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In this episode, we're talking with David Richter of Simple CFO Solutions.
David is a certified Profit First Professional. If you're not familiar with Profit First, this is essentially a financial management system for small businesses. Profit First was a groundbreaking book that was published back in 2017, and it’s one of those books I hear people reference time and time again because it has changed the way a lot of people think about their money.
David is actually under contract with Mike Michalowicz (the author of Profit First) to write the book on Profit First for Real Estate Investors. David's company provides fractional CFO services for real estate investors nationwide – meaning they perform the job of a CFO on behalf of your company at a fraction of the cost.
They can help you clean up your books, assess how healthy your company is in terms of profitability, empower you to manage your business finances based on the Profit First System, assess what business expenses are actually yielding an ROI, and tons more.
Needless to say, David has A LOT to bring to the table for us real estate investors, so we’re honored to have him on the show today!
Links and Resources
- Simple CFO Solutions (David's website)
- Profit First REI Podcast (David's podcast)
- Profit First by Mike Michalowicz
- Blog Post: Profit First Changed My Life. It Will Change Yours Too.
- Dave Ramsey's Envelope System Explained
- Rich Dad, Poor Dad by Robert Kiyosaki
- The Richest Man in Babylon by George S. Clason
- Land Investing Masterclass
- REtipster Land Coaching
Episode 101 Transcription
Seth: Hey everybody, how's it going? This is Seth and Jaren from the REtipster podcast. Today, we're talking with David Richter from Simple CFO Solutions. David is a certified Profit First professional. For those who might not be familiar with Profit First, this is essentially a financial management system for small businesses and entrepreneurs.
Profit First was a groundbreaking book that was published a few years ago now. And it's one of those books that I hear people reference time and time again because it's just changed the way a lot of people think about their money and their revenue and how to manage that. It really does a great job of translating the world that accountants and bookkeepers come from into a language that people like us can understand.
Basically, just ensures that a business is profitable from day one and helps navigate the waters on things like how much an owner should take as a salary and how much should they put away for taxes, and what percentage of revenue should go back to cover operating expenses and things like that.
A lot of people, if they don't have this kind of framework to live by, they just look at what the balance of cash is in their bank account and just use that as a gut feel to make decisions.
Profit First gives you a much more structured, sensible way to look at that. And I know Jaren was deeply impacted by the Profit First system and he actually wrote a big blog post about it. You can find it in the article, I'll have it linked in the show notes for this episode at retipster.com/101 because this is episode 101.
But getting back to David Richter. David is actually under contract with Mike Michalowicz, the author of Profit First, to write the book on Profit First for Real Estate Investors, which is pretty cool. And his company, Simple CFO Solutions, provides fractional CFO services for real estate investors nationwide, which means they perform the job of a CFO on behalf of your company at a fraction of the cost. They can help clean up your books and assess how healthy your company is in terms of profitability and empower you to manage your business's finances based on this Profit First system. Just kind of figure out what business expenses are actually yielding ROI and a lot more.
Needless to say, David has a lot to bring to the table for us as real estate investors. So, we're honored to have him on the show today. Welcome David, how are you doing?
David Richter: I’m doing great. Thanks for having me on.
Seth: Yeah, absolutely. Maybe to just kick things off here. So, how did you first discover Profit First? What's your story?
David Richter: My story, here we go. I read "Rich Dad Poor Dad" in college. So that was the thing that got me into real estate. I started working with a company after I'd done some of my own deals and I was a real estate investor, and I also started working with an investing company. And by the time I left there, we were doing about thirty deals a month, wholesale, fix and flip, turnkey, rental own, lease op, and everything in between. And what I saw there, I got to sit in every single seat. So, marketing, acquisition, dispositions, the finance seat, transaction coordination, like everything in a small real estate company or a growing one.
And one of the seats I really liked was the financial seat because I finally got to learn about what small business finances actually meant. Like how the deal when everyone says you should buy it, right? Because that's where you make all your money, how that translated into the actual dollars and cents at the end of the day, and how you could use that.
So that was super beneficial to be able to sit in all those seats and then see the financial picture behind those seats and be like, okay, this is how the company comes together to make the money. And then I was seeing too we grew to about from five deals a month to 30 deals a month, but then we also grew from five employees to 25 employees. So as much as we've gotten to coming in that much or more was going out too. That was one thing I got to see just how it doesn't matter what your top line is, it really matters what you're keeping at the end of the day. And I could see that tangibly right there.
So that was like the big eye-opener to me. And then I had to make a move cross-country because we could, and I sold my portfolio that I had and we moved to be closer to family and started working with another investor and started helping him clean up his finances and get that picture. After we did that, he told me and said like, “Hey, this has changed my life.” And I was like, “Okay, I got to start a company to help people in the real estate investing world because I can speak that language and whatnot.” And then someone called me, that was a mentor that said, “Hey, I heard what you're doing. You should read the book Profit First. I think you'll like it.” And I said, okay, I'll read it.
So, I read it that night. I took 10 pages of notes and I was like, “Oh yeah, this has to be a part of the framework of the company because it's written for the entrepreneur.” It's written for the deal maker to be able to manage an area, which is scary to a lot of entrepreneurs. So, I was like, I got to put this in play. Really, one of the mentors that I had from the company that I used to work at was like, “Hey, you should read this book. I heard what you're doing.” So that was how I was introduced to Profit First and kind of the background of my real estate investing journey as well.
Jaren: Yeah. It's super powerful, man. I can speak first-hand about how powerful Profit First has just completely revolutionized not only my land business and my real estate pursuits but even my personal finances, like I just had no working framework.
I don't know how many of our listeners can relate out there, but I stumbled into real estate and I kind of had to make it my career. My worst subject in school was math. And I made an entire career out of doing things that require math every single day.
