“Economy is not how little one can spend, but how wisely one can spend it.”

Scottish Women’s Rural Institutes Cookery Book, 1934

In the 1930s, a cookbook printed the saying above as a reminder and encouragement to its readers. Tough times quickly make it apparent how wise or unwise our spending habits are, and this is just as true for self-employed real estate agents today as it was for Depression-era homemakers. While the events of the past six years have served as a dramatic reminder that we live at the mercy of the market, they have also given us the opportunity to rethink our businesses.

It’s no secret that many individuals find themselves in debt – and with debt comes risk, and with risk comes stress. Before we know it, the tough economy is negatively affecting our personal lives as well as our businesses. Yet perhaps we can control debt and stress by learning the value of old-fashioned frugality, saving and planning. Below are some basic building blocks for managing your money in tough times so you can create your own good times.

1. Create a money plan. The first step in designing a comprehensive money plan is to create monthly budgets. Start each month with an estimated amount you will spend for each item. At the end of the month, record the actual amount spent on each item and determine the difference. If your budget ends up being out of balance, you’ll need to increase your income, reduce your expenses or change your spending plan.
2. Next, begin tracking your monthly and yearly cash flow by comparing monthly expenses with monthly income. By using a grid, you will know if you need to reserve funds from one commission check to pay upcoming bills. Most expenses are similar year-to-year, so after tracking your cash flow for a while, you will know what your monthly income must be in order to meet your annual expenses. You may find you need to save money early in the year for increased expenses later in the year. 

To complete your money plan, use this budget form to give you a snapshot of your average monthly income and expenses. For large items you must pay once a year, take the total amount and divide by 12, then use this amount in your monthly budget. This form is also a good tool to use in writing your future budgets for one, three, or five years down the line, which will take large purchases into account. Having a long-term, written goal of what you want your average monthly finances to look like will help keep you on track in the short term.

Remember that if you are self-employed, you are responsible for withholding your own taxes and Social Security. Set up a savings account and deposit the estimated amount owed for taxes and SSI as soon as you receive your commission check. Meet with your CPA to determine your quarterly payment requirements.

1. Reserve funds from good months to use in slow months. As an initial goal, plan to save six months’ worth of expenses to put in reserve. Establish a new bank account for your reserve funds so that you can buffer yourself from the peaks and valleys of variable income.
2. Coordinate your business plan with your money plan for one year, three years, and five years. This will help you create and maintain your income goals and keep unnecessary expenses down.
3. Think twice before accepting commission advances, using credit cards or establishing credit lines. Commission advances may sound good, but if something happens and your escrow doesn’t close, you’ll risk financial trouble. Using credit cards or credit lines to cover business expenses in a pinch may lead to increased financial stress as well. If you are ever tempted to do this, remember that it’s easier to go into debt than to dig your way out of debt.

The best way to avoid debt and the anxiety that comes with it is to create a money plan and stick to it. You’ll be able to save more when things are going well, profit in a tough economy, and possibly even seize an opportunity to expand your business when others are apprehensive. By using these basic money management tools, you can create your own good times.

Liz Recchia, author of HELP! I Can’t Make My House Payment!, is a real estate instructor based in Phoenix, Arizona. She is the owner/broker of We Sell Real Estate, LLC. Liz draws from over 30 years of hands-on experience in all areas of residential real estate. She founded The Kitchen Table Advisor, which helps distressed homeowners, first-time real estate buyers and real estate professionals develop effective real estate plans and identify the necessary steps to achieve success. For more information, visit: http://www.thekitchentableadvisor.com/