In this blog, we discuss one of the theories from a book called Profit First by Michael Michalowicz. We decided to base a podcast around this because many of its principles can be adapted at a household level. In financial terms, the ‘old way of thinking’ is discussed in the book, which is referring to the formula ‘the revenue of a business minus the expenses equals its profit.'
However, this way of thinking can be problematic because people’s expenses sometimes end up bigger than they need to be if there is any kind of financial surplus.
It’s a bit like having a six-bedroom house in which you fill every single wardrobe and every single drawer with things you think you need, just because the space is there. And the same can be said for ‘money left over.’ If not accounted for properly, it could be used simply because it’s there, not because it actually needs to be spent.
What we should do with this old idea of ‘revenue minus expenses equals profit’ is to flip it around and change it to ‘revenue minus profit equals expenses.’ This means treating your profits like an expense and putting away the amount you want or need to invest each week. What’s left can cover your expenses. It’s the same idea when people say, ‘you should always pay yourself first.’ We believe that this should go for both business and individual incomes.
When it comes to profit and budgeting, a common misconception is that the financial advisers at Money Over 50 tell people how to spend their money. This is not the case at all. When a client comes in, the advisers look at their financial goals and work backwards to figure out how much they need to continue investing before they retire. Working this out as a dollar value is important – but what the client does with the remainder of the money is up to them.
Our final thought is to always think about your financial mindset. We’ve had clients say to us “I'll come and see you when I have some spare money!” This is not a definitive number, and not a good mindset to have. That ‘spare money’ will never appear out of the blue – it needs to be set aside as a priority.
Dallas Davison, Michael Hogue and Ali Hogue.