When I got ahold of Profit First, essentially, it was like putting on glasses. It took the fuzzy picture of what finances and managing finances was for me, like the low-resolution picture, and just made it HD. It just made it all sync and revolutionized my life. I mean, even now my land business is really starting to take off in a really good direction. We're really ramping things up and it's healthy. It's really like, I don't hate my land business anymore. I know it's a good thing and it's not a point of stress. It's a real point of joy.
So, obviously, I kind of stole the show there. The question that I have for you is why do you believe in this model so strongly David? I mean, obviously, I believe in it super strongly, but what about you? Obviously, for you to become a Profit First certified professional, you must really believe in it. So why do you believe in it?
David Richter: Yeah. For reasons of—like your story. And now that we've seen it in play with real estate investors, it's changing their lives and that's not an understatement. I know everyone says that like, “Oh, this new thing changed my life” and whatnot, but we've really seen that it's an area that's a touchy subject with a lot of entrepreneurs because they're like you, they jumped into it. They have no idea what they're doing on the financial side. They're like, “As long as I make money, everything's going to be okay.” And that's how they treat that side. Or they give it to their accountant and bookkeeper and say, “You do that. I do this. Just make sure I don't go under.” And it's like, they don't even look at that side.
And Profit First makes it like that picture-perfect. Very clear of where you are, where you stand financially. And I've got a bunch of stories from clients that we've implemented. One of the biggest changes I saw, there was one guy who was stressed out in 2019, lost $70,000 that year. And that's quite a bit of money to him. I mean, it's a good, decent amount of money to anyone, and he lost $70,000 that year. And he was just burnt out. His wife had started working with him that year inside the business. And she told me later on, she started having seizures because it was so stressful. Like it was absolute chaos.
And they came to us in the first quarter of 2020 and said, “We need help. We're struggling. We don't know what we're doing wrong. We don't know where our money is going and all that.” And we started working with them and started implementing Profit First. Like there's resistance that everyone gives, like, “Oh, we got to set up bank accounts”—and we'll talk about the system I'm sure in a little bit—but there was the normal resistance of some of that stuff. But honestly, it's a different way of thinking too. So yeah, he had to get over that hurdle and got to think of it—your finances—in a different way.
But once he did, I got an amazing call at the end of the year at 2020. So, at the beginning of 2020, I had a call with his accountant before he started working with us and she said, “This is how much you've lost, $70,000.” And she said, “If I were going into real estate, I would never think about it after looking at your finances.”
So then at the end of 2020, I get a call and he calls me and I pick up the phone and he's like, “Hey, David, I actually have to pay taxes this year.” I'm like, “Okay, where's he going with this?” And he's like, “No, I get to pay taxes because I actually made money. I made quite a bit of money.” He told me how much he made. And so, he said, yeah, my accountant told me I made this much. And so, my next question was okay, what's my tax liability?
So, he's got a flipping business and rentals. He made quite a bit in flipping and quite a bit on his rentals, but because of depreciation he was thinking, “Okay, how much am I really going to have to pay?” So, she told him the amount, it wasn't as much if he was just flipping, but he went to his bank accounts, he's got two different owners tax accounts set up for his two different entities. And he worked in there and he was able to see that he had almost to the penny what he needed for 2020. And he said, where do I send the check? He's like, I'll do it right now. And then she said, yeah, but looking over this year, I'm much more inclined to go into the real estate investing business. So that came like full circle.
And then he was telling me that his wife had stopped working in the business and wasn't having the seizures anymore. He got back on track with his health and totally revolutionized his world. It wasn't just his business and just his finances, it helped all around. And that's like what we strive to do with this system because this system is a deep level. It's not just the surface level of, “Oh, this is where my money is going.” That's good, but then it can provide the real security that a lot of investors are seeking on a subject where they don't think it's going to be easy to be able to find that security, which this system is very good at doing.
Because another thing too, that he told me one last thing from that investor and why I think it's so important. He said, we set up that profit account. That's like the first account to set it up. They said, we took our first vacation this year as a family from that account, guilt-free. I knew we had the money. And I took that vacation. So that was just like the icing on the cake to him after all that other stuff.
So that's why I believe in Profit First, because it's not just that story but multiple stories of clients where we've been working with for a while and they've seen changes in their business and changes in their life too.
Jaren: Yeah, it's just really interesting David, because we all pursue business and we all pursue real estate so that it actually elevates our lifestyle and makes things enjoyable and good. But for so many real estate investors out there, they might, on the surface, look like they're doing a bunch of volume. Like they might be doing a lot of deals or they might have even a lot of revenue coming in, but I know that there were months where I've had tens of thousands of dollars come in and go right back out. It's a very different thing behind closed doors to have money coming in and actually knowing what to do once that money is there and how having the skill set, because it really is a skillset to tell your money where to go and what to do and to line up properly so that it actually adds value to your life.
I tell people a lot, we have a coaching program here at REtipster and I have a section where I talk about Profit First and I recommend the books that literally everybody comes in through the coaching program. And I tell them that what they're paying for in the coaching program is learning the skill set that's required for one side of the coin of success. And that's the activity to do the thing that generates revenue. And that's a part of it. If you're a land investor, you've got to know how to buy and sell land and run due diligence and deal with title companies and sellers and all that. That's one side of the coin.
But the other side of the coin that not a lot of people talk about is the business financial management side. And I really feel like when I got ahold of Profit First, that was the missing ingredient that was like, “Oh, okay, this is how the whole entity structuring thing works. And this is how I'm supposed to manage the revenue and tell it what to do.” Obviously, I'm very excited that you're here. Because I really love this subject and it's really near and dear to my heart just because of how much it's impacted me personally.
