Pay Yourself First!

​Welcome back to the real value podcast, the podcast about business, life, success; about finding value in anything and everything, and about creating absolutely as much of it as you can with the time we have! Good morning my friends, my name is Blaine Feyen and I am your host for this, and every episode of the Real Value Podcast. So honored to be back with you all again this week and very excited to be in the RVP compound and studio this morning because we’ve done some major renovations and this is the first episode in the new Real Value Podcast studio. We’ve got some new equipment, a new environment, and a new attitude. Not that I have ever had anything other than the best of attitudes, especially when I am in the studio, but you know that feeling when you put some effort into something and it turns out better than you imagined. That’s the way our new studio and creative brain center came out and I couldn’t be more thrilled.

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Anytime something is growing and expanding it will almost always reach a point where it has outgrown the space its in and it wants to break out and expand. This is, of course, true of growing families, as well as growing businesses, and its true of the Real Value Podcast, the Value Syndicate, and the Real Value Coaching Academy. Thanks to all of you, the Real Value Podcast has been growing each week, in subscribers, the overall listener base, the number of downloads, the number of questions and inquiries we get each week on a variety of topics, and in engagement and interactions on social media. Let me just say, as part of my gratitude exercise this morning, that I am extremely grateful for all of you, very grateful for the friendships that have come as a result of this podcast, and very grateful for what I have learned along the way. I look forward to that continued growth and education. In fact, its one of the things that gets me out of bed every morning. Knowing that there is so much left yet to learn in life, business, and relationships, and so much of the world left to see is what drives me, personally, out of bed every morning and on the path of knowledge gathering and seeking wisdom wherever it may live. Of course, I encourage all of you to be doing the same, which is what the Real Value Podcast is all about. So thank you my friends for allowing me the opportunity of continued growth along with all of you.
 
Several weeks ago I did a podcast where I touched on just a few of my personal philosophies about business, office space, real or virtual, and a few other business related comments and I said I’d go into more detail in future episodes. I apologize because I don’t remember which episode it was but I said somewhat in passing, more as a ‘stay tuned’ kind of announcement about upcoming episodes because I have several in the works about business structure, setting up and running a virtual office, wealth building, and so on. One of the comments I made in that episode was that we are a ‘profit first’ company and that we set up our accounting a little different than the typical company. This sparked more than a few comments and inquiries from some of you and I had a flurry of emails, private messages, texts, and phone calls asking what I meant by that. Our level 2 coaching students know full well what it is because its one of the first principles and practices I teach and it ties in very closely with a couple of the required forms that they fill out every month in order to get, and keep, a handle on their business, where there money is and is going, and how their wealth is expanding while their debt is shrinking.  Now, I will warn you that there is only so much that can be expressed in a podcast, since a podcast is audio only, and this concept and its practice requires some visuals to really understand and take full advantage of it. The good news is that I didn’t come up with the concept or the implementation of it, although I have modified a bit for my business and the appraisal industry. There are lots of YouTube videos and websites that talk about the Profit First concept and how to implement it in your life and business. There are some variations of it and some of the concepts can be modified to fit your life and business, it’s the principle behind the practice that I aim to get across in this episode.
 
