Episode Transcript
[00:00:08] Speaker A: Perfect. I think I'll just get started. If anyone else joins, we're. Let them. Let them join.
Okay.
Yeah. So this is profit first for personal finance.
I don't know if any of you guys in the room are familiar with the concept of profit first. I'll kind of COVID some of the basics, just kind of bring you up to speed.
Most people watching this will know who I am. So I'm Stephen Edwards. I run CTA. Accountants. We're an accounting firm with over a dozen team members looking after small businesses, individuals. And we focus on helping people sort of grow their business and take away some of the pain and the stress away from the back office. But in recent years, specifically the last two or three years, we've put a lot of our focus and our energy on profit first, because it's a way of kind of helping people manage their business in a more sustainable way, kind of increasing their margins and also managing their cash with less stress. And that's why the profit first club is here. It's where it was born. So we've been going since October.
We do have a notion page. I will send some links to everybody on the database following this session, and you can access previous webinars. There's some nice little resources. There's the first five chapters of profit first and some kind of useful tips on there as well. And quite simply, apart from sharing all of the content, we just go live once a month. We do recordings as building a nice sort of library of resources for people. So just a bit of a recap on what profit first is, because I am guilty of kind of assuming everybody knows what it is, because it's one of our passions at CTA nowadays, but it's based off a famous book by Mike McCallowiczk.
He's in America. It's a bestseller. So thousands of thousands across the world now. And really, the kind of summary of it is that turnover is vanity, profit is sanity for most business owners. Obviously, there's some exceptions with people trying to scale a business for exit and all those sort of things, but for most businesses, and it's mainly around businesses, but we are adopting it to personal finance today, so we'll get into that. But for most businesses, they focus on their turnover, and as long as that's growing, they think all their problems are going to go away. But there's multimillion pound businesses that make a loss and they struggle with their cash. So it doesn't necessarily solve all your problems, but particularly for smaller businesses, if we can reverse engineer. So that instead of sales minus expenses equals profit. What we want to do is say sales minus the profit we should be earning in our business as a business owner or as an entity that's sustainable and profitable, gives us what we've got left to afford, essentially, for our expenses. So it goes against traditional accounting rules saying profit is last. We're saying profit is first. So what comes first does matter. People don't say, I'm going to put my house last, I'm going to put my family last. And it's kind of the same with profitability. There's a lot of human psychology in profit first. The main thing it's based on is Parkinson's law. So there's a few bullet points there that talks about time. I'm sure everybody watching this on the recording, and you guys, Beatrice and Nick here live, that you've been in a situation where the lack of time has kind of focused your mind to get something done when you've got less time, when there's a scarcity around time, we tend to take action. It sharpens our mind.
The example that comes to mind is studying exams.
A lot of people just do all nighters, a lot of students, when it gets close to the final exams. And that's kind of human nature. And there's been some studies in Germany, I think, maybe Sweden, where they've done less working hours in a week, and they've actually got more work done with less hours in the working week. So there's quite a lot of around the human psychology element. I've got a picture of food there, an all you can eat buffet restaurant.
And in my experience, when you've got so much food around you, you tend to eat more because you know it's not going to run out. If you go to a Michelin star restaurant or a finer dining restaurant, you will eat a smaller plate and you will still be satisfied.
The logic behind this is the demand meets the supply in many ways. So the more that's available, the more we feel we can consume. And if we apply this to money, if we apply it to finances, we apply it to business.
A lot of people, the more money they earn, the more money they spend, because they've got a bigger supply, so they're going to demand more of the money their lifestyle adjusts to suit the new normal of the supply of money they have. So the principle with profit first is, can we create pots or can we create smaller plates? Can we give ourselves the portion size we need to kind of not to survive? But that satisfies our needs. Rather than overindulging and consuming more than what we need. And if we apply it to money, quite simply, if you've got all your money in one place, if you've got all your money in one pot. So let's pretend, if we apply to personal finances, let's pretend somebody's got three, two and a half thousand pounds a month available in their bank account.
If they see all of that in one space, the chances are you're probably going to spend all of that money. If it's all in one account. If you were to put 500 quid away in a rainy day fund, you're left with 2000 pounds, and you're probably going to spend the 2000 pounds and forget about the 500 quid. So that's the kind of idea with Parkinson's law. But we will dive into this in a bit more detail.
