Ep #14 Profit First Chapter 10 – The Profit First Life

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Hello and thank you for joining us today on the Profit Scale Thrive Podcast, where we guide attorneys to overflowing profits, scaled growth, and thriving lives. I am your host, Kelley Brubaker.

We have a secret though - this is a special place because we don't work with every law firm owner, we support the solo attorneys who are single parents because we know the special challenges you face, and we know the business advice out there is not always practical for you and your firm.

Each week we will talk about things that will give you the insight you need to stop feeling overwhelmed, to gain back your confidence, and to finally enjoy your law firm and your life again.

Podcast Episode #14: Profit First Chapter 10 – The Profit First Life

Hello and thanks for joining me today for podcast episode number 14. 

Welcome back, or for those who don't know me yet, my name is Kelley Brubaker. I'm a CPA and a business coach who supports solo attorneys who are single parents. 

I'm also a certified Profit First Professional, which means I help my clients implement the cash management system presented in the book Profit First written by Mike Michalowicz.

A few weeks ago, starting with episode 5 of my podcast, I began a dedicated series of episodes to share with you in detail chapter-by-chapter the book Profit First. If you have read the book, please follow along as I will share tips not in the book along the way. If you have not read the book, but you are curious about it, please stick around as we go through chapter by chapter.

This week we are talking about Chapter 10 – The Profit First Life. We have done a lot of work so far to understand why Profit First works, how to use it, and how to customize it perfectly for our own business. And, we only have one chapter left to review after this episode!

So we’ve spent weeks getting bank accounts set up, making our allocations and tweaking Profit First to work perfectly for us. What we haven’t talked about yet is budgeting and living with Profit First.

Remember back in episode #10 when we met the first official user of Profit First, Jorge? Mike caught up with Jorge for an update and Jorge relayed a story about a shopping trip he had with his mom back when he was still in college. Jorge said that with $60 in his pocket, he was struggling to watch his mom buy lots of stuff while shopping. When he asked her if she ever budgeted her money, her response was “When you make enough money, you don’t have to budget.”

Jorge told Mike that he didn’t necessarily agree with that statement, but he found that with Profit First, he didn’t have to create, maintain or review a budget. Profit First was the budget. 

Jorge said that while he wasn’t a millionaire, he was able to go on vacation with his family, do what they wanted and never think whether he could afford it. He knows how much money he has available for a fun vacation because it’s the balance that is in his vacation bank account. 

Mike noted that while we put restrictions on our money when it comes into the business, when money comes out, it is a reward.

Mike got an update from another Profit First user, Laurie Dutcher, CEO, accountant and owner of Secretly Spoiled, who started using Profit First a few years prior.  As a type-A numbers person, prior to Profit First, Laurie was always obsessing over her revenue. She was living check to check, not properly paying herself, because she was pouring all of her money and energy into growing her business.

Within months of starting Profit First, her personal finances stabilized and her first quarterly distribution was used to take her family on their first trip to Disneyland.  What else started to happen? Her business began growing faster when she started paying herself and focusing on profit first.

Giving herself permission to enjoy herself and her hard earned money, let Laurie elevate her business. It was no longer a cash eating monster!

And if you haven’t figured it out yet, Profit First, while being a business book, is a perfect fit for your personal finances too.  Consider running your life like a business. You generate income, invest and spend money. I’m sure you have a vision for your life similar to having a vision for your business.

Now you know that by using smaller plates in your personal finances, you will trim the fat from your lifestyle and zero in on what’s most important to you and find fun and creative solutions to get what you want. What you want is within reach. It’s not up to fate or winning the lottery to attain your wildest dreams, but by a simple change in habit, practiced consistently.

Profit First will trickle down to having a positive impact on the world.

The Profit First Lifestyle

Although a business book, the ultimate goal of Profit First is to create a lifestyle of financial freedom. As we have read through the book, Mike has shared updates from business owners just like you who have implemented Profit First and reaped the rewards from sticking with it.