So, where does this phrase, ‘profit first’, and the idea come from? Well, if you just Google the words Profit First, you will undoubtedly come across a book by one of my mentors, a man named Mike Michalowitz. Mike is an accomplished  entrepreneur turned author and has written 5 or 6 books. One of those books is called, ‘Profit First’, and it outlines this very principle. I will, of course, encourage all of you to pick up a copy or listen to the audible, and its required reading for coaching members, but I will also tell you that you don’t need to read the book to understand the principle behind it. I was actually introduced to this principle, more or less, about 20 some years ago while reading a book called ‘The richest man in Babylon’ by George Clason, also required reading. In fact, its required reading in my house and for the reasons I’ll share (both of my boys were given a copy, along with Napoleon Hill’s ‘Think and Grow Rich’ and Dale Carnegie’s ‘How To Win Friends and Influence People’). The Richest Man in Babylon is written in parable format so it’s a fun story about some old friends back in the times of chariots who had no money so they sought out the advice of their other friend who had become fabulously wealthy. This wealthy friend of theirs, Arkad, teaches them the principles that he learned and followed to amass his wealth. There were 8 of these principles and each one is a chapter and a story to hammer home the principle. Its super easy and uplifting to read so I’d recommend having it in your library. In fact, I’d recommend buying a bunch of extra copies and giving them as gifts to your favorite channel accounts or referral clients. Channel accounts, by the way, are your bigger clients who send you regular business and referrals. These are your super fans, realtors, lenders, accountants, tax planners, estate planners, etc. People who love what you do and think of you anytime somebody needs an appraisal and always refer you. Nevertheless, the eight principles from the Richest Man In Babylon are, 
#1. Pay yourself first, 
#2. Live Below Your Means, 
#3. Make Your Money Work For You, 
#4. Protect Your Wealth From Loss, 
#5. Make Your Dwelling A Profitable Investment, 
#6. Insure Yourself A Future Income (retirement plan, compounding interest, etc.), 
#7. Increase Your Ability to Earn (invest in yourself and your education), which is what you are doing right now, so congratulations!, and 
#8. Know Where You Are and Where You Are Going. 
This last one is something I talk about all the time and teach every single week in some form, which is all about tracking and measuring. It’s related to Pearson’s Law, which says, “when performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates.” Basically, what Pearson’s Law is talking about is what management guru, Peter Drucker said, which is, “what gets measured gets managed.” If you want something to good to expand and something bad or wasteful to decrease, just start tracking and measuring it. If you want your belly to shrink, start tracking your calorie intake, the makeup of those calories, and your calorie burn, how many calories are you expending in a day. Track it daily, in essence, measure it, and you will naturally begin to manage it. Stop measuring and you’ll likely stop managing it. Want your business to increase? Start tracking and measuring where its coming from, who’s sending it to you, how profitable is it, how long does it take you to complete it, etc. Start measuring it and it will get managed. What Pearson’s Law states is that, when you measure something, its performance tends to improve. What the law goes on to hypothesize is that when you measure it and then have to report it back to somebody, the improvement accelerates due primarily to the accountability aspect. This is, of course, one of the principles our coaching program is founded on and why its been so successful for the members. They actually have to do something and report back. I’ll share with you an interesting, but extremely common phenomenon in the coaching business. I have coaching calls several times per week. Some of them are private one on one calls and some of them are our group coaching, or level 2, calls. Before someone is allowed entry into either the one on one or the group program, I have a phone interview with them to get a better idea of their personality, their goals, their struggles, and to see if we’ll be a good fit when working together. One of the set of questions I always ask is, do you know your numbers? Do you get or do a monthly P&L?, do you do a monthly budget?, do you know how much you are actually making in terms of profit?, do you know what your expenses are? I’m sure you know where I am going with this because, if you’re like 95% of the people I poll on these topics, you got nervous as I asked the questions. The honest answers I get on almost all of them is ‘no’. As in, no, I don’t really know my numbers. Some of you can rattle off stats from Anow or Total regarding how many orders you completed, what your receivables are, and what your turn times are, which is great stuff to know, but none of those stats tells you one bit of information on whether or not you are becoming more financially secure, independent, or free at some point in the future. Some of you will say, ‘yeah, I mean I kinda know what my rough expenses are each month because they’re more or less the same’, but that doesn’t tell you at all whether or not your expenses are high, low, average, or where they fit in to your overall profit plan and wealth building goals. I’m not judging you based on those answers, by the way, because it is all very common, but it doesn’t make it the right way to do it just because everybody else is doing it that way. Its actually good news when I hear that because it means we have likely have a ton of latent potential in your business, a lot of cash we can eventually free up, and we can get you on a path to financial freedom if you’ll follow some of instructions. 
 
Ok, so the 8 principles from the Richest Man in Babylon are great and to be followed, for sure! However, since its told in parable format it doesn’t necessarily tell you how to go about doing all 8 things. They’re told as guiding principles but not as a ‘how to’ book for your personal or business accounts. Its more like a commercial for Etrade or some kind of investment company. Its good solid advice but I can tell you what happens with every single person who reads the book and then finishes it. It gets placed on the shelf, right next to another great book, maybe one on retiring rich or skipping the latte every day so you can retire a millionaire, and they go about their lives as if they didn’t just read one of the most important educational books in history. Again, without somebody breathing down your neck and holding you accountable to the principles, it’s tough for the average person to overcome inertia and their daily routine to implement some of the ideas. This is where the Profit First book has come in handy. It lays out the steps to take to implement some of the principles from the Richest Man in Babylon. Not all of them, but the key principles are more or less covered and then followed by a very clear, albeit kind of tedious, ‘how to’ and what to do to begin implementing the principles and practices. 
 