Seth: Before we get much further into this. So, if somebody is listening to this, they have no idea what Profit First is. They hear all this ra-ra stories and all this stuff. They're like, “Okay, I don't get it.” Can you just give us like a really high-level idea what is this? What are we talking about? Is this like an envelope system for business? Or can you give us a couple-minute overview of how this all works?
David Richter: Sure. Yeah. The actual practical behind it is like an envelope-type system. But before that, it's a mindset where in the typical mindset of an accountant or bookkeeper like the numbers people are, sales minus expenses equals profit. That's the formula that everyone uses and that's what entrepreneurs grew up on. They see their parents or they see other entrepreneurs like, yeah, that makes sense. I make a sale. I pay what I have to. And if there's profit left over, maybe at the end of the year, I can celebrate that I actually have some profit there. Or my accountant is going to tell me I have profit, but I have no idea where it actually is.
And the Profit First mindset flips that formula around just being two variables there. So, it's sales minus profit equals expenses. So, I have a sale. I sell the property, I sell that land and then I go and take the Profit First to make sure we're healthy. And then my company has to live off of what's left over. So, making sure that you are healthy first and making sure that you're getting exactly what you need from your company.
So, it's breaking that mindset of I've got to pay everyone else first before I pay myself before the company is profitable. And it's switching that around and saying, “I'm going to make profit on habit, and not an event that happens at the end of the year—hopefully—in my life.” It's taking profitability into everything.
Then the practical steps behind it are a match between the envelope system and Robert Kiyosaki's “Pay Yourself First” and The “Richest Man in Babylon,” like all these things that we've heard before. Here are the practical steps behind it of setting up physical bank accounts designated for your profit, for paying yourself, for the owner's tax, like to make sure your taxes are taken care of. Those three accounts, the property account, the owner's compensation, and the owner's tax are three accounts I would set up right away.
I call them the golden trio in the book that I'm writing. I'm a huge movie buff, movie nerd. I love all that stuff. And I love Star Wars and Harry Potter. They've got the three main heroes, always pushing the story forward. They've got Yoda, Luke, and Leia. Making sure that good wins and you need that in your business. You need a profit account, so that way you're profitable, owner's comp to pay yourself, and owner's tax to make sure the tax man never beats you. Making sure that you've got those three set up those three core accounts inside of your business, because all three of them force you to think about your business in a different way. That's how you make profit a habit inside of your business, because it's great to have the mindset, but then you have to have a system behind it to back it up. So, it is literally setting up physical bank accounts designated for those areas.
Seth: Now you said, the big three are an account for profit, an account for owner's compensation. That's like the salary you pay yourself.
David Richter: The salary you pay yourself, especially if you're working in the business. If you're working in the business, you're going to need to pay yourself because that's one of the seats in the business. So yeah, owner's comp is different from profit.
Seth: Yeah. And then taxes. And basically, after the money comes in and you've distributed it to those three accounts, whatever's left over, that's what goes to expenses?
David Richter: That goes to the OPEX account, right. So yeah, there's the whole system behind it because besides the accounts, you need to learn where you are now percent-wise. And the first step, the very first step, is doing a very quick assessment of just a rough and dirty assessment of your business. And I only like to gather three numbers. What did I make in the last 12 months? What did I pay myself in the last 12 months? And then what did I spend in the last 12 months? If I can gather those numbers easily, whether it be from my accounting software or from my bank statements or wherever, because the big number there is just what did you pay yourself?
So, how much did I make? How much did I actually keep for myself? And what did I spend? If I can get those, I can get percentages of where I am now, because the percent is based on what you actually make. If what you make is a hundred percent, let's say that's $100,000. If you paid yourself only $20,000 in the last 12 months, that's 20%. Then the rest of it is going to be OPEX. So, like your current percentages that you're working on, or CAPs as they're called in the book, current allocation percentages would be like 20% for owners’ compensation and 80% for OPEX.
So, you have to establish that baseline. Then once you set up those accounts, then you can actually move forward and say, my new percentages are now going to include at least 1% to profit, at least 1% to owner's comp, and at least 1% to owners’ tax where I am right now. So that way I can at least have some money going into there, into those accounts and setting those up and getting that habit of profit in place. So, then I could keep going on that, but that's the basic foundation of transferring and setting that first percentages.
Jaren: I just want to clarify for our audience here, David. So, when we briefly talked about an envelope system, and then we started talking about setting up different bank accounts, and I just want to make sure that we're not losing anybody. So, correct me if I'm wrong here, but essentially to just recap what Profit First is, it's a system that number one, changes the mindset about profitability that you run your business with what's left over from paying yourself first. Because the purpose of a business is to be profitable from day one.
And then beyond that, the second piece to it is that it's a system that essentially modernizes the envelope system, which for people who might not know, Dave Ramsey really made the envelope system really famous, where you can have an envelope called “grocery” or like “gas” for your car or whatever. And then every time you get paid, you distribute the money that you have to live off of across all the different needs for your life.
Seth: You'd actually put cash in my envelopes, right? So, it was like an emotional experience to lose the money every time you paid it. That's what this physical envelope thing comes from.
Jaren: Yeah, exactly. And so, Profit First is a system similar to that, more for business finance than it is for personal finance; although you can tailor it to personal finance. But what it does is it takes bank account, several different bank accounts, and essentially each bank account would represent an “envelope” for the needs of your business, starting off with profit owner's comp and taxes and expenses. Is that about right?
David Richter: Yeah.
Seth: And along those lines, just to get into more the technical stuff. So, when I was reading the book, I think if I remember right, he was saying to put your profit account, like literally at a different bag. Not just a different account within your business account, but literally if you get your main account at Chase bank, go open something else at a local credit union or Bank of America, it's like somewhere else that you can't even see the money. Is that imperative, or is that right? Or I don't know. What are your thoughts on that?
