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One of the hardest parts of owning a small business or running a home is managing the finances. When I opened my salon, I got hit with the hard reality that I was my own accountant. I, by no means, am a math whiz or even close to it. So instead of just pawning it off and paying someone I decided to take some advice from a boutique owner who runs a podcast and purchase a book called Profit First. If you haven’t read this, I highly suggest purchasing it after reading through this and come back if need be!
Profit First was written by Mike Michalowicz who is a small business and financial wizard. He basically took your grandmother’s ‘envelope savings’ and broke it down in to separate bank accounts. He goes into great detail in his book, but I’ll simplify it for the home. (Again, if you plan to utilize this, I highly recommend purchasing his book for the best accuracy!)
Take the First Step
The first step is going through your finances from the past year with a fine-tooth comb. Print off every bank statement, credit card bill and anything else you make payments to or on. Grab your highlighter, a red pen and a black pen. Highlight every recurring payment, whether it is the same amount or fluctuates. Next, put a red line under any unnecessary payments (i.e., fast food, shopping sprees, etc.). Finally take your black pen and go through the remaining payments. Put a N next to necessary purchases (i.e., groceries, mortage, insurance, etc.) and put a R next to any purchases that you can replace or eliminate (i.e., Netflix, daily Starbucks, etc.)
You need to know your recurring monthly payments and the average you spend each month. If done correctly, some of those recurring payments should have an R next to them and some a N. The necessary payments are things that cannot be replaced, made cheaper or eliminated. However, the replaceable purchases can either be replaced with a cheaper option or eliminated entirely.
I will admit if you are anything like me, once you have those statements done, it can be a little disheartening to see how much you truly are wasting on unnecessary purchases. But it is so vital that you do it and do it honestly! Once you have that completed, break it down in to categories. Here are our accounts we set up after reading his book, I strongly urge you to read Profit First to find the ones that best suit your home.
- Income
- this one is self-explanatory and a must for ALL homes. Here is where all of your monthly earnings will go (i.e., paychecks, direct deposit, etc.)
- You will never pay for anything directly out of this account, only use it as a hub to disperse to your other accounts.
- Recurring Payments
- This should include things like rent, mortgage, insurance… anything that you highlighted and marked with an N that comes out each month.
- Print yourself off a calendar for free here or purchase a planner exclusively for your payments to keep track each month. I added this step on my own, it helps keep track of what has and hasn’t come out yet at a glance. Then you know where you are sitting each month and if you can adjust your amounts.
- Daily Usage
- Use this category for things that are likely to change from month to month but still are necessities. Things like groceries, gas, clothing.
- The Vault
- Here is your savings account. Start with either a checking or a current savings you already have. Absolutely nothing will be paid from here. This account is solely for building up your savings. Trust me, even if you don’t currently save or think you can’t… you NEED this account.
- Debt Crusher
- The title says it all, this is the account you will pay off all of your existing debt from. If you do not have any debt (i.e., credit cards, student loans, mortgage…) than you won’t need it.
Why so many accounts?
Now you are probably thinking that have FIVE accounts seems ridiculous and unreasonable, I did too until I finished the book. However, each one of them is vital to the easy financing that we do twice a month. Twice a month is truly all it takes, not every day, not even weekly. We disperse money every 10th and 25th, like Mike suggests and just glance at our accounts randomly between there!
Income
Having an account strictly for depositing your earnings and such is the simplest yet most crucial step for this to flow smoothly! This keeps you from dipping into money and spending it before you need to. The only time you should access this account is to transfer it on your biweekly basis into your other accounts.
Recurring Payments
Recurring payments are just a fact of life but make it easier by having them come from one place. We have all our necessary payments come out automatically if we can and write checks for the ones that can’t. These are things that are essential and cannot be replaced such as mortgage, insurance, internet and electric. Everyone’s needs will be different, but we all have them so this account is a must. I suggest only having a checkbook, no debit card.
Daily Usage
Here is where you pay for your daily needs and irregular purchases. Everything from gas to groceries and even a candy bar should come from here. This should be the only account you have a debit card for. This will keep you from overspending and being wise with your purchases. If you check and don’t have money to cover that daily coffee then you skip it, saving you in the long run.
The Vault
Before we started implementing this, we never added money to our savings account. Ridiculous right?! We thought we HAD to live tight and couldn’t afford to save with outstanding debt. We were so wrong, and I am sure you are thinking the same, try it and you will not be disappointed. If you think you will dip into this account, open it in another bank aside from all the others and do not get a card or checkbook for it. That way, if you do need to dip in, it will be something important for you to actually go in and take money out.
Debt Crusher
Debt crusher is a must for almost everyone, unless you are on top of things and have zero debt… no mortgage, student loans, credit cards. If that is you, cheers to you! Skip this part. If you are like most Americans, start this account! You will transfer a certain amount biweekly to hep you pay off debt sooner. Mike suggests a method like Dave Ramsey’s Snowball Method, which is fantastic. You will still make your monthly payments from your recurring account, but use this money to add an extra payment each month!
Biweekly Transfers
Each month on the 10th and 25th, or whatever dates work best for you, you will transfer the money you have allotted to each account. But how much do you need? Here is an example for someone who has monthly $2,000 in recurring payments and an income of $3,000 biweekly. (For more detail check out Profit First)
- Recurring Payments
- Biweekly they will deposit $1,500
- Adding a little extra will save you when you either may earn less or a bill goes up!
- Biweekly they will deposit $1,500
- Daily Usage
- Biweekly they will deposit $700
- This covers their groceries ($200/week), gas ($100/week) and anything else they may need.
- Biweekly they will deposit $700
- The Vault
- Biweekly they will deposit $300 (10% of earnings)
- Adjust this amount depending on recurring payment necessities and daily usage. Yours may be higher or lower, adjust accordingly.
- Biweekly they will deposit $300 (10% of earnings)
- Debt Crusher
- Biweekly they will deposit $500 (all remaining funds)
- Use this money at the end of the month to pay to your biggest debt, use the snowball method.
- Biweekly they will deposit $500 (all remaining funds)
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