5 Critical Money Management Mistakes To Watch Out For
By JD Esajian on April 14, 2017
Running a successful real estate investing business is an exciting time. There is something about seeing all the work you put in finally paying off. When things start going well and money starts coming in you need to keep a close eye on your finances. If you are loose with your money everything you did will be for naught. Instead of building your business and growing a nest egg for the future you will be left wondering what happened to your profits. There is an old saying in business in that it is not how much you make but how much you keep. There is temptation when you are closing deals to spend money on areas that don’t offer an equal return. One or two poor money management decisions can set your business back months and leave you right back at square one. Here are five money management mistakes you need to avoid.
- Not Saving Money. You don’t need to spend every dollar you make as soon as it comes in. One of the biggest adjustments for new investors is the manner in which they get paid. Instead of receiving a consistent amount every two weeks you may only get paid once a month. This check is typically much larger which provides greater temptation to spend. There is the feeling that you need to make up for lost time to compensate for a lack of spending over the past few weeks. The reality is that it is ok to park some money in savings for a rainy day. If you are in business long enough you will realize that eventually you will need money to handle an unexpected issue. Without savings you will be forced to pull money from your primary account or take on unnecessary debt. The return on your savings investment is not overwhelming but it will come in handy when you need it.
- Taking On Too Much Debt. Debt is often seen as a necessary evil for new businesses. Instead of using money from savings they take on new debt to jumpstart their business. If used properly debt can a catalyst for growth but if used poorly it can end up sinking your business. Excessive debt forces you to work twice as hard for half the profit. You will be forced to pay down debt instead of using that money for your business. If you neglect your debt you will deal with issues on your credit report which can further complicate matters. As difficult as it may be you need to always keep one eye on your debt picture. Every now and then you should make an extra payment to reduce this number. This is especially the case with high interest accounts or accounts carrying a high balance. Every month you should make a plan for how you are going to tackle your debt and lower your monthly obligations. If your debt rises too high eventually your business will get swallowed up by it.
- Lack Of Financial Plan. What do you intend on doing with the proceeds of your next rehab deal? If you don’t have a specific, detailed plan you will end up spending recklessly. It is not a stretch to say that there should be a reason for every expense you make. Without a plan watch how fast a little here and there goes before you end up with almost nothing. There should always be a master plan or a goal with what you want to do with your money. This could be something as simple as paying off an account or as motivated as saving for something in your business. Whatever it is you should have almost every dollar spoken for prior to receiving a check at closing. You should allocate some funds for the short term while leaving a portion for the long term as well. At the end of every quarter you should look at your performance and see what needs to be improved. Without a plan for your spending you will be disappointing with where your money goes.
- Poor Budgeting. There is almost always something unexpected in the world of business. This is especially the case in the topsy turvy world of real estate. Anyone who has ever made a rehab budget before knows that something will pop up when you least expect it. If your numbers are poor and you lack the foresight to plan for the worst you will be left vulnerable when it inevitably does happen. It is not enough to offer a best guess with your budget or to blindly throw out numbers without any research. You need to do your homework and make sure your numbers are realistic. It is also a good idea to always add a cushion just in case something happens.
- Lack Of Diversification. It is important to never put all your eggs in one basket. This is the case whether you are talking about lead generation or one particular financial account. A lack of diversity increases the risk that the slightest change in the market can impact your business or your portfolio. When you have money coming in you should look to spread it out among several accounts or strategies. Let your money work for you instead of putting all your eggs in one basket.
How you manage your money is just as important as making it. Always focus on money management and avoid these five critical money management mistakes.