David Richter: Yeah. I love that part of it. That's when we usually start diving into more of the technical aspect. That is a way for you to not be able to access that profit until it's time, because that's where most people fall off the bandwagon of this. As they set all the accounts and then you're like, “Oh shoot, I did too much here.” And now you're just moving money around and now it's the shell game you've always been playing. It's like now you are not using it for the intended purpose because the whole purpose, like Jaren said, is for the owner's benefit. Especially if you started a for-profit business, you started this for the owner’s benefit. And a lot of people start it for different reasons. At the end of the day, it's for the benefit of what you want it to start it for.
So, setting up that profit account, I would still set up a checking account. It's called profit at your current bank. But if you want to go that step further, then I would transfer it. Once you transfer it from the income account, into the profit account, then the profit account could be transferred to that second profit account at another bank because if you don't see it, you're not going to be tempted to touch it. It's removing temptation from yourself to be able to touch that money that really is the money that when your accountant says you made this much in profit, it's really in that other account, it's actually there instead of just some nebulous number that they tell you.
Seth: You have already spent that on something else by the time you know it.
David Richter: Yeah.
Seth: Is that something you can do automatically or do with most banks like you have to manually get in there once or twice a month and be like, “Okay, take this dollar amount and put it over here. And do this or do that.” I mean, how does that usually work?
David Richter: There are some banks that automate that, but a lot of the banks people are already working with “don't do that” so they've got the system set up where they have to do it on a regular schedule. The last part of Profit First in the actual steps is creating that rhythm and what works for the rhythm inside of real estate. And for a lot of people that may be once a week, if you've got a high volume. I know in Profit First, the original book, he talks about doing it on like the 10th and 25th. And that might not work for a high-volume wholesaling company or if you're wholesaling land or whatnot. So, it's setting up a rhythm for you to be able to transfer money.
Jaren: Just to clarify what you're talking about there, when you say do it on the 10th or whatever the days were, you're talking about allocations, right?
David Richter: Physically transferring the money into those different accounts. So, you might need to actually transfer it on a much more regular basis, but it needs to be at least something that you can do consistently. So, if you're doing a bunch of deals in the month, because we're working with some people who do 5, 10, 15 deals a month where they're selling deals and they have to do an allocation at least once a week, because they've got to be able to pay the bills because they've got accounts payable that they have to pay every single week.
So, it's getting into that rhythm and that cadence that works for your business, but it's important to establish a process. The whole mindset behind this is a system. It's a system and a process. So, what can you establish inside of your business instead of what's probably happened up to this point is the haphazard pain of things and haphazardly not knowing if you're going to have enough money. This kind of evens out a lot of that. The more that you can put that system in place and then run it on a regular rhythm and schedule.
Jaren: In case people are like scratching their head, trying to be like, “Okay, wait a second. How do I have money sitting there that I can transfer out?” The way that it works is there's actually a generic, like just revenue or income account that all of the dollars come to and they sit there. And then when it's time for you to do your allocation and put them in their respective accounts, you manually transfer that out of the income account.
And then also I want to clarify too, that you can have as many accounts as you need for your business. A common one, one that I have is like a bank account specific for direct mail. That's probably my biggest expense in the land business. And we'll get into like the allocation rhythms and stuff for real estate investors, but whenever I have a sale and money's hit that income account, then I transfer it to marketing and expenses and other things that I need.
David Richter: Yeah. The five-core account is the income account, which is just a holding bucket. Those three golden trio accounts, the profit, owner's compensation, and owner's tax. Then the OPEX, which you already have said. Most people have an OPEX account already inside of their business.
And the biggest pushback we get from people is like, “What in the world? I have to set up four new accounts or five new accounts or however many it is that they need at that time.” And it's like, well, up to this point, have you gotten what you really needed? It's a totally different way of thinking, and this is a way that's going to give you clarity. But then we tell people if they're giving that pushback, at least set up the profit account. So, one actionable item from today that anyone listening could do, just set up the profit account and transfer 1% of your sales. Start where you can. Make profit a habit inside of your company and just do what you can today. Start where you can today.
But that's one of the biggest pushbacks we get is like, “Oh man, I have to set up these bank accounts.” It's like, okay, you're going to lose several hours at the bank setting these up, but then you're going to have an actual system that you can run for years and years and years inside of your company to give you a lot more clarity. So that's one of the biggest pushbacks we get.
Seth: Regarding the tax account, I know this probably depends on what kind of entity structure you have, whether it's like a pass-through entity or an S Corp or a C Corp. But if it is like a sole proprietorship or an LLC taxed as an individual, I'm assuming the tax that you'd want to set aside, should cover the whole thing, like the corporate tax and the personal side, right?
David Richter: That is what that tax account is for. So, depending on like you said, how your business is set up that's so your business is paying the taxes for the owner, whether that be their corporate tax or whether that be the tax that they do on their tax return.
The other tax that we encounter in real estate a lot of the time is property tax, which I would not throw in that account. This is different, this is just for the owner's benefit for those taxes. The property tax could be another account if you've got rentals. And if you pay those taxes like once a year or whatnot. So that way you can be saving that throughout the year, instead of getting the large property tax bill at the end. But yes, owner's tax should be like corporate tax for your personal taxes that you pay during April.
Seth: Yeah, the property tax, I guess in a way that's sort of an operating expense, but that is a difference that not every entrepreneur has that, but a real estate investor definitely does.
David Richter: A real estate investor definitely does if they have long-term holds.
Jaren: David, one last thing I think we should cover related to the nuts and bolts of the Profit First system are TAPs and CAPs. Do you mind diving into that for me?
