Real estate investors need to have their financial budgets in order. They need to understand their personal income and expenses. They also need to understand their personal financial statements. Once real estate investors become skilled at completing their financial budgets, they can expand that knowledge and understanding to their businesses and real estate investments.
As a real estate investor or aspiring real estate investor, it is likely that you have analyzed your past expenses, put them into spreadsheets, loaded them into Quicken or Mint with all of your data and come up with a budget. But then what do you do? The part that is seemingly the most challenging! You actually have to stick to your budget and put your plans into action. Doing this is easier said than done. If you are not experienced in making budgets or if you have given up on following your budget, how do you keep this from happening to you?
1. The best way we know how is to follow some of these tips below…Create a budget – it is best to look at your major expense categories and write them down. You will have rent or mortgage, food, utilities, cell phone, health, entertainment, travel, gifts, savings/401k, and investments. It would be beneficial to have a good idea of your average expenses over a couple month period. That way you can be realistic about your current spending and budget appropriately. If you need to make changes, you will see where you need to do so. If you have many category areas in need of change, then it is bet to work on one or two at a time rather than changing many money habits at once. Do not be too harsh on yourself if you need to make budget changes. In other words, don’t set the bar too high. Drastic and unrealistic budget goals are one of the surefire ways your budget will not succeed.
2. Budget for expenses that don’t occur on a routine basis – Make sure you give consideration to expenses that occur once a year, such as holiday presents, birthdays, vacations, weddings, car maintenance costs, and travel. These expenses do not occur every month and they will bust your budget plans wide open if you do not make them a part of your budget. Make a list of these events on a calendar and put a dollar figure to them. Place them in the month they are expected to occur so you can plan in advance how you will pay for them. The regular routine expenses are not the reason your budget will fail. It is these “surprise expenses” that will wreak havoc on your budget if you don’t plan for them.
3. Put your budget in writing – Take the time to write down your budget plans. Making a mental note of your budget goals is a recipe for failure. Don’t assume that your financial future will take care of itself by making a simple mental note to yourself. If you have your budget goals detailed in writing you can review and remind yourself weekly and monthly of your financial goals. I highly recommend using Mint (www.mint.com). Mint has a free budgeting service that allows you to get started with uploading and/or entering your expenses and your budget goals.
4. If you have a week or a bad month, forget about it. Don’t give up! – Let’s say you have been reaching your budget goals for three months. In the fourth month, for whatever reason, you didn’t reach your budget goals. Maybe you even stopped trying to stick to your budget! If this happens, don’t just throw your hands up in the air and admit failure. Everyone falls off the wagon sometimes. Your budget is a journey. There will be bumps in the road, so the key is to realize that everyone makes mistakes.
5. Adjust your budget over time – This one is big! It can take months or even years to fine tune a personal budget. When you initially made your budget plans, you probably had to guess at some of your figures. They might not have been in touch with the realities of everyday life. For example, you may have underestimated your monthly grocery or utility bills. If this happens, analyze all of the underlying money that was spent in this category to see if your initial estimate was unrealistic. If it was, try to come up with a more accurate number and then stick to that new figure. This type of adjustment is one of the keys to ensuring you can stick to your budget.
6. Review your budget every month – This is when you will make any adjustments that are needed. Set aside the same day each new month to review your income and expenditures. Match the expenses to your budget goals. By actively reviewing your finances and comparing them to your budget, you can adjust your spending habits. This gives you a chance to analyze areas that exceeded your budget expectations and make the adjustments in your spending habits or your budget. The goal here is to not forget about your budget. One tip that has worked for me is to put a printout of my basic budget goals in my check book. That way I see the budget every time I write a check. Others put their budget on the refrigerator so that they see it every day, even several times a day. I have also set an alarm at a certain time on a weekly basis that reminds me to review my budget. Find a method that works for you to review your budget, which will continually remind you that you need to stick to your budget. Again, this is a major reason why tip number 3 is so important.
7. Set specific short-term goals – Let’s say one of your budget goals is to invest in your first real estate deal in the next two years. If your goal is to invest $25,000 into your first deal, that would be $12,500 per year. Divide that number further into quarterly figures, in this case $3,125 every 3 months. Now, this is a more tangible budget goal to shoot for, isn’t it? I find that when I divide intermediate and long-term goals into short-term, tangible steppingstones, I am able to feel a greater sense of accomplishment and am more likely to succeed. This brings us to number eight…
8. Reward yourself – That’s right! Treat yourself when you reach your some of your short-term goals. Since your financial budget is really a journey, take some time to be good to yourself along the way. Sticking to your budget should not be a restrictive, unpleasant experience. Not only should you take the time to enjoy your financial accomplishments along the way, but use part of your budget for fun things that you enjoy. Just make sure your rewards don’t end up breaking your budget!
9. Pay yourself first – I’m sure that one of your budget goals is to save and invest a portion of your income. One of the keys to make sure you succeed at this is to do what the IRS does with your pay check, take it out of your discretionary income immediately. This way, the money is saved away right off the bat. Move the money immediately into a separates savings account, investment account, or self-directed 401k account. Many companies can setup automatic deductions from your pay check. Save as much as you can automatically, and then it not only becomes second nature, but something that also helps you grow your net worth.
10. Attitude is everything – When most people think of a budget, they picture restrictions and pain. Almost like a diet. You know what happens with most diets? They don’t seem work for long! First, if your budget is too strict, too restrictive on your spending, it won’t work either. However, you will need to honest with yourself and limit your spending in some areas. This will take some adjustment in your behavior, but more importantly, in your attitude. I found that when I am feeling limited and sorry for myself when I can’t purchase something that I want, I remember my financial goals I set with my budget. I think about the satisfaction I feel when I reach a goal like being able to invest in another cash flowing real estate investment. Over time, you find that you don’t want to disappoint yourself by breaking your spending goals on a spur of the moment purchase. Now, I actually get more pleasure knowing that I am reaching my budget goals when the thought of an impulse purchase crosses my mind. I think much more long-term now and think about both my financial future and my family’s financial future.
If you follow these tips, your budget plans are more likely to be a great success. By taking some simple steps you will find that living within a budget is not as tough as you imagined. It can actually be fun and rewarding!
Until next time, let’s continue growing our passive cash flow and net worth together!
Robert Newstead