Right. So a lot of people kind of use the profit first system in their personal lives already. If you're the sort of person who puts something aside for Christmas, if you put something aside for holidays, if you have any kind of mini pot or little partitioning, when it comes to your money, you're kind of doing profit first already.
I'm just going to put it out to the room. So, Nick and Beatrice, I don't know if any of you guys have any sort of pots for your holidays, for your Christmas, or if you do anything like that.
No, not Beatrice. Shaking ahead from Beatrice. How about you, Nick?
[00:07:23] Speaker B: I have a pot that goes immediately into school fees, and then I've got another pot that goes immediately into a mortgage, and then another pot that goes into something.
I'm joking, but I think there's a time of life, isn't there, when pots can be of different sizes? And I totally get the point, and I think it just depends on the time of life. I wish I had more pots available at the moment to fill with these extra pounds, but I get the principle, and I'm hoping one day that there will be larger pots. No doubt about it.
[00:08:03] Speaker A: Yeah. Brilliant. Thank you. Well, what I can say is, by thinking about it, you're far more likely to have larger pots. That's the first step in any process, is just making it front of mind, really. So, in my team, a couple of the team members, they have a Christmas club, so they put some money aside. That is a form of profit first. And that's one of the reasons I wanted to introduce this from a personal finance perspective, because it was born for businesses, but humans are humans, and it's the same principle when we've been employed. A lot of people watching this video might be self employed or run their own limited company, but when people have been employed, you don't pay that much attention to the tax that gets taken away on your pay slip. It's probably quite annoying initially because you look at it and think, oh, my God, am I really paying that much in tax? And ni. But actually you get used to the amount that hits your bank. So effectively that's a form of a pot. That's a tax pot, but you don't get any choice. So what we're looking to do is be proactive with that same type of system, but force our own kind of pot system on what's important to us in our lives, not just to kind of pay the tax. Ma'am.
Okay, so I'm just going to go back a little bit. So sorry to pick on you two guys because you're the only two live today, but has any of you heard or read the richest man in Babylon?
No, that's no from heard of it?
[00:09:40] Speaker B: Never read it.
[00:09:41] Speaker A: Okay, I would recommend reading it. Anybody who is watching this, I read it for the first time about five years ago and I will say it's the book. I mean, profit first has been huge.
It's aimed at business owners. But the psychology applies to anyone. But this is probably along with rich dad, poor dad, which is quite well known for a lot of people, if you're into reading rich dad, poor dad and the richest man in Babylon are the two most famous books when it comes to managing your money. And money, you know, I won't spoil the book for you, but the gist of it is that babylon was a very wealthy place. And there was a guy, let's just call him the richest man in BAbylon. And he had most of the wealth in the area. He had properties, he had all the luxuries YOu sort of needed. And there were people similar ages that kind of questioned how could he be so rich? And he agreed to get everybody together and explain his system, his logic, how he's built up so MUch wealth. So everybody showed up in the evening and he kind of pointed everybody out. And there were some really, what's the word? Credible people in terms of THeir professions, kind of architects, tradesmen, jewelry makers, all These sort of, wow, established people, but they didn't really have much wealth. And he said, look at you. You've all got the finest clothes.
You spend all Your money FurniShiNg Your houses.
You do all these luxuries in terms of your time.
You don't go short. But he said, your purses are empty. There's no MOney in your purses. And he said, what's happening is you're paying everybody else.
If we apply this to modern DAy principles, you're paying the electricity supplier, the gas supplier, you're paying YOur GYm MemberShIp, yOu're paying YOur mortgage. ObviOuSLY, there's an element that we haven't got ANy choice. You're paying your mortgage, you're probably going out for meals out and paying people that own the restaurant. You're paying all these people, and you're not really left with anything at the end. So basically, you're not keeping any of your money. And he said, rule number one, and there's loads of rules, and they apply to modern day money. It's quite scary, actually, how much it applies. He says, rule number one, this is the biggest takeaway, is a 10th of what you earn should be yours to keep forever. He says, give yourself permission to say a 10th of what you earn is always your money. You're not going to give that away to anyone else.