David Richter: Yes. If you read the book or will read the book, you will definitely encounter this. We talked about it a little bit on that first step of realizing where you are currently, those percentages. CAPs stand for current allocation percentages, where you are today. Like, what did you make? What did you keep? What did you spend? Then the TAPs are your targets. So, there are the goals you're shooting for, those target allocation percentages. That depending on the size business, you are going to scale up and down.
I remember, if you ever go into the book, there's a little chart there. It looks like a little Excel chart, where depending on the size business that you have, those percentage points that you allocate to like profit, owner's comp, the tax, and OPEX will be different percentages based on how big of the business you have.
And I remember in the very first column from like $0 to $250,000, the targets you should shoot for profit, I believe was 5%. The owner’s compensation is 50%. The tax is 15%. And then the rest is OPEX. Those are the percentages on that first one. And if you see those first three accounts, profit, owner's comp, and owners tax add up to 70%.
So, 70% should be benefiting you because when you first start out, it's usually you grinding it out, doing everything. You don't have the money to pay for someone. So, you need to be paying yourself first and making sure that you're covered. So that way you get in the habit of being profitable enough, as you grow in scale to start hiring people without going backward.
So that's where, as you scale up your business from that first level, the percentages are going to change quite a bit because you won't pay yourself such a big percentage as you start bringing people on, but you're making more money. So, 50% of $250,000 is $125,000 but 40% of $500,000 you're still staying at that level of where you need to be as you scale and grow depending on what you need to take home.
But TAPs are those targets. These are the targets I should be shooting for versus where I am now. And that's where we worked with people and we showed them like, “Hey, your current percentages for OPEX are like 176% of what you're making. They're way above and beyond what your revenues, what you're actually bringing in.” And that's where it's very eye-opening to people because people don't even realize. They're like, “No, I might have a spending problem,” but they don't know in numbers, where am I right now and what do I need to be shooting for?
That's why I love this system too, because not only is it the bank accounts and actually allocating to those accounts, it's showing you, here's where I am, and here's where I need to go. So, it manages your current finances and your future finances to help you project “This is where I want to end up.” And those TAPs, I was just on a call with Mike Michalowicz yesterday. And he was like, to get to the TAPs inside depending on what size business you are, can take up to like 10 quarters. Because you probably aren't going to just randomly go from 176% OPEX down to 50% OPEX. You're not going to be able to cut that much in a single quarter.
Now you could probably hack and slash a ton, especially in that scenario that I'm saying, but it's going to take your time to be able to go from, “Okay, we might be financially unhealthy now to financially healthy to financially elite,” which those TAPS represent. Financially elite companies that Mike interviewed and researched over a thousand different companies, including real estate investing companies and other types of companies as well too, to saying these were the percentages that the elite companies do at these different levels.
Jaren: Yeah. So, I want to play devil's advocate a little bit. Obviously, I've already shown my hand of cards here, because I'm a fan of Profit First, but let's pretend for a minute that I'm not, and I'm super skeptical. So, when it comes to most people, they have this conventional wisdom that most small businesses, especially in the first few years, they're not profitable and it's totally normal and totally okay. And a lot of cases necessary for businesses to grow to the point that they need to grow, to not be profitable. And so, I want you to speak to that because that's a lot of the pushback that I get when I talk to more conventional accountants and other people that are actually from the financial industry. It’s that not all businesses are profitable. I know that tech startups, for example, like their entire purpose of existence is never to be profitable, but to just scale to oblivion, become huge, and then get bought up by a big tech company.
So just speak to that for our audience. If somebody's sitting there right now thinking like, “Well, wait a second. In order for me to grow my business, I should reinvest 100% of everything that comes in back into the business, right?”
David Richter: I love this question because what you said is most people think this way and okay, that's like conventional wisdom, which has broken the system and why most people go bankrupt inside of their business, do not have the CAPs when they need it. Especially during downturns, who knows what the real estate market will do from now to the end of time. We've had the 2008/2009 crash. So, I digressed there, but conventional wisdom says that.
But that's where this whole system we said was, the very first thing is the mindset of saying, most people tell you, you have to invest a hundred percent. We're telling you, no, you don't. It depends. Do you want to stay in business a long time? Or do you want to just fly by the seat of your pants like most real estate investors or entrepreneurs and not have the security of saying, “Hey, if something horrible happened, I'm not living deal to deal. I'm actually okay, right now. I'm building the reserves. I'm building what I need in order to profitably scale and grow.”
You're lighting the fire under me because so many people put gasoline in our airplane that's going down. That's where most people say “I got to invest 100%” and they're going the wrong direction. They're going down. They don't know they're going down. And then they're going to crash a lot harder because they've invested everything into their business when it's not successful. And that's where so many people just need the mindset of, “Let me get healthy. Let me make sure the business is healthy because no matter what then, I'll be able to scale and grow no matter what the economic climate is.” And that's what most people get into real estate because of that. And they already are thinking differently than the masses in order to jump into real estate.
So, I'm telling you, you have to think differently one more time on a big subject where you are not comfortable with. It's the financial aspect. If you're not comfortable on that end, I totally understand. But I'm telling you, don't think like the masses that you have to pour every dollar in. Because I've seen too many people, too many of my friends do that. And then that takes their business down.
There's a whole series from Eddie Wilson. He owns Think Realty magazine, the American Association of Private Lenders. He's a good friend of mine. And he's got the whole cycles of what the business goes through from startup to perseverance, the profit is right in the middle, to scaling, and then to succession. And so many people want to go from perseverance to scaling and they miss the profit portion where that's exactly what happens. They're pouring fuel on into a plane that's going down and they're missing that profit piece.
