Profit First Chapter 10: Living Profit First

Profit First is not just for your business.

You can apply these principles to your personal finances also.

This is your path to financial freedom!

Financial freedom is having enough money to do what you want, when you want.

It is when the money you have saved up pays out enough interest (or dividends) to support your lifestyle with enough leftover that it also continues to grow.

1. Add up all your monthly bills plus your annual bills plus any debt you owe.

2. Stop accruing debt. If you can’t pay with money in your bank, don’t buy it.

3. From now on, every time you get paid, put a percentage of that money into a retirement savings account. Keep this at 1% until all your debt is paid off.

4. Use all your leftover money to pay off debt.

Income - 1% - Living expenses = leftover income.

5. Once your debt is paid off, work towards financial freedom.

Just like your business, you need to set up different accounts for your personal life.

a) Income account: All incoming goes here and then gets allocated out.

b) Vault account: This starts as an emergency account and turns into an income source. Start with one month's rent or mortgage and slowly build it up. Eventually there will be enough money in here that you will be able to live off the interest.

c) Recurring payments account: For paying all recurring bills. Calculate the monthly average of your recurring bills and add 10%. This is how much to transfer to this account each month.

d) Day-to-day accounts: Set up separate day-to-day accounts for anyone in your household that is responsible for daily expenses such as groceries, clothes, school supplies, and so on. Transfer the amount each person needs on your accounting days.

e) Debt Destroyer: All remaining money goes here to eradicate debt. Use the snowball method described in previous chapters.

Cut up all your credit cards except one for dire emergencies. Make this hard to get to, e.g., give it to someone else to hold onto.

Every quarter, reduce your credit limit by 50% of the amount you paid off for that quarter. So if you paid off $1000, reduce your credit limit by $500. This is a guard rail. Continue to do this until you have no credit card debt and your limit is $5000.

Many people worry about their credit score. Don’t worry about your credit score. It is far better to be debt free. Once you are debt free you can work on improving your credit score if it really means that much to you.

A lot of unnecessary expenses are ego-based.

We buy stuff to impress other people. Even if you tell yourself , and truly believe that you don’t, you probably still do.

The reality is that no one really cares about what you have. People mostly only care about themselves. And the people that do really care about you, your loved ones, still don't care about what you have. They’re going to love you anyway. And if they don’t, then they aren't really your loved ones.

So the next time you want to buy something, be honest with yourself.

Are you really buying this for you? Do you really need it or will it bring you true happiness?

If the answer is yes, then go ahead and buy it. This is not about deprivation.

But if you have any doubt, then the answer is probably no.

When you do buy something, a good way to see if you are lying to yourself or not is to not tell or show anyone what you bought. Does it still bring you happiness when you are the only one that knows you have it?

Every quarter you get a chunk of money from your business, i.e., your payout from your profit account.

If you have personal debt, use 90% of this profit payout to pay off your debt. This is on top of any regular payments.

Do whatever you want with the leftover 10%.

The exception to this is long term debt, such as your mortgage. Once all your other debts are gone (credit cards, bank loans, etc) change the percentages.

45% is to pay off your long term debt and 55% to do what you want with.

Once all your debt is paid off, you get to do whatever you want with 100% of your profit payments!

Parkinson’s Law states that available resources (time, money) will expand to fill the space made available for them.

You need to fight this.

Take some time now to calculate the minimum you can live off while still being happy. Remember, this is not about deprivation. You can enjoy life, but you also want to achieve financial freedom.

Allow yourself enough money so you don’t feel like a bum, just don’t spend in excess.

Once you have worked out this figure, make yourself a promise that no matter how much money you earn, you will not expand your lifestyle needs until you are financially free.

Your aim is to invest as much extra money as you can until your dividends are more than your current lifestyle. At this stage, you will be financially free.

Once you are financially free, you can increase your lifestyle to the amount of your dividends.

Frugality is not the same as being a cheapskate. You can still have the things that make you happy, but there is no need to pay top dollar.

1. Always look for a free option.

2. Never buy new if used is sufficient.

3. Negotiate everything you can. Full price is rarely the final offer.

4. When considering major purchases, write down and consider ten alternatives.

The wedge theory is about upgrading your lifestyle in line with your income.

Every time your income increases, put 50% of the increase into your Vault account. The other 50% is part of your new salary amount and gets treated as normal.

By doing this you get to increase your income while keeping Parkinson’s Law in check.

By doing this you get to increase your income while keeping Parkinson’s Law in check.

Teaching your kids basic financial skills is one of the best gifts you can give them.

The first thing is to make them work for their money. Allow them the pride of earning the things they want. It will mean a lot more to them than you just buying it for them.

Set up a chore list with each task having a corresponding pay rate. They get to choose how much they earn and how they earn it.

Have them split all their money in the following five ways:

• 25% for a “big dream,” such as a new bike or pony.
• A fixed amount to contribute back to the family. (simulates paying bills)
• 10% for a charity of their choice
• 10% for emergency (this is their Vault)
• Anything left over they can spend however they wish.

If your kids are too young for bank accounts, use envelopes.

Read the next chapter here.

Buy “Profit First” here: https://amzn.to/4bEg0iQ