3 - It’s Not Personal, It’s Just Business
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Get the Money Right: Episode 3 – START
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Joe Rodriguez
Hello. My name is Joe Rodriguez and you're listening to Get the Money Right with Todd Butzer. Todd has decades of experience in giving real estate agents the training and resources they need to get their finances on track. In this episode, Todd will be detailing one of the most fundamental steps of getting your money right: Separating your personal and business accounts. Now here's Todd:
[INTRO MUSIC FADES OUT]Todd Butzer
All right. Thanks, Joe. Hello, everybody. Welcome to episode three of Get the Money Right. And this episode we're calling Separate Your Money. In episode two, we busted some myths about money. And the first myth we talked about was the income myth. This myth is centered around the idea that when agents quote their income, they are normally quoting their total revenue, not their actual income. For example, an agent may say to me, "Hey, Todd, last year I made $100,000." And the truth is, 100 is great, by the way. The truth is, though, they had 100,000 in revenue, they didn't make 100,000 with costs of sale and expenses, which we'll explain later. Their income was really closer to 50,000. The danger of this is substantial because it becomes so easy to live on or spend based on their revenue when it's really not their money. And co-mingling the money is one of the biggest financial issues agents have. It causes a multitude of problems, including overspending, your actual income, failure to pay your taxes on time and just a lot of other issues. So the best way to cure the money myth, if you will, the income myth is to start separating your money. Right now, separating is just putting the money into its appropriate buckets business, tax, personal. And this is really your first major step toward getting your money right. And you can literally start today.
In this episode. We'll discuss the proper flow of your commission check and the account you should be going into separate it into the proper buckets. And again, I can't stress this enough. Remember to seek your own professional tax, legal and investing help. I cannot stress that enough. So here we go. A few years ago, I was teaching a large group of agents about business, financials, and in the class we had the money managers or essentially the CFOs, if you will, of two large real estate offices. Now, I'm not sure how exactly we got on this portion of the topic, but they both spoke up. And they said that when they get paid by the associates for those Associates monthly office bill. That they always get paid from the agent's personal checking account. And I was shocked. I asked those CFOs, I said, "Well, how many of the associates do that? How many of them pay with a personal check?" They said, "Well, virtually all of them do." Here we have a legitimate and deductible business expense. That's just been paid out of the personal checking account, not through their business. So unless we do some adjusting later on, we're going to miss accounting for this deduction. Now, this is a telltale sign that we're not operating our real estate business like a business. Frankly, we're acting as if we have a job and we're getting a paycheck. Incidentally, like I said in the very first episode, no one's bad. This doesn't mean you're a bad person. But we don't have a job. We have a business. And by writing personal checks for business expenses, we're missing so many of the wonderful opportunities that come with operating in small business. And we're costing ourselves so much money. We're also operating in a messy fashion, and we know that that has a predictable outcome as well. As I walk through the following scenario, keep in mind that we will have a graphic of the flow of the money. We'll post that on GetTheMoneyRight.com. And our various social media platforms. All right.
So let's start. We're going to start with the commission check of 10,000. You can, in your mind, put any number on this. I just used it for simplicity. And let's make the assumption for this exercise that your broker has already collected their split. If you do that with your broker, but that's already been taken out. And if you're with a franchise, you're royalty, if any, has also been deducted. That's already been taken out. And now you've got your essentially net commission check. Now, right here is a critical moment. Countless agents simply take this money and they put it into their checking account again, acting as if it's like they have a job with their broker. They're employed by their broker. Some people are employed by their broker and collect a regular paycheck. But the overwhelming majority of agents are independent contractors, and they're getting simply a business check handed to them. All right. So this is a critical moment. They put this into their checking account. Here's the problem. It's not their money. It's their businesses revenue. It's not their personal income yet. So prior to getting our money flow correct, we need to make a few moves. So first step, step one, open a business checking account. Technically, this doesn't have to be a special "business account" that you go to your bank and say, "Look, I need to open up a business checking account." I don't know that I'd recommend that. It's just simply a checking account that you're going to use only for business purposes. And of course, I would name it what you name your business, which we'll be getting into here in one of the next couple of episodes. Of course, make sure it's an account with no fees. Today, banking is so competitive. Go online. Check out your best options. You know, talk to a friend, talk to a colleague. Whatever you need to do. Google it. Find out a great bank that you can bank at easily. And they're not going to charge you any fees for your checking. Shop around or use the bank you normally bank. But I would also recommend you get a debit card with this account for the rare occurrences when you'd like to get cash out of your business for things like taxes. If Wilbur's not running there or you need to buy a quick meal or a coffee or something like that, and you want to buy it on your business. A debit card for the businesses is just a great, great way to go.