Most businesses never get to profitability. They say it only takes two years. And here they are 10 years later, it's like, “Shoot, I thought this was only supposed to take two years of not being profitable.” And then it's 10 years later and then they're stuck in this horrible rat race that they thought they'd gone out of, but they created a bigger rat race for themselves. So that's where it got totally changed, that conventional wisdom to think, “No, I need to be profitable. And that needs to be a focus of ours in order for us to really stick this out the long-term, no matter what happens in the marketplace.” There's my rebuttal to that devil's advocate's “We got to invest everything back into the business.” Yeah.
Jaren: It's just really a huge mindset shift because one of the biggest epiphanies that I had with Profit First was the fact that profit is actually a choice. Like being profitable at the end of the day, when you understand these principles, you choose to be profitable, and then you can grow your business. And quickly on what's left as long as you're within your means and bootstrapping and doing what you need to do as a startup to move the needle forward.
At the end of the day, for small business owners, we get into real estate to make money. And that's the purpose of a business. If it's not about making money then you have a nonprofit, you know what I mean? So, if we're in this thing to make money, then from day one, the objective should be to make money. It sounds like when you say it, like that's like, “Oh yeah, no doubt, bro.” But it was a huge epiphany for me.
Seth: My first several years in real estate, I wasn't following any kind of framework like this. And I remember having these moments of frustration where it's like, “I've poured how many hours into this? Like every penny I have goes back into this?” I'm like, “What do I have? I can't spend any of this money. When can I do it?” And having this kind of framework works like profit is always being accounted for. It's always going somewhere. There's something to show for all your work.
And also, just the understanding of how accountants look at this stuff. Accounting is really just a historic recollection of what already happened. It's not really budgeting or telling the money where to go in the future. It's just like, “Hey, just so you know, this is in the past now.” And the past it's like, “Well, what am I going to do with that? It already happened.” So, a lot of people, I don't think they really grasp that, but the book does a really good job of helping crystallize that and help you understand the difference between the two.
So, I know we talked a little bit about some of the challenges that investors deal with when they start thinking this way and trying to set up these bank accounts and that kind of thing. Are there any other big challenges or sticking points where they don't like it, or they just maybe even give up or decide not to go down this path for a particular reason?
David Richter: If they do it themselves, I've seen a lot of people come to us where they're like, “I've started this, but I didn't keep it up.” Because it can, you're breaking the habits. That's a tough thing to do. If you've read all the books on habits and it takes 21 days to change a habit or create a new one. There are all those different studies. We're literally creating a different habit or a different way of treating your money. And so, a lot of people come to us and they're like, I've started this, but I didn't keep out. And usually, it's because they didn't have someone either to help them and hold them accountable to it. Or they just were like, “I don't want to break this habit. I'm not committed to breaking this habit at this point.”
Because it's too easy to fall into the, “I have the money. I think I know where it should go. This is the best place for it instead of getting that help.” So those are a couple of other things besides, “Well, we don't want to set up the bank accounts and doing something like that.” It's those deeper issues of they don't want to truly break that habit that they've put themselves into.
That's one of the toughest things as we go through. It's going to be a little bit painful when we start this process, but I promise that no matter what, at the other end, you're going to be in a much better position and you're not going to be as worried or financially insecure anymore because you're going to have the power now to be able to know where your money is. But that's one of the biggest things, it’s the breaking of those habits.
Jaren: Yeah. I think Dave Ramsey, he kind of talks about my first exposure to anything related to managing finances was Financial Peace University. My dad forced me to go through it when I was in high school. I remember he actually said that when people try to start figuring out a budget or figuring out how much they owe in terms of like credit card bills or medical bills, they have this big box of bills that are like months and months old. And they're intimidated by it like there's gremlins in there. Like there's things that are going to come up and bite you.
But once you actually go through the process, Dave Ramsey uses the example, when you start looking through those bills, you realize that a lot of them were already consolidated with the newer bills and a lot of them are just like old news. So, you don't have to be afraid. Once you actually dig in, it does kind of feel like peeling a scab, like it's uncomfortable. Like it's like, “Ah,” because you have to face the fact that you didn't do things well. And that's always really hard for us as human beings to come to and recognize. But that's the first step of learning and growing, it’s recognizing that you have a problem.
David Richter: And I teach this stuff, but I hired a CFO for us to keep us on track because I don't always trust myself. I want to make sure that I'm putting other people to the same standards as I'm putting myself. And I had to do that because now it's like, we're on track where I have the rollout plan with the profitability and the percentage is moving closer to our TAPs every single quarter. And it's like, “I love this system, but we have a CFO for ourselves because I want someone to be focused on that all the time to be able to help us get to that position.”
Even for me who is here preaching it, I had to take my own medicine and saying, “I need to have this in place for myself too. Because even though I'm teaching it, I don't want to fall off the bandwagon ever.” This is someone who meets with us on a monthly basis because it's like, “Yes, what have we done but are we moving towards our TAPS? Are we actually making progress in what we started this business for?”
Because I tell people, profit unlocks your purpose. It unlocks your “why.” That's really what profit stands for people. It's the time freedom. It's the money freedom. It's the financial freedom to go with it on vacation with their family. Or it's like to not have your wife work in your business. It's like those things. That's where profit unlocks your “why,” it really helps you get to where you want to be inside of it. That's why I'm so passionate. That's why I've hired the CFO for our business too. We have to make sure that it's in place because we all have big hopes and dreams if you're an entrepreneur of what you really want to do. But if you're stressed about money all the time, you're not thinking about your profitability and what that really means to you and what you can do for good in the world or good for your family or whomever. So that's what we want to help people get their profit in line so they can fulfill their purpose.
Jaren: Let's talk about debt for a minute. What does the Profit First model say about debt? Because real estate investors, we're like best friends with debt. The more debt we can get, the better off we are.
