Last week marked the start of a new blog series I’m doing!
As I shared, starting with this current CURBS Cohort, I thought it would be fun to share a few takeaway’s from our weekly live group calls! This way, you can get an idea of what we discuss, learn, and do .. and I believe you will pick up valuable nuggets along the way!
This week we’re looking at our Personal P&L
This is one of the things that makes this course different than probably anything else out there that has anything to do with money management.
As a business owner, you know you should run a monthly profit and loss. The purpose of a profit and loss is to see in any given month, how profitable were you, and to track that profit over time.
Profit is two things when it comes to small business and the small business owner.
- It’s the money left over after collecting all the revenue and paying all of the costs and expenses.
- That leftover amount is what you pay yourself from the business.
If your business makes $300,000 as revenue and costs you $200,000 to operate the business, the business profited $100,000. The $100,000 of profit (money left over after your business expenses) is what you pay yourself.
You move $100,000 from the business and deposit it into your household account (which is considered personal income).
Most entrepreneurs understand a basic P&L (or should!) for their business. But, the buck stops there (pun intended!) Where they may be decent at managing the money and the profit and loss in the business, they pay little to no attention to the money in their household.
Which is a shame because unbeknownst to them, wealth is created through household finance, not business.
Here’s your truth bomb for the day:
Building your wealth and getting rich is a byproduct of how well you manage your money in your household! It has very little to do with your business.
It’s because wealth is created in the margin.
It’s the margin between what you make and what you spend in your household bank account.
Does this sound familiar? Business profit (which is what you use to pay your household) is the difference between what you make and what you spend in the business.
Household profit (which is what you use to build your net worth/wealth) is the difference between what you make and spend in your household.
No business profit – no household income. No household profit – no personal wealth.
Here’s what you’re never told…
During your working years, you are working for two selves. Your current self and your 20 year older future self who wants to retire. The day you retire you are unemployed. And, just the same as if you lost your job today and still had to cover the bills.
Your future self will one day lose his/her/their job but will still need to pay the bills. This means you must have other non-working income that you’ll use to pay for the cost of your life. You won’t have that income 20 years from now if you don’t start building it today.
When you don’t understand this you spend all of your monthly income only on your current self leaving no “margin” that would otherwise be set aside for your future unemployed self.
This is the reason why I have my students build a personal Profit and Loss. So that you start noticing your income relative to your expenses and determine your household profit margin. In CURBS we follow the “Profit First” or “Pay Yourself First” methodology.
You determine the amount of Profit you need to hit your Future Self Freedom Number, remove that amount from your household account, and then and only then, can you spend what’s left over.
In order to create a household profit and loss – you need to start breaking your money into categories. Which is the first section of CURBS. C stands for Categorize.
There are 5 categories and you will want to separate all of your income and expenses into 1 of the 5 categories.
The reason why you want to separate your money into these categories is because it will allow you to look at these categories to be able to make sound judgments of how your money is performing.
You need money working in each category.
Think of having 5 employees. All 5 employees have a role and job to do.
Your money needs to hold 5 roles and has a job to do in each category. If not, your money is being misspent which is the “cause” of the “paycheck to paycheck” situation you are experiencing.
Category 1: Income Money
You need to know your household gross (before tax) income. This is a key metric in wealth creation because many other ratios are determined from this number. Spend time thinking about your income. How does it look and feel? How does it compare to this same time last year? What does it tell you?
Category 2: Income Tax Money
Whether you are a W2, 1099 or K1, it’s important that you note the amount of taxes you pay. You also want to know the percentage of your income (tax bracket) you are in. Tax strategy is a key factor in wealth creation because the more you pay in taxes, the less money you make. One of the first questions I ask people is, “How much do you earn?” They will say, “$150,000.” My second question is: “Is that before tax or after?” What do you think 99% report? That’s right. They report the higher number. You can’t spend before-tax income. Only after tax. Therefore, knowing your after-tax number is critical. He or she doesn’t make $150,000. They really make $125,000. That’s the number you should report to yourself.
Category 3: Investing Money
The way to think of “investing” money is money earmarked for your future self, that’s invested into assets. There when you are ten, twenty, and thirty years older than you are now. That is an absolute (at least you hope so!). If you are 45 today, I can promise you, the 65-year-old version of yourself isn’t going to work this hard. He or she would like the “choice” to work and not have to work for a living. The day you retire is the day you are unemployed. This means you must ask yourself “how will my 65-year-old unemployed self pay for my cost of living the lifestyle I want?”
Unless you can count on an inheritance or trust fund, you have to create that trust fund for yourself. Your current self uses the investing money to buy assets that will grow and appreciate and can be used to generate your (non-working) income in the future. The truth about wealth is that it takes time. It compounds and grows on itself over the long haul. It requires a 20-year minimum. That means, if you are 45, you don’t have any time to waste!
*I also believe that your body is your #1 asset – which means we earmark money for that asset as well*
Category 4: Lifestyle Money
This category of money is used to pay the monthly cost of your lifestyle. There are two subcategories: Living expenses and Luxury expenses. It’s important to separate the two and itemize them so that you can notice where exactly your money is going. Living expenses are those that are required to pay. Your mortgage, car, utilities, groceries, insurance, gas, and so on. This amount should stay pretty consistent each month.
Luxury expenses on the other hand are those that are optional. They usually are expenditures that fall into the categories of convenience, status, entertainment, and luxury. Once you calculate the percentage of your income that’s going towards these little luxuries, it is usually eye-opening.
The more money you make, the more you start spending on conveniences like door-dash, house cleaners, yard guys, pool guys, subscriptions, the list goes on. You’ll notice that your car payments are high because of the emblem you buy for status. As well as watches and handbags.
Entertainment and eating out at expensive restaurants sneak in on a regular basis. And, the number of stars on the hotel stays increases as well. The more money you make, the more these luxuries become a standard way of life, causing you to overspend. Overspending means you are spending too much in this category which is robbing you of the ability to fund all of the others.
Category 5: Saving Money
Yes. This is its own category of money. And, it’s different from investing money. Investing money is spent to buy assets. Another word for “savings” is future spending. This is the money you are saving in small amounts on a monthly basis to allow it to grow. You use this money saved for big-ticket items that would otherwise put a big hit on your monthly lifestyle spending allowance. You’ll need money saved for those rainy-day expenses. For pricey entertainment or education. And, for your Dreams – like a dream vacation or a dreamy remodeled kitchen.
There is a finite amount of money that comes into your household each month. The rule is that you have to fund the other 4 categories if you want to build wealth while you enjoy your life on a monthly basis. By looking at categories like this, you can notice if you are inside or outside your lifestyle spending limit (that naturally comes from the desire to fund the other categories).
In the entire post, you haven’t heard me say the word budget.
There is no “budgeting” required. But, what is necessary is managing your money. Part of management is noticing, observing, and assessing every dollar of income and expenses and making spending decisions that are in alignment with your current self wishes and your future self needs. Because remember – just like a pregnant woman who is eating for two – you are working for two!
Using this process you’ll get good at considering trade-offs. If you know that you need to put $5000 in your “investing money” to stay on track. Or, you can use that same $5k on Luxury Expenses. You have a trade-off – which do you choose? In CURBS we call this the “respend.” You are respending $5k of the money you used to spend on Luxuries and instead are putting it towards investing.
The secret to getting off the month-to-month, paycheck-to-paycheck hamster wheel is giving your money 5 roles. You, as the boss and manager, tell the money what it needs to do to get the short-term and long-term outcomes you’ve set for yourself. This is why I teach my students to run their households like a business–the business of wealth creation.