Pay Off Debt Faster with Profit First | Incite Tax
Profit First uses separate accounts to cut expenses and free up cash for debt payoff. Pay smallest debts first using the snowball method, then redirect 90% of quarterly profits and tax surpluses toward principal. Focus on bad debt like credit cards before good debt like mortgages.
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How can the Profit First system help me pay off debt quicker? Profit First is a cash flow management system. There are 4 core principles that set the framework of the guidelines. Profit First is meant to be guidelines. Pick the things that make the most sense for you. Here are the principles. Smaller plates. If I have one giant plate, I can lose weight simply by filling up a plate that's a little bit smaller. So instead of one big bank account that I do everything out of, have multiple bank accounts where I transfer money into it. Into each of the accounts for specific purposes. Eat veggies first. If I eat my delicious broccoli that's been air fried first, I likely will have less room to eat all the carbs and maybe the less healthy things that are on my plate. Just like with dieting, there are certain elements of our cash flow that are going to be healthier for us to handle before we get to the junk food. Paying yourself first, setting aside money for taxes, setting aside money for profit distributions. Those are your veggies. Remove temptation. Some of the accounts, these smaller plates, are going to accrue a decent amount of cash in them throughout the year. So instead of being tempted to use the money that you set aside for something other than paying bills, set the money aside so you don't see it. Out of sight, out of mind. You remove the temptation. Therefore, you won't necessarily use it on unhealthy things or unproductive expenses. Rhythm days. If you look at the way a bear eats compared to a horse, horses are grazers, so they eat a little bit more throughout the day. And you have bears who eat one large meal. And while both are strong and powerful, the horse is leaner. Having rhythm days in our business where we are sitting down on a regular recurring basis to manage our cash is much better than waiting until we have to file our taxes and then we realize we made more money than we thought and how are we going to pay for the tax, let alone the upcoming bills. When we are talking about using the Profit First system to pay down debt quicker, those 4 core principles allow us to first Stop the bleeding. It doesn't make sense to pay down debt quicker if I'm continuing to accrue debt on the back end. Using the Profit First system as a set of guidelines, following those four core principles and the systems allow you to control the fact that you're going to cut unproductive expenses, things that are a waste, giving you the opportunity to then get in front of your debt. We recommend the snowball debt method. If you haven't heard about this, the concept is pretty simple. You lay out all your debts that you currently owe, and you sort them by lowest. Lowest remaining balance to highest. We are not paying attention to interest rate. We are only paying attention to the least amount, the lowest balance. If I have $100 or $100,000, $100 is going to be the top of the list. $100,000 will be at the bottom. And then you work towards paying that amount first. All of these payments, usually debt has a minimum payment. I'm going to make that out of my operating expense account as a normal form of my business. So once a month I'm making my minimum payments. Then as I pay off each amount, I'm going to take that minimum payment and roll it into the next one. And therefore the amount that I'm putting towards the debt that's at the top of the list gets bigger and bigger and bigger, kind of like a snowball as it rolls down a hill. I have done a very detailed video on this, including a walkthrough with a worksheet. Please check that out. We have it in the comments below, but that's kind of the general idea of how we use that. Now, as I mentioned, I want to pay off debt quicker. So with the Profit First system, I'm setting it up so that I can cut the unnecessary fat off of my business financially first. Now I'm making minimum payments on all the debt through my operating expense account. In addition to that, Profit First allows me to accelerate paying off this debt. One, my profit account that I've set up for Profit First gives me a quarterly profit distribution. Out of that profit distribution, if I have debt, Instead of using it to increase my lifestyle or buy something fun, maybe I have a little bit of a celebration, but I'm going to use 90% or above of my profit distribution to pay towards the principal of these debts, which allows me to pay down that balance faster, which allows me to create the larger snowball payment on the next debt on my list faster. So that will happen once a quarter. In addition to that, you might get to the end of the year and you've been setting aside money into this Smaller plate for income taxes. You get to the end of the year, you owe tax, and you find out that there's more left over in your tax account than what you ended up owing. Awesome. Use that extra amount also to pay down your debt principal. And then if you find yourself really humming along, your owner's pay take-home is really, really comfortable, you can choose to use some of that money to also pay down your debt further. Don't try to accelerate debt payments out of your operating expenses. If you find yourself getting an overaccumulation of operating expenses, we actually probably need to look at how much you're putting into all the different smaller plates. But that gives you a general idea of how the Profit First system, by managing your cash effectively, allows you to pay down your debt quicker. Now, I know there's lots of people out there— good debt, bad debt— some really popular celebrities who have way more influence than I do actually believe doing everything in debt. So if you're in that camp, then look, this Profit First system and paying down debt quicker isn't for you, and that's totally okay. Just know that in general, most people agree, even those who are like, buy everything on debt, Agree that there is bad debt and good debt, and some of the bad debt is what we would call consumer debt. They like debt because what they're borrowing money for is something that's an income-generating asset, meaning they've borrowed the money, but what they bought is actually increasing their wealth and cash flow more than the debt payment. Credit card debt, auto loans, you could argue maybe for some people student loans, those are generally considered bad debt. So at a minimum, use this method to pay off the bad debt faster. Your preference when it comes to the other type of debt, but I prefer to have the least amount of debt as possible. So there you have it. If you want help implementing Profit First into your business, if this sounded of interest, like, hey, I want to cut off the financial fat, I want to make it so that my debt balance isn't increasing every month and maybe paying it down faster, we do have a free guide on how to implement the Profit First system in 7 steps. Download it. We look forward to serving you. And remember, profit is a choice. Have the courage and wisdom to choose it.