So, what would Profit First look like for your personal finances? Let’s see…

1. Face the music. It should be easier now that you did this with your business finances. Add up your bills and debt.
2. If you have debt, stop adding to the balance. Put a freeze on all purchases you cannot pay for with cash.
3. Set up an automatic transfer to your retirement account every time you get paid. If you have debt, keep your retirement contribution at 1% and use every penny you have after necessary expenses to eliminate your debt.
4. Set up your small plates - your foundational accounts:
1. INCOME - All money coming to you personally is deposited here.
2. VAULT - Think of this as your emergency fund in the beginning. Build it slowly. Aim for 3 or more months of living expenses. Once all debt is paid off, this is going to grow quickly. This will become your money to invest to make you more money.  Special tip: set this account up at an inconvenient bank so you forget about this money!
3. RECURRING PAYMENTS - This will be the account that pays all bills that you have set up on automatic payments. The goal is to put the sum of your monthly average of automatic payments plus 10%.
4. DAY-TO-DAY - Think of this as your opex account for household expenses. This is the account you should get a debit card for. And, if you have multiple people who need to access this account, for example, your spouse or a teenage kid, set up one account per person. Make allocations routinely but determine the allocation amount based on the average spending per person.
5. DEBT DESTROYER - This is obvious - it is to pay off all debt. After funding the prior accounts, all remaining money will be allocated here. Follow Dave Ramsey’s advice to pay down debt with the snowball method. Remember that humans are emotional, not logical. The snowball method rewards you faster for paying off smaller debt first.
6. LIFE EVENTS - If your situation fits, consider opening additional accounts for life events such as buying a house, buying cars, paying for a wedding, college (yours or a kid), etc. Remember our golden rule last week? When in doubt, open an account.

If you have debt, it’s best to cut up your credit cards now. Remove the temptation to get this under control, but keep ONE card for true and honest emergencies. Hide it in your house or give it to a friend to hold for you if you must. Consider reducing the credit limit on this account as additional protection so you can’t fly off the rails in a panic in the future. Don’t reduce the credit limit below $5,000.

But, here’s a warning - part of your credit score is based on the total credit used vs your total credit card limit. By reducing your credit limit on your emergency card, it will lower your credit score by a few points. Keep in mind though that our ultimate goal is to remove all financial stress from your life by eliminating debt. So, in the end, your credit score won’t matter.

Rip Off The Band-Aid

Remember Mike’s story about his daughter giving him her piggy bank to save him from bankruptcy? Mike shares that for months leading up to that moment, he knew he was on borrowed time. He had 3 luxury cars in the drive, a country club membership he never used and a ton of recurring expenses for things he couldn’t remember using.

He knew but he was desperate to hang on to a lifestyle he thought he deserved and was not willing to give up. But, in one moment of selflessness by his daughter made him realize that none of that stuff mattered.

It’s human nature to cling onto the stuff we can no longer afford. We hold hope that something will “turn up to save the day”. We do this because we hate loss. And, we have a far greater desire to avoid losing something than we have to acquire something. It’s called loss aversion.

Loss aversion is everywhere. And it’s powerful. When combined with the Endowment effect, the theory that states we place a much greater value on something we possess than on an identical thing we don’t possess, you are dealing with a stubborn person comparable to a 3 year old in a tug of war with their beloved blankie.

For example, the beautiful red Porsche you’ve been eyeing. It’s nice to have, but once you own it, it’s beyond “nice”. Now it’s badass. You polish the car. Take your friends for rides. You love it because you own it. 

If you miss a payment, you fear they will repossess…your baby. So, what do you do? Cancel your daughter’s dance lessons and your gym membership, and start eating ramen noodles for dinner. Loss aversion.

You know what works the best: rip off the band aid. Luxury cars? Gone. Club membership? Gone. Netflix? Gone. When you realize that 99.99% of the people you know won’t care about what you own or where you hang out. When you realize that those 99.99% of people who know you will rally around your courage, that is when you will stand up, brush yourself off and say, “let’s do it.”

Death To Debt

Now with your quarterly profit distribution, remember with debt, we will use 99% to pay down debt and the 1% is ours to celebrate. Seriously, take a few minutes to enjoy paying down a big chunk of your debt. Have a drink. Dance to your favorite song. Paying down debt is winning and winning is fun.

The 1% is a reward! So, use it as a reward - go out to dinner even if it’s just for ice cream. Cherish that your business is serving you and killing debt at the same time. Rewards are an important feature of Profit First. While debt reduction alleviates pain, it does not provide much pleasure.

After you’ve eliminated your core debt - credit cards, bank loans and student loans, start using 45% of your quarterly profit distributions to pay long term debt and keep 55% to reward yourself. It’s a psychological win.

Soon enough you will be 100% debt free!!

Lock In Your Lifestyle

Parkinson’s Law - if you have $10 in your pocket, you will spend it. Be careful as your income increases that you don’t increase your spending unnecessarily.

Live within your means. Lock in that lifestyle. That means no matter how good things get,  you will not expand your lifestyle in response. You need to accumulate cash for at least the next 5 years to reach the ultimate goal: financial freedom.

Don’t freak out! Don’t think this means you need to be cheap. It means be frugal. Wisely spend money. Enjoy your life. But, for Profit First to have a permanent impact on your life, you need to build as big of a gap as possible between what you earn and what you spend. 

