We often write blogs about what real estate agents must do to successfully run their businesses. One blog we recently wrote describes how agents should be careful about the advice they take. Not all advice is created equal.
This blog is about something that every real estate agent should be aware of, that’s the need to save cash. Why must a real estate agent have cash? They must have cash because cash equates to security.
How Do You Know How Much Cash You Need?
Knowing how much cash you need means asking the right questions.
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How much do you spend each month?
Per Realtor.com, each year real estate agents spend an average of $5,000. That’s the average, though, not necessarily what your real estate agent expenses are each year. Your real estate expenses could be much higher than $5,000 for the entire year. Heck, your real estate expenses could be $5,000 each month depending on your advertising costs, what your monthly transportation costs are, as well as other costs to your business.
For illustrative purposes, let’s say that you spend roughly $1,000 each month on running your real estate business. That translates to $12,000 per year.
Based on $12,000 per year expenses, how much cash should a real estate agent have in the bank?
This is where it gets a bit tricky. The easy answer is that someone should have 6 months to cover their expenses for a survival fund. A survival fund includes more than just businesses expenses. A survival fund includes the cost of food, shelter, water, all the necessities of life.
Again for illustrative purposes, let’s assume that you have a separate survival fund. This fund is cash you’ve saved to ensure your real estate business is safe. That a bad month or two won’t send you into a different industry.
With that in mind, we can now calculate how much cash you should have in a real estate agent business emergency fund.
Based on $1,000 per month, the cash you should have in your emergency fund is $6,000 to $10,000. On the low end, $6,000 ensures that you can continue to run your real estate business for 6 months without having to find a job that supports your real estate business.
On the high end, $10,000 ensures that you can run your real estate business for 10 months without having to find an outside job to support the business. Either is good. 10 months might sound better. It isn’t necessarily if business is good. You want to use funds to build your business.
However, if you anticipate a downturn in the real estate market, $10,000 might be perfect. You’re probably thinking, “How do I build this cash reserve?” If you budget your monthly costs, and then stash some away with your goal in mind, you’ll save a 6 month to 10 month emergency fund for your business in no time.