So lets talk principle first. The profit first principle is a principle that is quite simply based on another law that begins with a ‘P’, and that’s Parkinson’s Law. Parkinson’s Law basically states that ‘work expands so as to fill whatever available time there is for its completion.’ We all know this to be mostly true and can find somewhere in our lives and business where, if you have 4 hours to complete something, you will magically finish it up around the four hour mark. If you have 10 hours to finish something, maybe you don’t take the full ten hours of working on it to complete, but maybe you take 7 hours and then 3 hours of doing something else before actually completing the work. Work expands to fill the allotted time. With Parkinson’s Law there are several corollaries, or ideas and conclusions that follow the original law. For example, the Asimov Corollary says, ‘In ten hours a day, you have time to fall twice as far behind your commitments as in five hours a day.’ Parkinson’s Law can apply to technology with the corollary that data expands to fill the space available for storage. But the corollary that applies to us in this particular case is the one that says, ‘the demand upon a resource tends to expand to match the supply of the resource.’ What that means when it comes to our money is that the demand upon your money expands to match the supply of your money. What many people tend to do in this regard, and I’ve been guilty of it myself, is to do what we call ‘bank balance’ accounting. This is where you check your bank balance, business or personal, and see a stack of money in there and say, ‘I’ve got enough, I’m gonna go buy that new thing.’ In reality, for many people their supply is considerably less than their demand but when you tend to just look at your bank balance you are being greatly deceived because most people’s bank balance shows the bucket of cash at any one point in time with no reference to all the jobs those dollars have to, should be, and could be doing if each dollar actually had a job. This is where unnecessary borrowing and credit card debt comes into play. We want something and either look to our bank account to see if there is money in there or throw it on a credit card and deal with it later. How this applies to business and the profit first concept is that most businesses follow what are called Generally Accepted Accounting Principles, or GAAP, and the standard methodology for reporting profit and loss is to have revenue on the top line (all sales and revenue generating activities), expenses subtracted from that on the next line, for a profit number on the bottom line (that’s why its called the ‘bottom line’), with taxes being paid on the profit. That’s a very simplified explanation, but that’s basically how its done. Revenue minus expenses leaves profit. Maybe there is some and maybe there isn’t. As long as the bills get paid, most people are fairly happy with their lives. 
 
With a profit first system, we simply flip some things around and the accounting goes revenue on the top line, profit allocation comes out first, owners compensation comes out, and whats left over at the bottom is what is left to pay expenses. ‘Whoa, Whoa, Whoaaaaa Blaine! How are we going to pay our expenses if there isn’t enough at the bottom?’ That’s a great question and I’m glad you asked because now I can tie it back to Parkinson’s Law which says that the demand for your money expands to match the supply of your money. If you have always run your business using the GAAP method of accounting (revenue minus expenses equals profit), guaranteed that your expenses tended to expand to use up the resources available. The problem is that often the expenses expand and use up the resources before the profit gets taken care of. This is the ‘pay yourself first’ principle in the Richest Man in Babylon story which was the very first principle. I know you’ve heard the principle tossed about before but this is where the rubber actually meets the road. If you aren’t planning for and allocating a particular percentage off of the top line for profit, how can you guarantee that you’ll even make a profit? The simple answer is, you cant. The best you can do is hope for one at the end of the year or at tax time when your accountant or bookkeeper hands everything over to you and says, ‘sorry, you didn’t make any money and, oh, by the way, you owe a fat check for taxes.’ Remember, work expands to fill whatever time is available and your resources will tend to match whatever demand is placed on them. What a profit first philosophy and system does is make profit one of the most important demands on your resources and, and here is one of the big ‘aha’s, it also makes you look very hard at your expenses. In fact, with a profit first philosophy and system, we are activating the first law I talked about which is Pearson’s Law or Druckers Law, which is what gets measured gets managed. When your expenses are placed after profit and, potentially, not enough money left to pay everything, rest assured you will measure and manage those expenses like you never have before. 
 
