Use Profit First to split revenue into four accounts, then allocate 99% of quarterly profits to debt. Pair it with Dave Ramsey's snowball method: pay minimums on all debts, throw the profit at the smallest balance first, then roll that payment into the next debt as each one clears.
In this tip, I wanted to share with you how the Profit First system helps you pay down your debt a lot faster. So we go into detail with this in Profit First for Microgyms as well, so that's a good read if you want to read it and buy it. Paying down debt with Profit First, we believe in having a Profit being paid first, hence the name. Okay, so how do we do that? When money comes into your business, we recommend you allocate it first to things that fit the definition of profit, which for me is anything that benefits the owner. That's going to be an account for taxes so that the business covers the burden of income tax. Not the person, not the owner. There's going to be an owner's pay account to make sure the owner gets a livable wage, and a profit account which is designed to give a quarterly profit distribution to the owner. Okay, so this— the profit account is what I want to talk about with, because that's how we massively accelerate paying down debt. You are going to still pay your minimum payments on debt through your operating expense account, and that's going to be a normal flow of your monthly cash outflow. But then once a quarter, you're going to get a profit distribution, and what we recommend is that use a small percentage on yourself to celebrate, um, whatever that may look like, but a small percentage. Then the remainder of it, so 99%, you use the 99% of your profit distribution And pay it towards your debt balances. We like Dave Ramsey's snowball method. I tried to look up if that originated with him or not. I couldn't tell. We're just gonna give him credit for it. I'm sure the method has been around for a long time, but it works really good. The idea is you list out all your debts from the smallest balance owed At the top of the list, and then you go in order all the way down to the last one being the largest balance that you need, or that you need to pay off, that you owe. You don't focus on the interest expense rate, you focus on the balance number. So again, make monthly payments like you normally do, stay current with your debt, but then once a quarter you can take your profit distribution And apply it to the next debt that you have owed. And what happens is as you pay off that first debt, you're gonna take the cash you were using to cover that minimum payment and add it to your next level, your next debt in your list. So now you're making a little bit more than the minimum payment towards that next debt. You're still gonna use your profit distributions. Mm-hmm. Apply that to the debt on the top of your current list, as those each getting paid, each get paid off, you're gonna take the minimum balances. So by the time you end up on your highest balance, once that's to the top of the list, your minimum monthly payment you're making to it is gonna be well above the minimum payment they're requiring. That's where the snowball concept comes from. Because if you roll a snowball down the hill, it slowly gets bigger. The snowball represents the amount of money you can put each month towards the debt. So again, using your quarterly profit distributions, you can accelerate paying down your debt. I personally have done this. It is freaking amazing. And you know, anyways, it's great. So that's the tip for the day. Please subscribe to our YouTube channel. Share this with the world. We want as many people To know some of these sound principles that they could be using. All right, thank you for your time. Keep saving lives.
