Profit First by Mike Michalowicz is one of the business books I read last year and I decided to start 2018 off by implementing some of the features of this book and I wanted to share they are working well so far. In fact, it’s working so well I got my wife on board and we setup our family budget using the same ideas.
The premise of the book is, of course, on taking your profit first and in order to do that Mike recommends creating several different banking accounts. For example, here would be all the different bank accounts for a small business. Income, Profit, Owners Comp, Tax, Operating Expenses “Opex”, and two extras, Profit Hold and Tax Hold.
Then it works like this:
- Deposit all revenue into your income account.
- Every 10th and 25th transfer out into the main accounts based on percentages above.
- Take your biweekly/monthly draw from the Owners Comp account.
Now for my business, this felt way overboard and I honestly didn’t need all those accounts. I decided to simplify and go with income, profit, and taxes, then instead of twice a month at the end of the month is when I do my transfers. By doing it this way I can look at the P&L statement and know exactly how much income I’ve had and then just move it around.
As I said I’ve enjoyed this process and its personal finance at the basics. Every dollar goes somewhere and if you aren’t purposefully planning where that is, then it’s probably getting spent. Because of this, I talked to my wife and we decided to give this same thing a try for our family budget. Here are the accounts Mike recommends you setup:
- Income Account – Every deposit goes in here
- The VAULT – Emergency Fund (Start at 1 month. Goal is 8 months)
- Recurring Payments – Mortgage, Cars, HOA, etc.
- Day to Day – Grocery, Gas, Dining
- Debt Destroyer – For paying off debt
This felt like too many to me again so I simplified, (yes he says you shouldn’t do that, but he isn’t the boss of me):
- Income Account + Day to Day combined (debit card)
- The VAULT – Emergency Fund (Money Market)
- Recurring Payments – Mortgage, Cars, HOA, etc. (regular checking without debit card)
We divided all our recurring payments out and found the exact amount that needs to go in that account, now when a paycheck comes in that amount goes to Recurring, a set percentage goes to the Emergency Fund, and the remainder stays in Income for day to day expenses.
By doing this I’ve noticed a few things. The first is we are spending less per month because the income account doesn’t have a lot in it. Something happens to you when you know your only account with a debit card is low, and that is the personal side that takes over.
I’m sure this system will not work for everyone, but if you feel stuck in a rut that you can’t get out of it could be worth a shot.