So, what happens if you start tracking this every month using this system and there’s not enough money left over to pay your expenses? Easy, you close up shop and become a Walmart greeter! No, you have to take the money from somewhere which is likely from your profit allocation percentage and pay those bills. Its either taken from profit or from your compensation. There has to be some pain involved with this process and taking money from the profit allocation or from your own compensation makes it all very real. That’s not to say you haven’t had to pull money from your own pocket to make payroll a time or two already. However, when you have to start taking from what you are setting aside for profit or your own personal paycheck and paying bills with it, I guarantee that you will start reducing those expenses and figuring out how to be much more efficient, much more effective, and you will realize what you can live without and still produce the same or more. As you do this every month, you are learning to track and measure your expenses and what gets measured gets managed. What you are also doing is guaranteeing yourself a profit every single year because you are planning for it right off of the top. And why shouldn’t you? You’re working hard my friends! Why shouldn’t your business pay you a fabulous salary, make a fabulous profit, run efficiently, pay your taxes easily, and give you more life than it takes? However, if you aren’t planning for it, it will only happen by shear accident if it happens at all. An important concept I would be remiss in not stating is that the pay you receive from your business; this is your paycheck, your draw, your disbursement every two weeks, or however you pay yourself, this is what the business pays you for the activity you do in the business. This is the money you deserve for your hard work each day. If you were going to hire somebody to step into your place in your business, you’d have to pay them some kind of salary or some form of compensation for the activity that they’d be doing so, in essence, you’re hiring yourself everyday just like you’re buying your own business every day. Profit is different. Profit is what the business gives you for being a smart business owner and running a good business. If you haven’t been judicious with your money and haven’t run a good and efficient business, you may still receive your compensation for your activity, but no profit for you. I did a podcast episode some time ago about whether you are an entrepreneur or just a proprietor. This is where the rubber meets the road when it comes to answering that question. If you have no idea whatsoever whether or not you are profitable and you have no plan or monthly practice in place to know these things, you are merely a paid salesperson, production manager, and toilet cleaner in somebody else’s business, likely owned in whole or in part by a bank or AMC. Some of you like to tell people that you own an appraisal business but, in reality, you are the equivalent of an independent contractor for the AMC or bank and you simply live off of the checks that come in each month. Well what happens if you cant work? What happens if the business model changes? What happens if your clients disappear? Do you have some kind of plan or are you counting on the gravy train continuing into perpetuity? All valid questions to ask yourself. 
 
So that’s the principle of a profit first business; revenue minus profit and owners compensation equals expenses. But like the parables in the Richest Man in Babylon, its really just a nice story with no practical application being demanded of you. And this is where it gets a bit tough to chart out for you on a podcast because it really helps to see some visuals, but I’ll do my best. The actual practice of putting profit first comes down to a few basic practices that can get as simple or as complex as you’d like. At its simplest, and one I highly recommend and use, is the multiple bank account practice coupled with a monthly business and personal budgeting practice. The multiple banks accounts practice looks like this: You go to your favorite bank or credit union and you open at least four accounts, I recommend five. “Five accounts Blaine?! Are you serious man?!”, yep, serious as a heart attack. I‘ve done it with as few as three and as many as eight, but five is what I recommend and I’ll explain why. The five accounts can be one main account with 4 sub accounts, but you have to have separate buckets to place all of your money or you’ll never get to where I hope to take you in regards to making money, keeping your money, and wealth building. In my system, we actually have a sixth account that I’ll talk about, but you should have at least four, I recommend these five and I’ll explain the differences as we go.  You can imagine these like a bunch of buckets on some kind of stand with each bucket above the other. The buckets are hinged so they can be tipped to pour whatever is in the top bucket down into the bucket below it and then that bucket can tip and flow in the bucket below and so on. The five accounts are as follows: account 1 is your main hub account or your operating account. This is the top bucket. All of your money comes into this account and I’ll tell you in a minute when it goes in there. By the way, I’m talking about your business accounts, but I teach a personal account method as well that I wont go into in this episode. Your main hub account or your operating account is the account you are using today to pay all of your business bills and your salary. Hopefully, you already have this account setup. If you have been depositing your business checks in your personal account, stop everything you’re doing and go open at least your main hub account for your business today. The next account you open, and this can be a sub account of the operating account so that you can easily transfer money between them via phone app or online, is your profit account. We have to have a place to push whatever your goal allocation percentage is for profitability into that account every single month and, of course, we want to do that first. If you want to just put 1% of your deposits as profit each month, fine, do that, but do it. You make a deposit of $5000, $50 goes into the profit account. I wont go into allocation percentages for profit and expenses in this episode but the coaching students who are listening, you know what your target allocation percentages are for each of these categories. The next account you open is the owners compensation account. This is quite simply the account that you put your pay into. If you pay yourself as a w-2d employee, put it in that account. If you haven't yet decided how much you want to pay yourself because you’ve been kinda just using money from the account to live, we need to get you to the point where you are paying yourself something. We call it owners compensation, by the way, because its not all necessarily pay and you can still run legitimate business expenses through this account. The next account you open is your tax account. This is, as it sounds, is the account where you deliberately set aside a percentage from each deposit for taxes. I didn’t say you set aside money each month or each quarter, or that you just hope there’s money in the account come tax time, I said you set up a separate account and you put a percentage from each and every deposit into the tax account. The next account or sub account you set up is what we call the operating expenses account. This is the account where we quite simply set aside the percentage from each deposit of what I don’t want my operating expenses to exceed each month. 
 
