into
the health insurance equation; creating an incentive to
check bills, compare costs, and evaluate urgency/frequency
of appointments.
d.
The plan must meet certain criteria
Why an HSA?
1.
To combat the rising cost of healthcare
2.
Recent trends in cost- shifting from employers to employees is
noticeable, and has employees vested in finding a solution to the
problem
3.
To make the healthcare system cost-efficient by reducing the
subsidies inherent in a third-party payment system
4.
Reward individuals that efficiently manage their healthcare dollars
5.
Desire for individuals to take more control over HOW medical
dollars are spent
6.
Provide a lifetime savings vehicle for medical expenses
7.
Individuals want to have more control over their financial destiny
8.
With a an HSA, Health insurance plans start looking AND
COSTING like other types of insurance i.e. auto, homeowners
Who is eligible for an HSA?
1.
An individual needs to be covered by a QUALIFIED highdeductible health plan to set up a Health Savings Account
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2.
In addition, individuals cannot be:
a.
covered by a health plan that is not a qualified highdeductible plan
b.
claimed as a dependent on someone else’s tax return
c.
entitled to Medicare benefits (age 65 or older)
Note: A spouse can have single coverage under an HSA, if they are not
covered under the other spouses plan. The account however, is for
the individual covered under the HSA qualified plan only.
3.
D.
E.
HSA rules are determined at the federal level. Individuals may be
eligible under state guidelines (domestic partners, civil unions etc.)
for qualified-health insurance coverage, BUT not eligible to open
the savings account portion of the plan.
Is an HSA right for everyone?
1.
No. While many people will benefit from the creation of HSA’s;
individual insurance alternatives, situations and personal
preferences will determine if it is the right type of coverage.
Individuals that HSA’s will benefit most are people that save
money on premiums from other insurance alternatives, and that
will systematically fund the savings account.
2.
A good starting point is to look at recent years medical spending,
and calculate the total dollar amount that would have been spent on
premiums and medical expenses under terms of the HSA qualified
plan. Compare it to the actual amount spent in the same period for
insurance premiums, co-pays and co-insurance.
Do I need certain type of insurance plan?
1.
Yes. The plan needs to be a qualified “high deductible health
plan” (HDHP)
2.
A qualified HDHP is a health plan that meets the following
requirements:
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a.
b.
F.
Individual coverage
i.
Annual deductible: $1,000 minimum
ii.
Annual out-of-pocket expense limit: not more than
$5,000
Family coverage
i.
Annual deductible: $2,000 minimum
ii.
Annual out-of-pocket expense limit: not more than
$10,000
iii.
These plans do not have co-pays for doctor visits or
prescription drugs
iv.
These plans can be “network” plans
v.
Some qualified plans may have a first-dollar benefit
or low-deductible benefit for preventive care only
vi.
In the case of family coverage, a plan is only an
HDHP if under the terms of the plan no amounts are
payable until the aggregate family deductible is met
How much may be contributed to an HSA in calendar year 2006?
1.
2.
For plans with coverage effective Jan 1, 2006:
a.
Individual: Either your plan deductible or $2,700;
whichever is LESS
b.
Family: Either your plan deductible or $5,450 whichever is
LESS
For plans with coverage effective after Jan 1, 2006
a.
The contributions are pro-rated based upon the number of
whole months covered under the qualified insurance plan.
1/12 for every month, i.e., if coverage begins in November,
only 2/12ths of the maximum amount is permitted.
i. While annual contributions are limited based upon the
deductible, there is no maximum limit on the
accumulated balance of the trust account
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