At a certain point money starts earning money all by itself. Money earns interest and investments pay dividends. 

Here are 5 rules to keep you locked in to your lifestyle for the next 5 years:

1. Always start by looking for a free option.
2. Never buy new when you can get the same benefit you would if you bought used.
3. Never pay full price if you can avoid it.
4. Negotiate and seek alternatives first.
5. Delay major purchases until you have written down 10 alternatives to making the purchase and have thought through each one. Save your splurging for Profit First distributions!

Yes, the Profit First life is a frugal life. Again, frugal is not the same as cheap. You can and will live very well when you are frugal more than you would when you are posing as a big spender. Why? Because frugality removes financial stress, enabling you to better appreciate and enjoy the things and experiences you purchase.  Big spenders buy the same things, but their purchases are served with a big heap of massive stress. Who’s got time for that? Remember well-dressed poverty is still poverty.

Ok - so if you are thinking that 5 years is too much, Mike offers a plan B. It’s a concept attributed to Brian Tracy that’s called the “Wedge”. The idea is when your income increases, only increase your spending by half of the amount of the increase. It’s a way to restrain Parkinson’s Law.

Profit First Kids

In the time Mike published the second edition of Profit First and now, he has written a kids book about Profit First. It’s called “My Money Bunnies”. The reading level is for 4-8 years olds but my kids were pre-teens when they read it and found it amusing and fun.

I promise by introducing your kids to the Profit First system early in life. It is a massive gift to them. They will learn the value of money, how to manage it, earn it and finance their dreams.

Imagine how your financial life might have turned out differently if someone taught these important lessons to you when you were young.

Listener’s Question of the Week

And now, it’s time for our Listener’s Question of the Week!

Today’s question is from Jim. Well, it is more of a statement than a question. I hate paying taxes. I need to run every possible expense through my business to get my income as low as possible.

Thanks for your comment, Jim. I agree with you that I hate paying taxes too, but running personal expenses through your business to lower your taxes is legit tax evasion. No kidding. 

By doing this, you are spending $10 to pay $3 less to the government. It’s math that will never add up.

Here’s what to do instead: use Profit First to set aside a proper amount of money to pay for your taxes. But, also, hire a tax professional who can work with you to create a tax savings plan so you can legally manage your tax bill. Tax planning is something that many tax professionals can do but don’t have the time for during tax season.

Thanks for reaching out, Jim. I hope you take my comments to heart and work with a tax professional on a tax plan. If you need help finding a tax professional, please reach back out to me. I will be happy to connect you with a few tax professionals I know who can help you.

If you would like to submit a question for a future episode, please send an email to [email protected] – and no - by sending an email you will not get added to an email distribution list, there will not be a phone call and there will not be a sales pitch. We follow the golden rule – treat others how you wish to be treated!

Inspirational Quote

This week’s inspirational quote is from Alon David, “If you feel stuck, stop, reset, refocus and keep going.”

Final Thoughts

Final thoughts for today! Applying Profit First beyond your business and to your personal finances will guarantee you a life of financial freedom. Can you imagine? I hope so!

It doesn’t take much effort to customize Profit First for personal finances. But, you do need to take the time to set it up.

And, your kids are not too young to learn these lessons and strategies now! Even if you set their accounts up as piggy banks on a shelf in their room. Start the habit now.

Homework for this week:

1. Open your personal bank accounts and start your personal allocations.
2. Based on your most recent pay, lock in your lifestyle. Figure out how much you should be living on.
3. Sit down with the members of your household and talk about Profit First and the positive impact it will have on your household’s long-term financial health.

If you have any questions about today’s episode, feel free to comment if you are watching on YouTube or send me an email to [email protected].

If you know someone who might need to hear this information, please share this episode with them or if you are on YouTube, tag them below! 

Be sure to follow and subscribe to get notifications for future episodes.

Did you enjoy this episode? Please consider leaving a review. 

And before I go – remember - profit is something you intentionally plan for in the beginning. It is not a potential bonus at the end of the year!

Thanks, and have an amazing day!

Now that we have Profit First up and running in our business, we have two things to talk about: budgeting and financial freedom.

Imagine not needing to create, maintain or review a budget? It’s possible!

And consider using Profit First (AKA cash stuffing) in your personal finances. You will trim the fat from your lifestyle and zero in on what’s most important to you and find fun and creative solutions to get what you want. What you want is within reach. It’s not up to fate or winning the lottery to attain your wildest dreams, but by a simple change in habit, practiced consistently.

Be sure to follow and subscribe to get notifications for future episodes!

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