Now, I understand, right now many of you are saying, “Blaine, I have no idea what that percentage is or should be, it varies each month and I don’t have a handle on it, I typically just pay stuff as it comes up and I pay it out of my general business bank account”, and so on.  I get it and its ok. Part of this process is taking baby steps to get a handle on these very things my friends! You take the baby steps of first setting up the accounts and following some of the rules I’m laying out for you and, over time, you’ll begin to get a handle on your numbers. It may take you 6 or 8 months of doing something like this, along with our budgeting method and P&L tracking, to get comfortable with and educated on your own numbers. And it may take you a year! That’s ok. Rest assured my friends, tomorrow is coming, just as next year is coming. What you start doing today will be reflected in tomorrow and next year. You don’t have to get this stuff all at once or all done by next week, but you have to start. I will guarantee and make a solemn promise to you all that if you do it, you will not be disappointed. Not only will you be thanking me within 3 months, your kids and grandkids will be thanking you in 10, 20, and 50 years because this is not just about daily and weekly accounting in an appraisal business. These, my friends, are the necessary steps to build real wealth, have a profitable business, and set aside enough money for your retirement. Do you realize just how much money you’ll have to have in an interest bearing investment by the time you want to retire to live reasonably comfortably? Let’s do a quick thought and math experiment. If you have an investment and its averaging 4% annually and you think you can live off of $40,000 per year at retirement, you’ll need $1,000,000 in that account earning 4% annually by the time you’re ready to retire. If you’re only 35 or 40 now, imagine what $40,000 will buy you in 20 or 30 years. Given the time value of money and inflation, I imagine $40,000 will be the equivalent of about $10,000 or $15,000 of today’s money come retirement time. Do you think rents and housing prices will stay the same as today? Will bread cost the same? Will gas cost the same? Of course not. So if you can live off of $40,000 today, you likely will not be able to in 20 or 30 years. That means you’ll likely need $80,000 to $100,000 per year minimum to live reasonably  comfortably. That means, at 4%, you’ll need $2,000,000 to $2,500,000 in an account earning an average of 4% annually. How close are you right now? Have a plan to get there yet? If you have no plan to get there yet and have just been avoiding the conversation because its scary and anxiety producing, I would strongly suggest pulling up your britches and getting dirty because tomorrow is coming, next year is coming, retirement age is coming. There will come a day when you can no longer shlep yourself around houses anymore and will want retire, even if that means still working and doing something else, you’ll need funds to do it. If you cant plan out your profits and get some kind of handle over your business expenses over the next 6 or 8 months, are we really to believe you’ll just magically end up with $2,000,000 in a 4 or 5% interest bearing account in the next 20 or 30 years? Let’s be honest, many of you act and live like you’re rich and you’re not! Stop acting like you’re rich and start saving like you want to be. I don’t really care how much money you make each year. If you’re not netting $1,000,000 per year after taxes, you aren’t rich so stop living like you are. When I was young and making $22,000 per year working for my family, I used to think somebody making $100,000 was rich. Then I hit that level and realized how silly the notion was. Then at $100,000 per year you think $500,000 per year is rich. Then you realize that its not. And onward up the ladder you go, realizing that at each new level, rich takes on a new meaning. Those of you earning less than $1,000,000 per year net, stop living like you’re rich. Those of you not even in the six figure category, most definitively use the profit first system because every one of your dollars is that much more important. 
 
