I initially picked up the book Profit First to help me as I started my online business,
but I quickly realized that the Profit First system could be just as effective for my personal
finances. Since implementing profit first for my personal finances just a few weeks ago,
I feel like I’ve gained complete control of my money. I’m saving more money than ever before,
I feel like I have more freedom in my spending than ever and I know that I will be able to hit
ANY financial goal that I set. This system REALLY works and it’s so simple to use! So
in this video, I’m going to show you exactly how to implement profit first into your own finances
so that you can achieve financial security and crush any goals you have for your future.
So the profit first system is a cash flow management system devised by Mike Michalowicz.
He adopted this system out of necessity when he found himself completely broke after selling his
multi-million dollar business just months beforehand. He realized that by focusing
on growing his business and driving more sales, his expenses began to totally consume the profits
that the business was making. As a result, he never really earned any profits himself.
And I think this pretty closely relates to the way many people, including myself, handle personal
finances. When you don’t have a system in place, you typically just spend whatever enters your bank
account, which makes it really hard to save money or have money available for emergencies. And as
you earn more, you tend to spend more, which is a dangerous financial habit to get into.
But the profit first strategy fixes these problems by organizing your money before you even think
about spending it. It involves creating multiple bank accounts, each with very specific purposes
to ensure that every dollar goes to the right place. And the best part is, this system can be
completely tweaked and customized to fit the exact goal or lifestyle you want to achieve.
The way I’m using the profit first system requires 5 separate bank accounts.
These are an income account, an expense account, a profit account,
a savings account and a taxes account. So I’ll take you through each of these accounts and how
they can be further customized for your financial circumstances and goals. Then we’ll talk about how
to figure out your allocations for each of these accounts so you can put profit first into action.
So the first account is the income account, and this is going to be the umbrella account
that all of your other profit first accounts fall under. Every single dollar you earn will
start in the income account and get passed through to one of your other accounts.
This can just be a standard checking account. You won’t be spending directly out of this account,
so you don’t need to have debit cards, check books or anything flashy associated with this account.
Also, every dollar that comes into this account will come out of it shortly afterwards.
So there’s no need to set this up as a savings account because it will be empty most of the time.
The only thing you need to worry about is the ability to deposit any income you
earn into this account, and the ability to then transfer that income into your other accounts.
The next account is the expense account. This is the account where you will be paying all of your
regular expenses from. This includes your rent or mortgage payments, your car payments, your phone
bill, or whatever other recurring expenses you have. You’re probably already making all of these
payments from your current bank account, so as you set up new bank accounts to implement profit
first, I would recommend converting your current bank account into your expense account. This way,
you won’t have to go to all the trouble of hooking up all of your recurring bills to a new account,
and you can just continue paying out of this account as usual. The expense
account is really important because it’s where most of your transactions will be occurring,
and keeping these expenses separate from your other spending or saving habits
will make sure that you spend only what is absolutely necessary.
Next is the profit account, and considering this is the profit first system,
this is one you absolutely have to have. The purpose of the profit account is to make
sure that you are taking money for yourself with every dollar you earn. This is less of a problem
for personal finances than it is for business owners, but it’s common for people to put all
of their money towards expenses or investments or savings. And this isn’t necessarily a bad thing,
but setting aside a little money for you is a healthy way to reward yourself and allow you to
spend money on things that aren’t a necessity. Personally, I was really strict on myself with
investing for a few months, and I wouldn’t allow myself to spend anything that wasn’t an expense
or an investment. And it was exhausting! By having this profit account, I’m setting
aside a small portion of my income to spend on anything I want. And this is really empowering,
because if you allocate your money into these accounts properly, it guarantees that your bills
and savings goals are accounted for, and the money in this account can really be used for anything,
whether you want to save up for a vacation or make an irresponsible purchase on a whim. I find
it really exciting to look at my profit account and know I can blow it on absolutely anything,
but at the same time, it encourages me to spend that money on something I really feel strongly
about because it feels like the money I’ve worked the hardest for. So I personally have this account
set up as a normal checking account. And depending on how often you plan to spend from this account,
you may want to choose to have a debit card linked to this account or keep it
as a savings account so that it earns a little more interest. Personally,
I just use a credit card for all my purchases, and pay it off with funds
from my “profit” checking account whenever I spend on anything that’s not an expense.
