Profit First

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:

1. Deposit all revenue into your income account.
2. Every 10th and 25th transfer out into the main accounts based on percentages above.
3. 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.