Please note, I didn’t say that if you don’t earn $1,000,000 you weren’t rich in all of the important things like health, family, friends, and happiness. That’s true wealth anyways. What I said was, if you’re not earning $1,000,000 per year net, stop acting and living like you’re rich. Start giving every one of your dollars a job, put them all to work for you, and maybe someday you will be. “But Blaine, I’m not savvy when it comes to finances and investing and all that stuff.” Listen, you don’t have to become an accountant or a trader on the New York Stock Exchange, but understand that you are already a financial trader. You are currently trading your time for money which is one of the worst investment plans you can be operating on long term. You will eventually run out of time AND money. And for those of us who are blessed enough to live long happy lives well into our 90’s and beyond, we have to worry about outliving our money. So, right now its time to buckle down and get you to a point where you have some basic information, a basic set of money practices, and taking some baby steps toward financial independence. Now, if you don’t care about any of that stuff, you likely don’t really care about profit, loss, expenses, or any of the other vital numbers of your business and appraising is just a hobby for you. That’s ok too. However, I am talking to the ones who have chosen this as a real business and look to their appraisal business as a vehicle to get them to the point where their business is salable or, at least, funding their lifestyle and future lifestyle. Remember, you’re buying your business every day so decide today if it something you’d be willing to buy at the price you’re paying right now. Alright, so up to now we have our main hub account, or operating account, we now have a second account or sub account called profit, we have another account called owners compensation, we have another account called taxes, and we make our fifth account or sub account called operating expenses. This, again, is the account you place the goal allocation percentage, sometimes called your target allocation percentage, of what you want your expenses to eventually be. And again, you don’t have to know all those numbers yet. Just get the accounts set up first and then we can work with the numbers. Remember what Pearsons Law and Peter Drucker said, what gets measured gets managed. The idea is to set all of this stuff up and start to become a financial forensic investigator. Examine the crime scene and try to determine where all of your money has been going so you can get to the bottom of it. These case takes time so give yourself some grace and just spend 15 or 20 minutes per day for a few weeks looking at your bank statements and business statements, if you get them and understand them, and start to become a master of your own destiny. Eventually, you’ll start to see patterns and behaviors that you can begin to address. And eventually, you’ll start to understand your numbers and your target percentages better.  So, for example, let’s say that you just looked at your business as a big pie chart and said, ‘well, I need to set aside 30% for taxes, I’d like to make at least 5 or 10% in profit, I’m going to pay myself 40% as a salary, and that leaves about 20% for expenses. I’m not saying these are or should be your target allocation percentages, its just an example. So then we put dollars to the numbers. If you bring in $100,000 per year, that means that you’ll set $30,000 aside for taxes, you’ll pay yourself $40,000 in salary, you’ll take another $10,000 as profit, and you’ll have to set aside $20,000 for expenses. Easy numbers. What this means then is that every time you make a deposit into your main hub or operating account, you are next transferring all of those percentages from that deposit into all of your sub accounts. You’re tipping the main top bucket and pouring money from that bucket into the buckets below it for all of the jobs that each one of your dollars now has. If you deposit $5000 into the account, based on the percentages we just mentioned, you’d put $500 in the profit account, you’d put $2000 in the owners compensation account, you’d put $1500 in the tax account, and you’d put $1000 in the expenses account. Again, easy math and maybe not related in any way to your actual business, just an example. But that’s, at its simplest, how it works. 
 
