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This quiz, developed by Rich Arzaga, CCIM, a REALTOR® and certified financial planner from San Ramon, Calif., will help you assess your financial planning smarts.
1. You’re a selling machine who earned more income than expected in your rookie year. What’s the first thing you should do with the profit?
A. Max out your retirement contributions.
B. Open a rainy day account.
C. Increase your marketing budget to increase sales.
D. Buy an electric vehicle to save on gas (and pose in for selfies).
Answer: B. A key measure of long-term success is managing the ebbs and flows of this business. Once you’ve established a contingency fund, you not only will sleep well but can pursue other financial goals like A and C. Sorry, a new car isn’t a prudent investment in your first year.
2. Now that you’ve started your rainy day fund, how much should you save, and how should you invest the money?
A. Save the equivalent of three months of expenses; invest it aggressively for high growth potential.
B. Save the equivalent of three months of expenses; invest it conservatively.
C. Calculate household expenses for six or 12 months (depending on your risk tolerance), deduct income from other sources (significant other’s job, rental property), and save for the difference. Invest in cash-equivalent or conservative accounts.
D. Save $36,000, which would cover $3,000 a month for 12 months. Park it in aggressive investments.
Answer: C. Estimating the unexpected is an art and a science. Generally, three months is too short a period. Many financial advisers recommend at least six months, which would narrow it to C or D. But six months may be too little (how many down-market cycles last only six months?), or too much (what if you have additional income?). D neglects supplemental income, too. So, C it is! Invest conservatively because when the real estate market is down, the stock market often follows suit.
3. Part of your financial strategy should include mitigating personal liability risk to protect your personal assets, like your home, investments, and savings. Which approach is best?
A. Create an entity for your business, like a corporation or LLC.
B. Purchase extra personal liability insurance.
C. Purchase additional errors & omissions insurance.
D. Purchase business income insurance.
Answer: A. A legal entity can protect your personal assets in the event you’re sued and lose. Your losses would be limited to the assets inside your business. Consult an attorney to understand which entity is best for you in your area. E&O insurance is a must to cover claims, but it isn’t designed to protect your assets. Business income insurance is a good idea, too, but it only covers loss of income due to illness or injury. Personal liability doesn’t protect personal assets from most business-related claims.
4. As a newbie in the business, you’ve witnessed record-setting real estate appreciation in the past couple of years. But this isn’t the norm. Looking at the big picture, what can you expect in terms of average annual price appreciation from a home?
A. 2.5%
B. 4%
C. 11%
D. 10%
Answer: B. According to NAR, the median sales price on existing homes rose, on average, by 4% annually over the 30-year period ending in 2021, outpacing inflation, which has averaged 2.5% annually. A diversified portfolio, which might include real estate, REITS (11% return over time), stocks (the S&P 500’s historical return is around 10%), and bonds, is a way to maximize returns and mitigate risk.
(Sources: NAR Research, U.S. Bureau of Labor Statistics, NAREIT, and Haver Analytics)
How Did You Do?
Four correct answers. Cue applause! Keep honing your financial literacy with help from the Center for REALTOR® Financial Wellness, which provides NAR members with tools and information on topics from budgeting to starting a business (financialwellness.realtor).
Three correct. You’re off to a good start! Visit the Center for REALTOR® Financial Wellness to take the free financial wellness checkup and track the progress of your personalized financial wellness goals.
Fewer than three. Don’t worry, NAR has your back! Take advantage of the Center for REALTOR® Financial Wellness’s educational resources, self-assessment test, and recorded workshops on best practices.