1006 – Financial Goal Setting is the key to Wealth Creation and Profit First is the key to Business Cash Flow Management

Last week in the personal finances section, we introduced the personal financial statement as the starting line you can later look back on. This week, we’re talking about goals — the finish line that you’re set on getting to.

With the release of his Freedom Journal last year, John Lee Dumas introduced the acronym S.M.A.R.T., which stands for specific, measurable, achievable, realistic, and timely. Your goal needs to meet these five criteria or it won’t be achievable.

Specific – you need to have a specific end in mind.
Measurable – you need to have a quantifiable way of measuring your goal.
Achievable – your goal needs to be something that is achievable from a general perspective.
Realistic – your goal also needs to be achievable for you.
Timely – there needs to be a finite end; a date by which your goal will come to fruition.

When you don’t have a goal, you’re in what Michael Hyatt and Daniel Harkavy call a “state of drift” in their book Living Forward.

To set your own financial goal, try this five-step exercise:
1. List all your wants, desires, and must-haves.
2. Estimate a dollar value for each item on your list.
3. Organize the items on your list by priority. For each item, list a length of time until you need to reach that goal.
4. Divide your list into three categories based on the time length for each:
a. Short-term goals (within 18 months)
b. Medium-term goals (18 months to 5 years)
c. Long-term goals (longer than 5 years)
5. Within each time frame, organize the goals by the priority you’ve already determined.

In this episode’s business segment, we’re going to talk about the concept of “profit first,” a concept from Mike Michalowicz’s book of the same name.

As Moshe explains, most entrepreneurs get into business to try to fulfill a specific dream or motivation (such as having more time with family, or more money). Often, a few years into the business, they and their business are still just making it by month-to-month. This is often due to Parkinson’s Law.

Moshe also talks us through owner’s pay. If all you bring home is the amount that you would pay someone else to run your business, you aren’t actually making any profit. The value of your business is what’s left after someone (you or someone else) is paid to do your job.

Profit-first methodology flips the formula around: instead of “sales – expenses = profit,” it’s “sales – profit = expenses.”

If you ask any health or fitness coach how to change the way you act, they’ll tell you to eat smaller portions — and to do that by using a smaller plate. Profit-first strategy works similarly, as Moshe illustrates. You’ll set aside profit first and make less money available for expenses, in effect eating from a smaller plate.

Moshe starts the taxes section by talking about income tax, which is the most complicated tax that most people need to face. The government uses this to control some of our behaviors, so it builds in things to give us credits based on certain actions. Other types of taxes include sales tax, property tax, VAT, FICA, and many more.

For most of this segment, Moshe focuses on health insurance and the Affordable Care Act. One of the problems, he reveals, is that the plans available through the ACA aren’t necessarily great. He also discusses the tax penalties involved in not having health insurance for the entire year.

Show Notes:

[01:31] – Goals are the destination, or finish line. We learn about the acronym S.M.A.R.T. and what it means in terms of goals.
[05:45] – Without a properly formatted goal, you’re at risk of falling into a “state of drift.” Moshe explains what this means in some depth.
[06:49] – Moshe clarifies the importance of various aspects of setting goals, using the example of a runner. He then offers another example: weight loss.
[09:40] – This works the same way from a personal financial perspective. This time, Moshe offers himself up as an example.
[11:15] – As the availability increases, our demand for that resource increases at the same degree, Moshe explains.
[12:14] – How do we go about setting financial goals for ourselves? Moshe gives a five-step exercise to help.
[18:48] – Moshe pulls up an exercise that he did a while ago, listing his short-, medium-, and long-term goals from around 2014.
[26:25] – Launching into the business section, Moshe talks about the book Profit First. He then shares his own relation to profit-first methodology.
[27:52] – There was a specific problem that profit-first methodology was created to solve. Here, Moshe explains what it is.
[29:18] – Parkinson’s Law indicates that as the availability increases, our demand for that resource increases at the same degree. This is the crux of the problem, Moshe explains.
[30:54] – Moshe discusses owner’s pay, which is the pay that you would pay someone else if you walked away from the business and had them run it. He also explores the difference between owning and running a business.
[33:42] – Profit-first attacks this system and allows the owner to escape this pattern, and Moshe talks about how this works.
[36:17] – Moshe talks us through the four principles involved in implementing profit-first. He uses the example of weight loss (and gain) to illustrate his point. The first concept is using a smaller plate.
[38:47] – The second principle, using the same example, is to eat your vegetables first.
[39:38] – The third concept is removing temptation.
[40:48] – Finally, the fourth principle is establishing a rhythm.
[43:04] – A frequent question that Moshe gets from business owners is this: “What do I need to know about business taxation?” Fortunately, he has the answer! To get a copy of his free guide with five tax tips every business owner needs to know, you can text “5taxtips” to 44222 or go to dreambuilderfinancial.com/5taxtips.
[43:52] – Moshe talks us through income tax, property tax, and sales tax.
[45:35] – We learn about VAT, or value-added tax, in a fair amount of detail in terms of how the tax functions and its impact on the final price of the item.
[46:47] – In the United States, we have a FICA tax, which Moshe explains fairly briefly here.
[47:25] – Moshe rattles off lots of other tax types that he hasn’t yet covered.
[47:55] – For the rest of this show, Moshe will focus on the Affordable Care Act. He starts off by explaining the basics of how the ACA functions, both for individuals and insurance companies.
[49:58] – The plans available through the healthcare marketplace aren’t typically that great, Moshe explains.
[50:33] – Going without health insurance results in penalties, which Moshe lays out in detail.
[51:45] – There are a few exceptions for people who would be exempt from the penalties
[52:03] – You need to use caution with the premium tax credit.

Links and Resources:

DreamBuilder Financial
Freedom Journal by John Lee Dumas
Living Forward by Michael Hyatt and Daniel Harkavy
Kiplinger’s Retirement Savings Calculator
Profit First by Mike Michalowicz
Parkinson’s Law
5 Tax Tips Every New Business Owner Needs to Know
The Affordable Care Act