What is Personal Profitability?
I started my first business almost 25 years ago. Like many entrepreneurs, I didn’t get to choose the circumstances surrounding me. I wasn’t able to predict the hard work I would endure to bring the business to its 25th anniversary. I didn’t even get to choose the name of my business – my mother did that for me.
Now, it’s important to note that I am coming up on my 25th birthday. The business reaching its 25th anniversary is my life. My business’ name is Timothy Janes (LLC?). Of course, there are a lot of things that go into a complete life. Cultivating yourself and the life you live in every aspect is important – and a topic that could take its own post – but for this post I want to focus on one thing: Personal Profitability.
Just like any business, each of us depends on the money we take home at the end of the day – the bottom line – staying in the black, instead of dropping into the red. Once our bottom line is in the red, that means that we are spending more money than we bring in. On the other hand, every dollar that we are over zero for our bottom line represents savings and more disposable income. With those savings or disposable income, we can take vacations, buy something nice, purchase a house, invest in the stock market, really anything we want – including simply growing our savings.
Unfortunately, too many of us do not view any part of our lives as a business. For the most part, I’m a fan of that philosophy; however, when it comes to money, we need to buckle down and really focus! Without money, we can’t sustain ourselves in modern society (unless you go off the map to live a 100% independent lifestyle or become one of those super-travelers that make me wonder how they’re surviving while travelling the world jobless, but I digress). We work hard to earn the money that we make. With so many expenses (e.g. student loans and mortgages) that people face today, it’s hard to keep that bottom line out of the red. My goal today is to help you do just that.
How Personal Profitability Works
Somebody bringing home $40,000 a year can be more profitable than somebody bringing home $50,000 a year. It depends on what you are doing with the money you bring home at the end of the day. Some factors are out of your control (like taxes, social security, etc.), but there are many factors that you CAN control. Let’s look at an example.
There are two people, John and Tom, who work for the same company. They are in the same tax bracket, have similar mortgages, don’t have any kids, and overall live pretty similar lives. The biggest difference is their salary. John is Tom’s boss, and he makes more money. At the end of the day, after taxes and other governmental obligations, John takes home $50,000 annually, while Tom takes home $40,000 annually. Again, they have pretty much all of the same major expenses – mortgages, car payments, etc. However, John likes to live a more expensive lifestyle. He likes to buy new clothes each week, go out to dinner multiple times a week, go on multiple long-distance trips a year, and spend money to buy items that ultimately end up in the basement at his house after one use. Let’s see how John’s personal profitability compares to Tom’s.
Here we see the disparity in the savings rate. Tom saves 2% more of his annual income than John to have equal savings in dollars at the end of the year. Considering it is good practice to save 10-15% of your annual income, Tom is pretty on point, while John has a bit of expense control to work on. Now, the difference of $10,000 in the “Other Expenses” category may seem unrealistic, but that’s just what one great vacation, too many meals out, and needless gadgets can do to savings. The lesson here is that a savings rate change of a couple percentage points can make all the difference. Let’s look at it another way.
Let’s say that John decides to become more responsible with his spending. He decides to start saving 10% of his annual income by decreasing his “Other Expenses.”
There are a few things to notice here. First, by decreasing his “Other Expenses” by 2% per year, thereby increasing his savings by the same amount, Responsible John is now saving $5,000 annually – a $1,000 increase, which is a 25% increase from his old savings in dollars. As we look towards the right, we see Old John stuck in his ways of only saving 8%. Here we see that, in order to reach the same dollar savings at a rate of 8%, Old John has to get a nice (and hefty) boost in his income to $62,500. That’s A LOT. A few ways to consider with this:
- It’s a $12,500 increase in income
- It’s a 25% increase in income (boy, I would love that raise at work…)
- If he had a savings rate of 10% at THAT income, he would save $6,250 annually
Basically, the point is this: A tiny increase in your savings rate will help you save more money annually than a large jump in your income.
See how saving 1% more of your income changes your annual savings!
Even without math, this makes sense. When you decrease cost percentage, it directly increases your bottom line by the same percentage. On the other hand, increasing the top line percentage does not directly increase your bottom line by the same percentage, because cost percentage has not changed (fixed or variable). When spending the same percentage with a higher top line, it takes a lot longer for your bottom line to reach the same dollar amount as just decreasing costs.
Personal Profitability and You
Personal profitability is all about what you do with the money that you bring in. How much money are you spending in comparison to how much money you make? Do you track it? Do you create a budget? Are you putting money into your savings each payday, or are you going out to buy new things? Are you incurring unnecessary expenses? Are you living above your means?
I would venture to say that most people think that earning a higher salary is all it takes to become more profitable. To those people, I say: That’s not necessarily true, AND, more importantly, decreasing your costs makes you profitable faster. So, everything that your family, friends, coworkers, and strangers say about saving money is true. Bringing your lunch to work, carpooling, buying non-name brand clothes, denying the cashier when they ask, “do you want to supersize it?” – these are all ways to increase your savings.
As mentioned in the beginning of this piece, our life is essentially a business. To explain this, I’m going to take an excerpt out of an email I had going with Wayne Chen (a.k.a. Supply Chen, himself). I like he laid it out:
We should run our lives like a business and act like we’re the CEO and CFO. Running your life is not so different from running a business. Like senior management, identify our personal goals for the next 1 year, 5 years, 10 years, 30 years, and then create long- term programs to help achieve those goals.
Slice the programs up into easier to manage projects, then slice the projects into more granular tasks:
Re-evaluate and re-align with our life vision every so often (quarterly, annually, whatever). Try to be as objective as possible, separating ego from true progress.
Creating SMART goals will help quantify whether you’ve achieved your goal or not. If you don’t achieve your goals, WHO CARES? You still made an effort towards your goal!
For those that don’t know, SMART goals are Specific, Measurable, Attainable, Relevant, and Time-bound. Usually, these goals are applied towards earning new degrees, learning new skills, or making a big life purchase, such as a house. You can use this method for increasing your savings, too: “I will increase my annual savings rate from 8% to 10% by the end of 2018.” After you set your goal, figure out how you will achieve it: “I will start bringing lunch to work three times a week, go out to dinner only once a week, and buy less clothes.” Finally, figure out what you are going to do to accomplish those changes: “I will make lunch the night before work, I will learn new recipes and keep my house well stocked, so I can cook at home more, and I will only buy one new piece of clothing per week, instead of two.”
Becoming personally profitable is not an easy thing to do. It takes awareness, persistence, and discipline. Thankfully, the hard work and sacrifice put into decreasing cost pays off. Plus, it takes a lot less effort to save a few dollars here and there than to bring in thousands of dollars more per year. Treating your financial life like a business will set you up for success. We’re supposed to be the masters of our own destiny, right? So, take the reins of your business and start steering it down the road towards personal profitability.