I’ve been sharing with you some of the conversation I had with my friend David Richter, author of Profit First for Real Estate Investing. I want to wrap up this series by giving you a brief summary of how David’s ideas would be implemented and how the money would flow into and out of your business accounts. For a more detailed look at his system, you can find his book on Amazon.
This system for your finances centers around having multiple bank accounts to help you have control over your cashflow. Here’s how the money flows:
Income Account: Revenue you get from your business is put into this Income Account. From this account, you allocate (or flow) your income money into the other bank accounts to be used for specific designated purposes. You will set the percentages for how much flows into each of the other four accounts.
Profit Account: This account is your reward for being a business owner. You designate a percentage of all revenue that comes into your business to be moved into this account. Each quarter, you’ll withdraw money from this account as profit to yourself that you can use as you wish for yourself and your family, whether it’s taking a dream vacation or paying down personal debt.
Owner’s Pay Account: This is a separate account into which flows the money to pay the wages or salary for just you, the owner. No more waiting to see what’s left over at the end of the month for you after other employees are paid and expenses have been covered. Money for those things has been allocated elsewhere.
Owner’s Tax Account: You will put money into this “do-not-touch” bank account to cover your business and personal taxes. As the business owner, your business should be paying YOUR taxes, not the other way around.
Operating Expenses Account: This is the single account you originally opened and were using for everything, but it now has a new designation. After you have moved the designated amounts of money into the Profit, Owner’s Pay and Owner’s Tax Accounts, all leftover money from the revenue deposited into the Income Account is moved into this Operating Expenses Account from which you will pay all your business employees and company bills.
By using separate accounts, every dollar has a home and a designated purpose. It forces you to focus on the health of your business first and then get creative with what you have left over.
Building wealth is the result of developing good habits when it comes to how you handle your money. If the habits you have formed aren’t getting the results you want, maybe it’s time to make some changes. Wealthy people control their money. Financial freedom isn’t achieved by accident. I hope the ideas David Richter and I discussed and I’ve shared with you have made you look at your financial practices in a new way.