Sick of paying all of your bills and barely having enough money left over for yourself? Yeah, me too!
What if instead of paying all of our bills first, we paid ourselves first and saved more money?
It’s a crazy idea that Mike Michalowicz came up with to help his business become more profitable. If we take those same ideas and apply them to our personal finances, it can completely change the game!
What is Profit First?
The long and short of it is that profit first means setting aside a designated amount to pay yourself (or save) before paying any bills.
Normally profit is calculated Income – Expenses = Profit. Typically, we follow that pretty much to a T. We pay all of our bills first and then whatever is left over is ours to keep; it’s our “profit”.
But it doesn’t have to be that way. We can flip the equation on its head and say Income – Profit = Expenses. Mathematically, it works out the same, but it’s a completely different mindset. We are putting ourselves first and setting aside what we need to reach our goals, then building a budget around that, instead of the other way around.
How To Save More Money With Profit First?
By paying yourself first you are taking control of your finances. You are deciding how much to save and what you’re going to use that money for, before you ever pay any bills.
Too often, we let our expenses take control of our lives and that leads to things like debt and hardship.
I started doing something similar to this, very young, before I ever knew what Profit First was. I began saving for my retirement at about 21, even when it felt like I couldn’t afford to. If I’m being honest, I did that because I absolutely refuse to work my life away.
Funny thing is, it ended up turning my entire financial situation around and now I’m in a pretty comfortable spot because of it.
Saving 20% of your income is a pretty common piece of financial advice (I can’t tell you how many lectures I got about this growing up), but if that number doesn’t work for you, feel free to change it.
The simple act of paying your bills last will help you know how much you have to work with to live within your means, and help you build wealth at the same time.
Gone will be the days of having too many bills and not enough income! You will finally be able to afford to save for your retirement!
By flipping the equation around and saving more money for yourself first, you are taking control of your financial situation. You are putting yourself, and your family’s needs, above everything else that life throws at you. And you are setting yourself up with a security net, should you need it.
You will be surprised how quickly that money adds up once you start putting your profit (savings) first. Eventually, it will get to the point where you don’t even think about it.
It will become routine, and then all of the sudden you will be able to pay down some debt, take more vacations, and you will be much more comfortable with your financial situation!
How To Implement Profit First And Save More Money?
I’m going to warn you. It might be a little bit difficult at first, especially, if you already have a significant amount of bills or debt that you’re trying to pay. But fear not; it can be done!
The first step should be to figure out what your goals are and how much you need to save (each month, each year, each paycheck, etc.) to achieve them.
For example, if your goal is to retire at a certain age (mine is 45), then perhaps you should save $500-$600 a month in a designated retirement account with tax benefits.
Don’t be afraid to set big goals because you can always break them down into smaller, more manageable chunks. Just make sure you add in a buffer to factor in recreational spending, because that’s important too and I would never want you to give up going out entirely!
The next step is to take inventory of your expenses. How many bills do you have? How much are they? Does your current income cover all of your bills?
Once you know how much money is going out, compared to what is coming in, you can look for ways to cut unnecessary expenses and reduce the others. Do you really need to pay for Netflix, Hulu, and cable, or can one of them go?
Really take stock in what you value and what you need. Try to reduce or cut things that don’t fall in line with that. Odds are, you probably aren’t using it that much anyway.
Unless it’s insurance. Please keep your insurance! Believe me, it’s so much better to have it and not need it, then need it and not have it.
Once you do all that, it is smooth sailing until your next pay day. You simply set aside your “profit” amount into your desired accounts and use the rest of the budget you built.
From there, you can then pay your bills and if there is anything left over, that’s even better!
Putting yourself first is not selfish, and neither is paying yourself first!
Mike Michalowicz’s concept of Profit First, where you set aside a portion of your income for yourself, or your profit, before paying any expenses puts you in charge of your own finances. By figuring out how much you need to save each month in order to achieve your financial goals, taking inventory of what expenses you have, and looking for ways you can reduce, you are able to build a better budget and plan.
Remember, Income – Profit = Expenses. Set aside money for yourself first, then build your budget and pay expenses from the remaining amount.
It’s fairly easy to do, and if I’m being honest, it takes a lot of stress out of looking at your bank account. Plus, it’s very easily to tell what you can and can’t afford.
I mean hey, if it can work for businesses and people like Mike Michalowicz, it can work for you too!
Leave a Reply