Next is the savings account, and this account is important because it is the one that will help you
achieve any financial goals you set for yourself! Obviously, as the name suggests, this will be
any money you set aside for the future, whether that means as an emergency fund or as retirement
investments or whatever your preferred strategy is for saving money. But, the point is you are
taking a set amount out of every dollar you make and setting it aside into your savings account.
So you can be as aggressive or lazy with this account as you want. Profit First author Mike
Michalowicz suggests making this account one that’s really difficult for you to access,
and recommends setting this account up at a separate bank or any account that’s inconvenient
for you to withdrawal from.The idea here is that if you are looking at this savings account on a
regular basis, it’ll be easy for you to “borrow” from your savings to spend on other things,
which undermines the whole profit first system. Later we’ll talk about
how to allocate your money so you won’t have to steal from your own accounts,
but I just want to mention this strategy of making the account inconvenient to access. I
am personally in the middle of setting aside money for my emergency fund and my retirement portfolio
with a Roth IRA. So my savings account is actually set up as a brokerage account with M1 finance.
When I get money into my income account, I actually transfer my “savings” allocation directly
into my M1 finance portfolio. This guarantees that I’m staying on track for my savings goals, and it
keeps the money out of my main bank accounts where I would be tempted to move it around elsewhere.
So while you can keep this money in a standard savings account, I like having it as an external
investment account which keeps it out of sight, out of mind, and out of my reach!
Last is the taxes account, and this might be unnecessary for you depending on where your income
comes from. For businesses, this is an absolute must, as businesses have to pay taxes every year.
If you’re a W2 employee, your taxes are most likely already taken out of your paycheck.
So if your only source of income comes from this kind of job, and your taxes are already taken out,
you don’t need a tax account. For me, however, this account has been life-changing. In addition
to my full-time job, I do freelance work that generates substantial income, but, this income
isn’t taxed when I receive it. During the 2019 tax year, I earned over $30,000 from freelance work,
but I never set aside money for taxes. So when the tax season came around, I owed $6,000 in taxes
and didn’t have any of that saved up! Luckily tax deadlines were pushed back because of COVID, or I
would’ve been in a really tight spot with the IRS. So now, every time I earn freelance income,
I set some of it aside into my tax account, which I have set up as a savings account. This way,
as I pay taxes throughout the year or when I file my taxes, I’ll have every dollar I need to
pay my tax obligations and I’ll never be caught with a huge tax bill again. So if you have any
other income sources besides your W2 earnings, I cannot recommend this type of account enough.
Once you have all of these accounts set up, you have to do the most important part of the
profit first system, and that is determining how you’re going to allocate your money into
each of your accounts. You will choose these allocations as a percentage of your income.
This is kind of like budgeting, but in my experience, it’s much
less boring and much more rewarding than setting up a formal budget.
So the first account we need to allocate for is expenses. And look, I know this is called
profit first, and we’re starting with expenses, but unlike a business, your life will have some
mandatory expenses that cannot be avoided, so we have to make sure you cover these costs. And to
do this, you need to know how much you spend on living expenses every month. This should include
every single fixed or recurring cost that you pay. For me, this included things like car insurance,
car payments, rent, groceries, my spotify subscription and so on. So add up all of
these fixed costs. Then, consider all the recurring expenses that aren’t fixed. For
example, filling up your car with gas or buying groceries might fluctuate in cost every month.
I would suggest overestimating the cost of these expenses so that you have some wiggle
room for when these bills are higher than usual. Lastly, consider things like dentists
appointments or routine car maintenance that might only occur a few times a year. This is
something I forgot about initially, and I had to readjust my allocation percentages as a result.
Anyway, add up all of these costs to determine your total monthly living expenses.
I would also suggest bumping up this number another $100 or so,
just to give yourself some wiggle room and the security of knowing your estimates will
always cover your bills. So for me, my total monthly expenses add up to $1,600,
and I’m bumping that up $150 to cushion my estimates. If you build up extra money over time,
you can easily redistribute the surplus, but it’s better to be safe with this account.
Once you have this number, you need to figure out how much of your income is required to
supply that monthly amount. As I said, I do freelance work and have a full-time job.
Since my freelance work is not guaranteed, and it can actually be pretty irregular,
I didn’t want to have my expense account reliant on that income. So I use my W2
paycheck to cover my living expenses because I know this is the most stable form of income I
have - and that’s just something you might want to consider when setting up your allocations.
So, my paychecks are approximately $1,200 on a bi-weekly basis, or $2,400 a month.