David Richter: Okay. So, I've talked with Mike about this and he has talked about it several times. Mike Michalowicz, the author of Profit First I'm talking about. I love the analogy. There are the three different types of debt. There is debt leveraging, debt bridging, and debt anchors. So, if we're talking about debt anchors, that would be like your credit cards or unsecured debt that's not tied to an asset. Or that if you're running your business on debt and have to borrow just to stay in business that's not tied to a property. That's dangerous, having a lot of that type of debt. Or keeping the cycle going as well too. And I'll tell you how you can eliminate that debt.
Now, debt bridging a lot of people did during the coronavirus pandemic at the beginning, no one knew what was happening so everyone was getting like the EIDL loans, PPP loans. They were thinking, “Well, if I just have this bridge, I'll be able to pay it back and then stay in business.” That's where people were trying, to bridge those loans.
And then there's debt leveraging, which a lot of real estate investors do and understand very well. Where you've got a $500,000 property, unless you have been in this real estate game a long time, having $500,000 in cash sitting around. So, you go into a private lender or a bank or hard money, or however you get your funding source and you leverage the money on that asset. So that's that leveraging for an actual return on your money. Those other two types don't really offer returns. You think it's your emergency fund basically where hopefully I can use this money and sometime get out of this muck.
But the debt leveraging is what we use a lot. I love the debt leveraging. I love that to be able to say, “I bought the asset for this. I'm going to sell it for this. And this is what my return is going to be on that debt.” So, you have to be careful also with debt leveraging, if you're too high with your LTV or loan to values and all that too. But that type of debt is great for real estate investing.
The other two are debt bridging or debt anchors, like those credit cards or unsecured lines of credit, unsecured loans or things not tied to properties or whatnot can be dangerous if you're using it for OPEX. And in the book, it covers this to say, to eliminate that bad debt, instead of funding 10% of your profit account, maybe do 1% to the profit and 9% like a debt pay down account. So that way you're destroying the debt with the profitability of the company and you're not going into more debt to create more debt because you're using it for your OPEX, your operational expenditures.
That's where those two types of debts should be eliminated as soon as you can. And you can set it up with a system. This is why I love this, and what you said, Jaren, that when in doubt, add an account. If you've got debt, set up an account just for debt reduction, debt pay down, debt destroying, whatever you want to call it. Throw the percentage points in there instead of profitability and say, “We're going to destroy this debt.” So, we can now throw all the money that we had going into that one, now backing the profit and turbocharge our profit accounts.
So that's not only the three types of debt that he covers and that we cover with Profit First, but also the way to destroy the bad type of debt that we can get into as a business owner as well too. But that leveraging, just be careful with it obviously, but that's the one where you should be seeing a return on that debt. Which brings me up to if you are taking other people's money like private lender, a hard money lender, or whatnot, and they send the money directly to you for a project to do that project, I'd have an account called OPM for other's people money that doesn't touch your OPEX, that doesn't touch your profit, or it doesn't get commingled with the actual operation of your business. And it's specifically a different account for your projects. So, I just wanted to throw that in there too because we're talking about the different types of debt and the systems behind destroying those debts too.
Seth: Yeah. So, my takeaway from that is that if it's a positive cash flowing debt, it's fine. If it's not, it's bad, get rid of it.
David Richter: Right.
Seth: We’ve had a couple of conversations with Keith Weinhold about this in the past and his mentality or the whole idea on how to handle debt is like, really, if it's positive, good debt where you're making money from it, you want as much as you can possibly get, infinite levels of debt, because that's always going to pay you. Would you agree with that? It's kind of like taking that statement to the extreme, but I guess if it is positively cash flowing, is there ever a point at which you should say, “Nope, I'm going to just stop that just based on principle” or is it more just a question of what's the loan to value and what's the cashflow?
David Richter: Exactly. That's where I always ask the question. If you've got $20 million worth of property and you can secure it on $15 million worth or $10 million or whatever that loan to value is, as long as you've got the buffer that's good for you, I would say yes, you could scale up that way. And that's how most business owners in the real estate investing arena actually scale up. That's where they can go and that's how they'll have to do it because even if they could, even if they have a million pounds of liquid cash around, they could probably leverage that into so much more and actually build a bigger business, if that's what the purpose of their life and their business is.
I think that's a very personal question to the actual listener of “Where do you want to go?” because so many people do not think of the end in mind. I've got another great book that's coming out this year, it's called “Exit Rich” that I would highly recommend. It's from a person in one of the masterminds I'm a part of, but just thinking about exiting before you get in, it doesn't matter what business you're in, because if you think of it that way, then you will be able to set the CAP on yourself. And then you're sticking to your principles of where you want to go.
But I'd say as long as it's cash flowing positively, make sure that you keep that under control with where you want it. But I'd say go as much as you want to go with that, as long as you're getting the returns and it's safe according to your standards of what you're able to handle as a risk.
Jaren: Yeah. To echo what you guys were just saying for my personal framework on debt, I've gone back and forth a lot because of conversations like we had with Keith Weinhold and Robert Kiyosaki versus Dave Ramsey and a lot of just back and forth with this whole concept of debt.
And for me, I think the biggest guiding principle is I only want to use debt if it's used to buy an asset that can cover the cost of that debt and then pay me money on top of it. And most of the time that looks like buy-and-hold cashflow-based real estate, but it could look like something like buying an insurance brokerage that has month to month cashflow. If I bought a book of business that has $50,000 coming in a month and I bought it for out of pocket $5,000 or something or whatever, and then I leveraged the rest of it to however much I had to put down, that is a good situation to be in.