The book will explain it better, because there's a reason why it's so popular, but it's just quite a powerful. Basically, there's nothing new there. It's saying you should save. You should save 10%. We kind of all know that. But emotionally, it's kind of something we can. Humans are really good at prioritizing today, putting off tomorrow, so we don't really think about it. And I'm going to give some examples of how powerful the concept can be later on. But that's the gist of it. So really, the profit first system, in my eyes, is creating pots. But creating pots that can serve your lifestyle, but also creating pots that are going to serve you in the future is really one of the things we're trying to encourage people to do here. So just really expanding. Building on the concept of the richest man in Babylon, if we flip profit first. So profit first for business is pay your profit first. The Money comes In, the revenue comes in, the turnover comes in.
And in personal FinAnce, the MOney hits your personal account. So whatever you decide to pay yourself from your business, or if you're employed, that's your money. And what we're saying is, most people say, we use the profit first principles. Most people say, right, what are my bills? What are my bills? What do I need to pay? I need to pay my mortgage, I need to pay my car, my car lease, or I need to pay my gym membership, I need to pay my sky bill. And you pay all these different things and what's left is for me. So what we want to do is we want to flip that. That's the whole idea of applying profit first to your personal finances, is what money do you really need or want to a, live the lifestyle that you want and b, look out, think about your money future. Because really, we've got money now and we've got money future.
So what we want to do is we want to make sure, first and foremost, can we move towards this? 10% of what you earn is yours to keep. So what we would encourage, and I don't say to people, you should just put 10% away straight away if you're not used to doing that. That's definitely not the approach, I would say, but can we move closer towards that principle of, actually, this money is mine to keep forever. I'm not just going to spend it on suffer, have to. I'm going to put that aside for my future. And that's what we want to encourage with pay yourself first, pay your mortgage last.
And so money for the future would be first and foremost. But then what do you want to do?
I've come across something called your terms.
So your terms is really, what do you want out of your life in terms of. So it's an acronym. The time you want to put in. So how many hours do you want to work to earn the income you want? Do you want to not work Fridays? Do you want to work 5 hours a day, 50 hours a week, so many months a year? So what time do you want to put in? That's the t in terms. The e stands for the energy.
What's the energy you want to commit to the work and week to week, month to month?
R is the resources. What resources? So a lot of this applies to business owners, but you can kind of think about it from your personal finances as well. M stands for the money and s stands for the sanity. And really, with your terms, you should end up with a number of how many hours I want to work and how much money do I need to live my life on my terms. And it's quite handy, Nick, that you're here because you're in the luxury holiday market, but for a lot of people, when they think of their terms, it will be, oh, I need to earn x amount of money. But actually what we want to do is we want to reverse engineer, why do we need that amount of money? So what I would encourage people to do, and actually I might put a template together because we have got, this is your ideal lifestyle tracker. And really what you want to do is list out what you need to live your ideal lifestyle. What do you need to pay per annum or per month for the ideal house? So what do you need to pay for your mortgage? What do you need to pay for the disposable income you need? If you want weekends away, meals out so many times a month, or whatever it means to you, how many holidays do you want? I was going to go back to, which is quite a big thing for a lot of people, and holiday doesn't necessarily need to be a luxury holiday, it could be a week away from your house.
So the reason I'm talking about all of this is if you've got your terms and you know what's important in your life, what we want to do with your personal income is we want to make sure what you're receiving, you're working towards that, because if you lose sight of what you want to achieve from a lifestyle perspective, the money is going to come in, the money is going to go out. But if we've got this plan in terms of what our ideal life looks like now and in the future, we can make sure we're kind of creating these pots, or we can partition money to serve our lifestyle now and in the future.
So getting into some of the more practicalities of this, so really I'm not going to overcomplicate it and introduce too many tactical sort of tactics and ideas and tips. I am going to drip feed this over the sort of coming months. But quite simply, can you start partitioning pots of money so you could create different bank accounts? So a lot of people got more than one bank account. So let's say you've got 2000 pound that comes in every month, a starting point. If you wanted to put 1% aside for savings, that would be 20 pounds. Because I'm not suggesting anybody who watches this recording starts at 10%. If you're not used to saving money, and there's quite a lot of people not necessarily used to putting money aside, it's a bit like going to the gym.
If you don't go to the gym, it's really hard to say go to the gym five times a week. That's not really sustainable for a lot of people. What I'm more interested in is helping people build a new habit.