To cover the $1,750 I have estimated for my monthly expenses, I need to take out
$875 per paycheck, which is equal to 73%. So, my allocation to my expense account is 73%,
which means every time that money enters my income account, I’m immediately putting 73% of
that income into my expense account. And because I’ve given safe estimates on my monthly expenses,
I never have to check my account to make sure I can afford my bills for the month.
Unless my expenses change, I can pay bills in complete confidence knowing
that I’ve already allocated the appropriate amounts, and that is a really freeing feeling!
Side note, for those of you with multiple streams of income,
I would recommend using your most consistent or reliable stream of income for your expenses
allocation to give you peace of mind. Since I do this, any secondary income that I earn
from freelance work is allocated differently. I don’t allocate any of that income to my expenses,
and that means I can allocate more of it to investing or my profit account. So you might
need to create additional allocation strategies if you have any irregular sources of income,
but it’s definitely worth it to have your expenses securely paid every month.
The next account I recommend allocating for is your savings account. After you have your expenses
covered, allocating for your savings account is how you are going to reach your financial goals,
whatever they may be. For example, many people suggest saving 15 to 20% of your income, whether
that’s in a savings account or investing it for the future. This is a pretty easy allocation to
determine based on your goals. If you have debt to pay off, or a big purchase to make, I would
suggest setting aside a percentage of your income for those purchases at a rate that works for you.
Obviously you can make this percentage larger or smaller based on how quickly you want to reach
those goals. My personal goal is to save 25% of my income. I am already saving 3% with a 401k through
my employer, so I allocate 22% of my paychecks to hit that 25% goal. So 22% of every dollar that
comes into my income account gets distributed to my brokerage accounts, where it is saved for
the long term. Some of this 22% is being allocated to my emergency fund, and one of the great things
about this profit first system is that I can adjust my savings percentages as I hit goals
like completing my emergency fund. The flexibility is really nice and it’s super empowering to know
that I am taking the right steps to complete these goals and actually seeing them through.
And lastly (with the exception of the tax account, which I’ll briefly discuss in a minute)
is the profit account! At long last, you finally get to start setting aside some money for YOU.
We’re allocating for the profit account last because it means all of your other financial
needs and goals are accounted for. You’re paying your bills as needed, your saving for the future,
and you now get to enjoy the rest. So unless you have other forms of income or multiple savings
goals, you can simply allocate the remaining percentage of your income to your profit account.
With the 73% towards expenses and the 22% towards savings that I mentioned earlier,
this leaves me with 5% towards my profit account. And it might not sound like a lot,
but once you’ve allocated money towards your expenses and your savings, you’ll be surprised at
how little you need to spend. I mean technically, you don’t have to spend another dollar at all,
since everything is already accounted for. So even though this is a small percentage,
the fact that it can be spent on literally anything you want makes it feel so much more
rewarding than it sounds! And even though we’ve calculated this allocation last,
remember that this percentage is going to come out of every single paycheck. You’ll never again
earn a paycheck that will have to go entirely to bills, or paying down your debt, or saving for
the future. You’ve planned for it, and you now get to earn some spending money every single paycheck!
And to touch on taxes briefly, I take a generous estimate of 37%
out of my freelance income to account for my taxes. Again, I know I’ll get some tax
breaks but I’d rather be on the safe side and collect a tax refund during tax season than
be handed a bill instead. If you have income like this, just do a little bit of digging to
determine your approximate tax obligations and add a few percent for cushioning. So while my
standard income is 73% expenses, 22% savings and 5% profit, my freelance income is 37%
tax, 43% savings and 20% profit, which makes hustling for that side income so rewarding.
And after all of this, you are ready to put profit first into action!
Once you’ve used this system for a few weeks, you’ll begin to notice whether you need to adjust
your allocations to meet your expenses or to work towards other goals that you develop. Then as you
earn more money or lower your expenses, you can allocate more of your money towards your
profit account and enjoy all of the rewards that the profit first system can deliver.
Like I said, this system has completely changed the way I handle my money,
I feel so confident in my strategy and I don’t think I will ever go back. If
you guys have any questions about getting started with profit first,
please let me know in the comments, and I will be happy to help you figure out how
to get it to work for you. Otherwise, if you are interested in more videos about personal finance,
saving money or anything else money-related, please subscribe to the channel because I
am posting new videos here every single week. Enjoy your profits and I will see you next time!