Struggling to balance your fluctuating income with long-term financial goals? Whether you're navigating tax strategies or planning for retirement, mastering your money as a millennial in CRE can feel overwhelming. Here’s a simplified guide to help you take control of your finances and build a strong foundation for the future.
1. Define Your Financial Goals
Set clear goals that guide every financial decision you make:
Short-term goals: Focus on immediate needs like building an emergency fund, saving for travel, or purchasing a car.
Mid-term goals: Think about lifestyle upgrades, limited partnership (LP) investments, and funding capital calls.
Long-term goals: Prioritize financial independence, retirement, and real estate acquisitions for wealth-building.
Your financial goals should be your North Star. Every dollar you earn should be working toward bringing you closer to these goals. Financial planning is about consistently aligning your actions with what you value most.
2. Build a Strong Financial Foundation
The two essential pillars of financial stability are:
Emergency Fund: Aim to save 3–6 months of living expenses in a high-yield savings account. Given the volatility in CRE, a 6-month buffer is often ideal.
Debt Management: Tackle high-interest debt like credit cards and personal loans before investing aggressively. Paying off credit cards with 20% interest is like securing a guaranteed 20% return on investment, making debt elimination a priority.
3. Entity Formation: LLC vs. S-Corp
As an independent contractor in CRE, choosing the right business structure is crucial for tax efficiency and legal protection:
LLC/Sole Proprietor: Simple to set up and maintain, but you’ll be responsible for self-employment taxes, and legal protection is limited. This is usually suitable for those earning under $75,000 annually.
S-Corporation: If you're earning above $75,000, electing S-Corp status can help reduce self-employment taxes and maximize deductions. However, it comes with more administrative costs and the need for payroll taxes.
Choosing the right structure can save you thousands over time and help you optimize your tax situation.
4. Maximize Your Qualified Business Income Deduction (QBID)
QBID allows you to deduct up to 20% of your qualified business income, which is a significant tax-saving opportunity. For high earners (above $191,951 for single filers), proper planning is required to optimize this deduction.
Example: John, who earns $500,000 as an S-Corp, could increase his QBI deduction by adjusting his salary to align with the “2/7 rule.” This small change could save him over $25,000 in taxes. Working with a financial professional to structure your salary and business income efficiently can lead to similar results.
5. Optimize Retirement Accounts
As an independent contractor, you have the freedom to choose the retirement account that best suits your needs. The most common options include:
Solo 401(k): Ideal for maximizing contributions, allowing up to $69,000 in 2024. You can contribute both as an employee and an employer, giving you more flexibility.
SEP IRA: Easier to manage, particularly if you have a fluctuating income. Contributions are based on a percentage of income, making it a great option for flexibility.
In most cases, the Solo 401(k) is more beneficial, allowing you to build retirement savings
more aggressively while also optimizing your business income for tax purposes.
6. Convert Commission Checks into a Steady Income Stream
With variable income, managing cash flow can be challenging. Create a system to stabilize your income:
Set up an operating account for daily living expenses.
Create a business account where all commission checks are deposited.
Automate transfers from your business account to your personal account on a weekly or monthly basis. This will help you mimic the structure of a regular paycheck and create financial stability.
Any surplus should go toward long-term goals, such as savings, debt reduction, and investments.
7. Stay on Top of Quarterly Taxes
As a self-employed individual, you're responsible for paying quarterly taxes. Failing to do so can lead to penalties, so it's important to stay organized:
Estimate based on last year's tax liability: If your income is stable, divide last year’s total tax by four to calculate your quarterly payments.
Annualizing method: For those with fluctuating income, calculate your tax payments based on your earnings each quarter.
Setting aside money regularly for taxes and automating payments can save you stress and avoid penalties.
8. Balance Liquidity with Lifestyle
While income in CRE can fluctuate, it's crucial to avoid lifestyle inflation as you progress. Focus on maintaining liquidity and reserves for when the market slows down:
Pay yourself first: Allocate a portion of your income to savings and investments before increasing your spending.
Resist lifestyle inflation: Ensure that your growing income also contributes to your financial safety net, rather than just upgrading your lifestyle.
Building liquidity allows you to weather market downturns and seize future opportunities.
9. Enjoy the Fruits of Your Labor
CRE can be a demanding industry, so it’s important to take time to enjoy your successes. Reward yourself for the hard work, whether it’s through travel, hobbies, or spending time with loved ones. Financial success is about more than just accumulating wealth—it’s about
building a life you dreamed of.
WealthBound is here to support millennials in the CRE industry with personalized, practical financial advice. Contact us today to learn how we can help you implement these strategies.
Disclaimer: This blog is for informational purposes only and should not be taken as financial or tax advice. Always consult with your legal, tax, or financial advisor before making any changes to your financial plan.
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