Savings Plan - For Investors Only

Most people have a Savings Plan or two, but if you are going to be a successful real estate investor, you will need many different kinds in order to run your business, protect your assets, and fund your investments, as well as be there for you in case of an emergency.

Savings Plan A: This is your basic three-six months Personal Reserves account. Calculate what it would take for you to pay for the roof over your head, utilities, food, insurance, transportation and the other bare minimum life essentials, and then multiply that by 3-6 months. Open up a high paying Savings Account or Money Market Account (I use Vanguard Prime Money Market) and automatically transfer whatever you can afford from your paycheck into this account until you have reached your goal. Now don't touch it - ever, unless it's an emergency (that's what it was for, remember)!

Having the money automatically withdrawn from your paycheck and deposited into this account keeps you disciplined, because if you depend on yourself to do it, you won't do it in most cases. If you feel money is tight and you can't do this, try to think honestly about it.

Every single one of us spends money on something that is not an absolute, life sustaining essential. If you want something bad enough, then you have to give something up to get it. Look at your spending habits and identify one or two areas that you could cut back on or totally eliminate which would give you the money you will need to start saving today.

Some ideas Starbucks, cigarettes, spa treatments, nails, dining out at too many meals, etc., etc. Just pick one or two to cut out, take that money you were spending, and channel it to your savings. You'll be surprised how quickly it will add up.

Savings Plan B: This is your Wealth Fund Account - the money in here is used only to buy real estate investments. Even if you invest with no money down strategies, there are always incidental costs, like title, inspections, etc., so you'll still need an investment account.

Once you've fully funded Savings Plan A with the proper amount of reserves, open Savings Plan B. Reallocate that money to this account. Again, always be on the lookout for areas that you can cut your expenses so you can save quicker. After you have saved enough for your first purchase, the process will start all over again.

There is one other way to fund this account, and that's with your monthly Cash Flow from the investment properties you will buy.

Savings Plan C: This is your Operating Account used to pay all of your property's expenses. This will be a Checking account. When you buy a real estate investment, because you will only be buying homes that cash flow (which is the money left over from the rent payment after you've paid all the bills), in order to accelerate your investing career, you should never, ever spend any of your cash flow.

Instead, each month when you get your rent check, deposit it into your operating account, pay all the bills, and whatever is left is your cash flow, which you can then transfer to your Wealth Fund account.

After a while, you will be able to approximate very closely what your monthly cash flow is for each property. Once you get several properties under your belt, you'll find that is the only source of funds going into your Wealth Fund. But in the beginning, more than likely, you will have to fund it with a good, solid savings plan.

If you’re more traditional and prefer to bank with someone local whose branch you can go visit, then I’ve been using Washington Mutual for years. Their fees are very reasonable and they have excellent customer service.

Savings Plan D: This is your investment Property Reserves account. Just like you have a personal reserves account, you will also need a reserves account for your investment properties.

Things happen - vacancies, repairs, natural disasters, etc., etc. If your property for whatever reason fails to produce income any longer, you will still have to pay the mortgage, taxes, insurance and utilities, so you need a fall back plan when this occurs. My rule of thumb is to have six months of mortgage payments per property on reserves. In other words, if Property #1 has a mortgage of $500, then I should have $3000 in reserves set aside for this property.

So how do you set aside that much money? First, it's ok to include the security deposit as part of your reserves. It's available to you the entire time the property is tenanted, and should they move out, it will be replaced by the next tenant. Also, in most states, your have a 2-3 weeks to return the security deposit to the previous tenant, so this is a perfectly acceptable way to get your reserves.

The Second way is, you guessed it, from the cash flow coming in on the property. When you first purchase a property and get it tenanted, put your cash flow into Account D first, then in Account C after you have the appropriate amount of reserves.

At this point you may be wondering if you need a different account for each property. Account A is personal, but B, C, and D follow your investments. In another section of my website, I address the importance of creating an entity for your investments. Usually each of your entities can hold multiple properties, so each entity should have the B, C, and D accounts set up.

Sounds confusing? It's really not once you get the accounts opened, set up your automatic transfers, and get comfortable with all the concepts presented here.

And remember, none of this happens all at the same time. It is an evolving process. So take it one step at a time, and you'll be amazed at how easy it is!