Let’s talk about the schedule of deposits briefly. I recommend you make deposits twice per month. I think the profit first book recommends the 10th and the 25th of the month but I, personally, like the 5th and the 20th. It works for me and my bills and you can do whatever you’d like. The magic is in waiting a bit to let the checks pile up and also not overburdening yourself with too many transfers between accounts. Make a deposit on the 10th and the 25th and that’s it. Twice per month you make deposits and, if you want, twice per month you make transfers. I used to make the transfers once per month but I’ll tell you what happens when you do this. By the end of the month you have spent some of your deposits already, either on bills or lunch or something else, so then you have to go back and try to reconcile how much has been spent and allow for that amount in your transfers to the appropriate accounts. I know some of you get your appraisal fees ACH’d or direct deposited into your account and that’s ok. The profit first system is a behavioral system and its designed to get your mind thinking and your body behaving in a certain way. The reason I’m not a big fan of direct deposit is that you never see the and feel the money. When you get checks each month, you feel the paper, you see the dollars and you can let the checks pile up and sit next to you in the designated money pit area. You’re letting your money age a bit. When you look over at the designated money pit area and see 5, 10, or $20,000 in checks sitting there, you feel differently than if it all just got dumped into your bank account. I have some banks that direct deposit my funds and I print off the corresponding email that says they’ve paid us, I rip the excess paper off so that it’s the size of a check, and I set it on the money pit pile of checks so that I see it there. I have other businesses where that is the only way I receive money; PayPal, Venmo, Zelle, Square, and direct deposit. Just know that when you never get to touch the money, you feel differently about the money. This is one of the reasons Dave Ramsey is so adamant about people using a cash and envelope system to budget and get themselves out of debt. When you hand a cashier a dollar bill, you are physically seeing that dollar disappear. You have a physical response, whether you recognize it or not, but you are saying goodbye to that money inside of you. When you just hand over a plastic card or swipe your phone over an electronic kiosk that takes your money our of your account, you never get to see the money disappear except from your bank balance. The feeling is different. And, for many, when that bank balance gets to zero, they have overdraft protection, which is just credit, or actual credit cards that they can use to keep living like they’re rich. I’m not saying that you have to use cash for everything or go to an envelope system, but you do have to become systematic and deliberate about each and every dollar and give every single one of them a job if you want to build wealth my friends. Let me also say, we talk often on our coaching calls about P&L’s and budgets. The P&Ls that we talk about are the ones that you learn to hand write yourself so that you begin to understand what they are saying. The budgets that we talk about are the ones that you hand write every single month so that you are in control of your money and your future and you know what job each one of your dollars has each month. That’s as complicated and sophisticated as we get. You don’t have to understand cash flow statements, aging summaries, balance sheets, EBITDA, and a bunch of other accounting principles to be wealthy. That’s what accountants are for. Let them do all that stuff. But its YOUR money so you do have to have a plan for each of your dollars and begin to understand how to budget for each one of your dollars, including budgeting for your profit, your compensation, and your future wealth building funds. I know one of the comments or questions I typically get at this point is that you only use your accountant at tax time so how are you supposed to know all of these numbers? And that’s why we hand write them. I’ve developed specific forms to use to do your monthly P&L and budget and its real easy. In fact, even though I call one of them a budget, its basically a personal profit and loss statement but its set up like a budget. You don’t need to wait for your accountant to tell you if you’re profitable or not because you’re going to take charge of your money and make yourself profitable! That’s the way this works my friends!
 
I cant go into investing in this episode for a few reasons, one is time, the other is because I don’t want to advise you in that particular area. What I’ll briefly say is that you should seek out some education and advice on IRAs, Keoghs, SEPs, Index funds, and any other investments that can help you protect some of your money and prepare you for your future. The money wont magically be there for you when you need it most and I’d strongly recommend taking advantage of the benefits of compounding interest. But back to the schedule. Make your deposits twice per month. With each deposit, you transfer your allocated dollars to the appropriate accounts: profit first, owners comp, taxes, and operating expenses. I said earlier that I recommend a sixth account so I’ll touch on that one now. Your sixth account, should you decide to undertake these wealth building steps and challenge, is what we call your survival account. Your survival account should be at least 3 months worth of your living expenses. If you need $5000 every month to pay your bills and eat, then your survival account, at some point, should have $15,000 in it. Again, it doesn’t have to get there overnight, but you should be building it up. This is your personal emergency fund for things like car repairs, roofs, a water heater, an emergency expense that you didn’t plan for. You take money out of the survival fund and then you work to get it built back up. The survival fund does not get built until you are out of revolving debt, by the way. These are you credit cards and stupid loans you may have taken for stupid stuff like boats and ATVs. I love boats and ATVs too, but if you had to borrow money at 5% or more to own it and you don’t have a survival account set up, your profit account set up, your expense account set up, and your tax account set up, then the loan falls into the stupid category and we get to dunk you in the stupid debt dunk tank. Pay off your stupid shit first and then start building your survival fund. This is a money market account so that you have access to it for emergencies but not easy access for more stupid shit. I’ll leave the survival account right there so we can focus on the main five accounts: your operating account, your profit account, your compensation account, your tax account, and your operating expense account. Remember, you can actually open up five separate accounts, or, if your bank operates this way, you can open one main account that allows for sub accounts where you can actually transfer the money into each of those sub accounts and it removes that money from your bank account balance in the main account. Out of sight, out of mind! When the resource is no longer available because all of your dollars are at work doing their jobs, you are less likely to rely on your bank balance to make purchases. Each dollar is at its place of work and you cant touch it for anything but its designated responsibility, like taxes or your own compensation. Now, I teach a $0 balance system that I’ll share with you now. Every single month with every single deposit, you allocate every dollar of that deposit out of the main account and into the sub accounts. Every dollar! At the end of each deposit, you put every single one of your dollars to work in one of the sub accounts. Your main hub account, your operating account, should essentially be at $0. Keep whatever money you need in there to keep it open, of course, but otherwise every dollar gets allocated. You give every single dollar its marching orders and send it on its way to the appropriate account. The bank balance in the main hub account is essentially zero almost all of the time. Its just a pass thru account where dollars apply for work and then get their jobs. Once they get their jobs they are off to work to help you sleep better at night. For those of you who just cant wrap your head around 5 accounts but you can with 4, then your main hub account becomes your operating expense account that you continue paying all of your bills out of. With the 4 account system you have your main hub account, which doubles as your expense account, then your profit account, your owners compensation account, and your tax account. I don’t like this method because of Parkinson’s Law. If you don’t get yourself into the habit of clearing out that main account, you can tempted to think you have more money available to you than you really do and that’s bad. 
 