Before we go to the next steps, though, I'd also highly recommend you get a business credit card. Again, this does not have to be a special card and you don't have to go for miles if you like. Miles, great. Do that. I would recommend a no annual fee or very low annual fee. I would also probably recommend that it be a Visa MasterCard instead of American Express, because you might just find a little bit more acceptability. Although I use Amex quite a bit and it seems to work fine too, so you just check it out. You could also shop for low interest rate credit card. But frankly, if you're diligent and you pay it off every month, that becomes a little less of an issue. But you know what to look for. Just check that out. But get yourself a business credit card. I would recommend that you put as many of your legitimate business expenses on the card as possible for tracking and deduction purposes. And we're going to get into all kinds of discussion later about business deductions, the way the credit cards are set up nowadays. It's so terrific in terms of how they break down, what you're spending your money on. So you're going to want to put all of your business expenses on that one business credit card. And the danger here, of course, is that you use the business credit card for personal use or you use a personal card for business expenses. And I'm going to encourage you not to do that. We're going to post a link on our website. GetTheMoneyRight.com with a link to research different cards that might meet your needs. Remember, only business purchases go on the card. Business purchases never go on your personal credit cards. We don't co-mingle that. An example would be next time you register for an educational event. Business card, not personal card. No lecture here. But if it's not a legitimate business expense, don't fudge this. Don't be messing with the IRS. You're going to have great, great peace of mind if you just don't mess with that.
Joe Rodriguez
I think just a follow up question I would have is if you're having a debit card that you're comfortable with, is there any reason you would get a a business credit card?
Todd Butzer
That's a good question, Joe. So if you if you have a debit card on your business account, there is no need to have a credit card. You don't have to. The beauty of the debit card and this is why a lot of people like them is they are not necessarily they're not borrowing money on a card that they have to pay back later. It's just money that's coming out of that account and all of you know this. The only caution I would have is that. When you operate with simply a debit card and if you're traveling for business, you're checking into hotels or you're renting cars, things of that nature. Be sure to check with the debit card company or your bank to find out what kind of restrictions there are there. And make sure when you're booking your hotel room or your rental car that you find out exactly how it works with the debit card because it can get a little funky with a debit card. So my honest recommendation would be I would use an actual credit card. I think it's a little simpler. Good question, Joe.
Okay. Now back to our commission check. We're going to take that $10,000 and we're going to deposit it directly into our business checking account. The whole thing goes in there again. Not our money yet. The next step, we're going to leave approximately 30% in the business account, or in this case, $3,000. And again, we're going to put a graphic on the website so you can look at it. When I ask agents, why are we leaving 30% in the business account, they inevitably answer, quote, for taxes. And that's understandable because they are aware of it that they're going to have to pay some taxes here. And it's it's actually good they're thinking that way. However, that's not what the 30% is for. We're actually leaving the $3,000 in this case, or 30% for ongoing operating expenses for the business. A quick example of an operating expense. We just mentioned an educational event office rent, your monthly office fees, things like that. And we're going to go into great detail on this coming up. But this 30% or 3000 in this case is the money you're going to use to pay off your business credit card on a monthly basis. Incidentally, the reason we're not holding the 30% for tax in the business's account is because for the overwhelming majority of you, your business doesn't all the tax you do. And we'll explain that in detail later on. Also, and remember, seek competent tax advice here.