And it's the habit that counts. And you need to do a habit for at least 21 days.
They say it takes 21 days for it to become a habit. I think it's around 66 days for it to be who you are, it's beyond a habit. It's just subconsciously something you'll always do. So I'd say, right, can I for the first month?
The problem is you get paid once a month, so you might need to do it for 21 months for that to be a habit. But can I, for the short term, just get used to putting some money aside that I don't put aside at the moment. So 1% if you'll start from zero. And that's exactly how I coach profit first clients.
Any business owners watching this? When we work with our profit first clients, some people don't put aside their tax money.
It sounds quite crazy. A lot of people be thinking, oh, my God, I could not live if I didn't put any money aside for tax. But the truth is, some people worry about it later on when the time comes. And for somebody who's not used to putting anything aside for tax, there's no point telling them to put 20% aside starting next week because it's not going to work. It's too much of a strain. It's a shock to the system. However, what I can do and what I do encourage people to do is put 1% aside for tax because there's no excuses. There's literally no excuses not to put 1% aside. And what we do is we compound that. So we might do 1% for quarter one, we might move to 4% for quarter two, and we sort of move that up. So that person is in the habit of putting money aside for tax. And I would say the same with your savings. Start with 1%. If you're already doing 1-2-3 can you just notch it up a little bit?
So I'm talking not about savings because it's quite important for the future, but it's not very exciting for the here and now. I would encourage people to use this system to benefit you now. So if you're not used to putting money aside for holidays, create a pot. Call it the holiday pot. I want to go to Florida next year, next summer. So 2025, I'm far more likely to make that happen. A if I decide that's what I want to do, all starts with a decision. So you need to make that decision.
B if I book something, and actually, a lot of the entrepreneurial organizations I'm in encourage business owners to book something even if they don't even think they can afford it. Because what you're doing is you're planting the seed, and that's going to grow into something, and then create the pot and start putting money aside. You're far more likely to go on that holiday if you do that. Compared to saying, I hope to go on holiday next year, I'm not going to create a pot, but I'm hoping I'm going to have the money later on.
If you're watching this and you haven't got the money now, what I'd encourage you to do is start a pot for that holiday you want to go on next year.
If this is relevant, rings true for you. It could be something else, it could be a big occasion, or whatever it means to you, but let's use an example of a holiday and just put something aside. If you can only afford to put 20 quid aside, start with 20 quid, 50 quid, 100 pound, whatever it means to you. So, with profit first for businesses, we move towards five or six pots. And the reason I've got Monzo, Stalin and tide on here is you don't need to create several bank accounts. What you can do is have one Stalin account or one Monzo account and you can separate your money. So let's pretend you've got 1000 pounds in your Stalin account and you could split that into five accounts with 200 pounds in each.
But actually, it's one account, but it's called a space. I think in Starlin, I use spaces and pots interchangeably. It's called a space. So if you allocated 200 pounds to each space, when you log into Starlin, it says there's nothing in your account. You don't even see it because it's kind of in the background, hidden in these sub accounts or these sub pots. So what I'd encourage people to do, if they want to kind of practice this system with what works in your life is to, if you haven't already, get a Stalin account, a Monza account. Tide are the three main ones I seem to come across. And if you've got a bank account you already use, get in the habit of transferring some money to one of these accounts and just create some pots. I'm not even going to tell you what pots to create. I can suggest one that's quite uniform for a lot of people, is maybe some kind of savings and maybe a holiday. But whatever emotionally connects to you, it might be a big occasion.
My wife and I, we're doing our wedding renewal in 2027, so potentially I can have a pot now for 2027. I've not started that, but actually, I might start it after this. I might practice what I preach, because you could have a pot for anything. So whatever really resonates with you. I'm going to pick on Beatrice and Nick again because you're in the room. Have you got any questions around this or any ideas what you think you could potentially use this sort of system for?
[00:24:09] Speaker C: Well, as I said, I don't do pots. I've read profit first, but I haven't started implementing it yet. I do have a starling and a Monzo account, so I just need to make a start with the suggestions you've made. I think.
[00:24:23] Speaker A: Yeah, I mean, yours would be interesting, Beatrice, because I'm talking from the context of a personal finances, but absolutely, obviously supplies for your business as well.