This is, in essence and in its simplicity, the profit first system that I recommend to everybody. Now, I know nobody listening will do anything at all with this information. That’s a given for a few reasons; the information is free and, therefore, not that valuable, its new, and therefore you’re a bit skeptical, and inertia. It takes effort to sit down and do all this stuff and appraisers are great at nose to grindstone work effort on appraisal related activities. Its much easier to keep saying, ‘I’m so busy right now, I’ll do something like this in couple months when it slows down.’ Look, you’re going to do whatever you want and that’s a given. I offer you the profit first system as a way to plan for your days and your future. You may have to listen to this episode 5 or 6 times to fully grasp it and you may have to come back to this episode in a year when you’re ready to start taking advantage of this system. That’s ok too. The seed has been planted and you can do with it whatever you’d like. I often get the question when I’m teaching this system, ‘can’t I just use quickbooks, or Xero, or Peachtree, or whatever software you use to do your accounting, and set up some virtual bank accounts in that but keeps my one main account?’, and the answer is no, that’s what you’re already doing. Your accounting software is already set up with what is called a chart of accounts, which is all of your allocations for income, expenses, taxes, and compensation. That’s an accounting system and its an ex post facto system that reports what happened, not what could happen. The system I just taught you is a behavioral system that puts you in a completely different mindset of managing your money! Its your money my friends and your accountant, bookkeeper, and software will not manage it for you. They only account for it and report back to you what happened in the past. A P&L or balance sheet is like an appraisal in that its always backward looking. It can give you information about the future, for sure, but its taking aged information and telling you what happened. An accounting statement is also not moving your money anywhere important. Its only telling you what happened to it. What I just taught you is a way to take absolute control of your own dollars and putting them to work for you like a rich person. Do you think wealthy people have one main account they look at each month to see if they can afford that latte or a new iPad? Nope! They have a bunch of accounts that tell them what each dollar is doing for them. Until you take control of yours and tell each one of your dollars what to do for you, many of them will disappear due to Parkinson’s Law which says the demand for your resources expands to meet the level of the resources. Get rid of the resources each month by putting them to work in their separate houses or buckets and the resource is no longer available to be frivolously frittered away.
 
I’d like to thank you my friends for investing your most valuable resource today to learn about another extremely valuable resource. Every single day we are trading our time for something. When you’re working hard, you deserve to be well compensated and experience some profit if things are done right. You also deserve to have something working for you while you’re working for it. That’s what this episode is all about. Making what you work hard for, work hard for you so you can enjoy it. Listen to this episode every week for the next 6 or 8 weeks until you have a good grasp of the concept. Reach out to me if you’d like and I’ll help explain it a little deeper and how we use the system. Whatever you do, just do something to help build a better future for yourself and your family. Until next week my friends, I’m out…