So we've got the $10,000 in there. We're going to save or leave 3000 in that account. Next, we're going to cut a check into our personal checking account. Your household checking account for $7,000. Again, I can't stress this enough. These are simply ballpark. They're just idea generators for you. Just to give you an idea of how this how this works. Be careful, though. The $7,000 is also not your money. We have tax obligations that are going to be coming on the 7000 on the numbers after we've taken away our business deductions. We're going to have tax obligations and yes, we're going to have personal deductions and exemptions and so on. But there is going to be a tax liability here. So we can't just simply take the 7000 into our own personal checking account and start writing checks on that. This is we're going to have to set aside some money to be able to pay those quarterly tax estimates that we talked about in the very first episode. Next step. We're going to open a tax savings account. So we've got this 7000 in our personal checking account. We go and we open up a tax savings account. You might already have an account that you can use for this. It doesn't have to be special. It's simply a savings account that you have access to. You can get a money in and out of it any time you want. And that's it. It's just money you have access to. This is only for taxes. That's the only reason for this account. So we open this tax savings account. What we're going to do next is we're going to send a portion of our 7000 into the tax savings account. A good ballpark number in lieu of anything else would be about 40 to 50% of the 7000. Again. Don't take my word for that. Discuss it with your tax professional. Once you've established this habit of money going into the business, checking account, withholding essentially 30% for your ongoing operating expenses, sending money to your personal account, and then taking tax money out of every single check. Folks, you're well on your way to peace of mind and sound fiscal management. And this is something if any of you were sitting down with me one on one today and say, Todd, what should I do first once we get our mind right about the fact that we're going to take care of our money, this would be first step. Let's separate the money appropriately so that the money that we're using our in our household is our actual money, not borrowing essentially from business expenses or from the IRS.
So let's say we're setting aside $2800, which would be 40% of the 7000. This would leave us then $4200 in our checking account from a commission check of $10,000. Now that's our money. Not the 10,000. So you can clearly see how this can become a huge problem. And in it, it breaks my heart, frankly, that associates work from the 10,000. They live off the ten. But that's not their money. And you can see how this can be a big, big problem for those who don't separate the money and they simply work from the gross commission check. So that's really it for a big move on getting the money right. So just to kind of recap here, we're going to set up a business only checking account. Get a debit card, go out and get a business credit card, or use a card that you have right now, but use it only for business and set up a tax savings account. You're going to then deposit the whole check commission, check into the business account. You're going to keep approximately 30% in there. You're going to send the remainder into your personal checking account, and then you're going to make a deposit into your tax savings account.
Just a sidebar here. Some of the numbers that are going into your personal checking can change per commission check if we're paying ourselves a salary or a guaranteed payment, which will go over in future episodes, and it can be a fantastic strategy and you're going to learn all about why and how to do it. Coming up in, like I said, in a future episode. But for now, separating your money is going to go a long way toward getting the money right.
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Joe Rodriguez
That concludes this episode of Get the Money Right. To stay up to date on the latest and Get The Money Right. Follow us on social media and be sure to subscribe on your podcast platform of choice. If you want to support the show, please leave a five star review and share with your friends. If you're a real estate agent who is getting their money right, want to be a guest on the show, please submit all inquiries to getthemoneyright.podcast@gmail.com. Links to everything we discuss today in the episode description.
Thank you for listening, and have a wonderful day.
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Get the Money Right: Episode 3 - END
In this episode of Get The Money Right, Todd will be detailing one of the most fundamental steps to getting your money right: Separating your personal and business accounts.
Business Credit Card References:
Example Diagram: Where a $10,000 commission check goes
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Hosted by: Todd Butzer
Produced by: Joe Rodriguez