What Losing All My Money Taught Me About Making Money
I talk a lot about success, and I talk a lot about failure. That’s because I’ve been intimately acquainted with both. Let me brag for a second before I humble myself. I sold two companies before my 35th birthday, the second one to a Fortune 500 company. I’d made it big, and I had the bank account and toys to prove it—at least for a little while.
When I started out in business, I followed the traditionally accepted accounting and business practices. I took on clients I probably shouldn’t have and I struggled simply to meet expenses, never quite making it to the point that there was much in the way of actual profit left over at the end of the quarter or the end of the year. But then I sold my businesses, got some huge checks in my hot little hands, and I thought that I was finally wealthy. Wealth had happened to me, and boy, was I happy about it.
High to Low
It was on Valentine’s Day 2008 that I hit rock bottom. Not only did I realize that I’d blown through all my money faster than you can imagine, but a conversation with my accountant told me that I owed tens of thousands of dollars to the IRS for the huge proceeds of my business sale. Not only did I not have two nickels to rub together, but I was actually in the hole–I had a negative net worth. It was devastating, and it was the beginning of my enlightenment, though I didn’t know it at the time.
What I learned the hard way is that wealth isn’t an event; it’s a habit.
Before I hit rock bottom, I’d thought that events brought wealth, huge chunks of it at a time. In truth, it’s the daily habit of stringing together little bits of money that creates wealth. Wealth is a habit, and it isn’t created by a huge pile of money that falls into your lap. It requires discipline, and it requires a plan.
Here is that plan.
The Importance of Profit
I call my approach Profit First, and it’s a simple method for evaluating business deals to determine if they’re profitable and for amassing wealth from the business you transact. The way it works is that a predetermined percentage of every single bit of income that your business generates is allocated to profit. First, that money is set aside before any bills or employees are paid. The net result is that every transaction generates profit. To ensure this, you assess each potential deal based on whether there’s money left over to pay the bills after you’ve set aside the profit.
What you avoid is the all-too-common trap of working just to meet your expenses. If a deal can’t support both the profit and your expenses, then it’s not a deal worth making. If you pay your expenses first and then use the leftovers (if you have them) to scrounge up a little profit, you’re not making wealth a habit; you’re making it an occasional event that might happen every now and then. That’s not wealth!
It takes discipline to change your mindset and your practices to reflect the principles of Profit First, but let me tell you … it’s worth it. There’s no more uncertainty about whether or not you should do a deal. The answer is there in black and white. There’s no more realizing that paying the last bill of the month leaves nothing to speak of in your bank account. You’re prioritizing what’s important, and you’ll find ways, sometimes creatively, to pay the bills with what’s left.
I realized when I looked around my home back in 2008 that well-dressed poverty is still poverty. My garage held more fancy, expensive cars than there were drivers in the house. My wife, kids and I didn’t lack for creature comforts, but that lifestyle wasn’t sustainable. Profit First creates genuine, sustainable wealth. It’s uncommon, it’s simple, and it’s also foolproof. Create the habit of wealth, and you will inevitably continue to generate more wealth, not because you need to buy more fancy toys, but because your business is set up and operates on the sound principles of making profit and wealth your priority.
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