I think, though, the risk is if you scale that out into what Seth was saying, if you scale that out to oblivion, if the market changes and all of a sudden, your property values drop overnight, which can happen, you might be in a situation where you could solve all of your properties and you still owe more than what your properties are worth. If they're cash flowing, though, I would say, just hold onto them and wait five years and you should be all right. But we don't have a crystal ball, we don't know, but I think that that's one of the benefits of real estate is that over time, historically values tend to go up. So even if you get hit with a pretty gnarly drop of property values, if you hold on to them for the long haul, they normally rebound and then some.
Seth: Yeah. The original Profit First book was not necessarily written for real estate investors. I know you're apparently working on that, David. But when I think about a real estate investor, we've talked about some of these things already, things that people may want to adjust just because of the type of business that they're running. Things like setting up a separate account for property taxes, things like that. Are there any other big obvious adjustments or changes or just different ways a real estate investor should look at this compared to a more generic type of entrepreneur? Like any other allocating money for different types of things or doing it more frequently, or anything like that come to mind?
David Richter: Yeah. So, I would say there are several big things. It is the frequency, for sure, because if you're doing a deal a day, you might need to do an allocation a week instead of twice a month. So, the frequency can change depending on your business. Honestly, we've got some people too, where they've got rentals, but they've also are just flipping one property a quarter. On the flipping, they only do it per transaction. They allocated that for like a whole quarter.
So, it's really depending on your business and in real estate, in what you can do on a very rhythmic type basis on a making it a system and process. Then I would also say setting up those different accounts, like you said, the property tax or the OPM for other people's money, making sure that you don't commingle like those rehab funds. Then I would also say another thing inside of real estate is how you calculate what is called real revenue.
Real revenue inside of the Profit First book is from the perspective of like a typical business that has a consultant-type business, sort of like a bookkeeping or like a service-type business, I would say. They've got the income that comes in and that's usually their top line income. And then they can just allocate it out.
Well, in real estate you know that usually the money that you get at the closing table is usually not just let the property profit is. So, calculating real revenue inside of real estate can be pretty simple still. Inside of a flip company, it is the actual property profit. That's what, not necessarily the cash to get at closing, but what is the profit you truly made on that property. Like what did you sell it for minus everything you were into it. This is my true property profit. That is the real revenue for a flipping business.
Then if you have a rental business or a long-term hold business, anything like seller finance deals or whatnot, then I would say it's the top-line income, like that rental income minus any obligations on a monthly recurring basis, like through a bank or a mortgage or whatnot, like your PITI, that pass-through revenue.
You've got the top line, which is like your rental income minus your PITI to give you your real revenue. Which really helps clarify a lot to the buy and hold person, what they really have left to allocate. So, you might be making a thousand dollars a month top-line, like that's the rent you collect, but you've got a $700 PITI mortgage that's all wrapped up into one payment and then that really leaves you with $300 of debt to cash flow or the real revenue, but you can now split out into those percentages in those accounts.
So that would be another big change from the original book. It’s calculating real revenue for the different types. And I just section them off into two main types of businesses in real estate investing, the selling side and the buy and hold side. So that would be another big one I would say too.
Seth: Yeah, I know there's a big fundamental difference between a flipping business versus a buy and hold business. And a lot of investors have this, they do flipping and they do buy and hold. So, does it almost make sense if you look at one bank account with this envelope type system within it, should you almost set up two of them? And if so, it starts to feel like a lot of work just to move money around all the time. Am I overthinking this? Is that not necessary? Or do you recommend that kind of thing?
David Richter: Well, let me go back to stories. So, the guy who I was talking about at the beginning had a flip entity and a rental entity. And at first, he set up the accounts for his flipping entity and he liked it so much then he eventually set them up for the rental entity and is now doing it with them too. And now like a year later he says I have 10 accounts now. I never thought I'd ever have these many accounts. And I would never go back. That's where he is now.
We've also got one guy who has seven entities that he did it for two of his flipping entities and set up accounts for them individually because they could both stand on their own. They were decent-sized flipping entities. And then he was like, I love this. So, he started setting up the accounts for every other entity because he wanted the clarity that it gives him as the entrepreneur.
So yes, it might sound like a lot of work upfront, but once you actually start going through it, I would just say, if you've got multiple entities, do it with one entity first and see the clarity it gives you, then you'll be like a lot of the other investors we work with, whether they're like, "Good grief, I've got to set this up in my other entities as well too." And like I said, we've got one guy with seven entities and he's opened up the accounts for every single entity because he loves the clarification that it gives them inside of his business.
And on the actual bookkeeping side, you literally are only booking transfers. You're booking transfers when they go back and forth. So, it's not like a ton of headache for your bookkeeper. That's another pushback that accountants and bookkeepers give. They are like, “Oh, this is going to create so much headache on the bookkeeping side.” And no, you're literally booking transfers.
And then it's still the normal operations of the business that go out to the OPEX. But except for at the beginning of the month or once a week where you're doing the transfers, you can book those transfers, then you're basically done. Then you do the reconciliations at the end of the month, which for those ones like the profit account, you’re doing like three or four transfers a month into there, depending on what your business structure is, you're reconciling three or four transactions. So, on the bookkeeping side, it’s not a big headache. On the owner side, it's providing massive clarity and we've seen people, they do it in one entity and they're like, “Oh, let's do it in the rest of these entities as well too.” Because that was one of our concerns. It was we work with people with multiple, multiple entities, but then there are the ones that say, “Oh, I want to set this up in more entities. We never pushed that out to the beginning.” It's more like, show them how it works. And then they come to us and be like, “Yes, let's get this set up for everything.”
Jaren: Yeah. From my personal experience, it is a lot of work on the front end. I mean, there's no way to get around it. It's annoying and tedious and finding even a bank that will allow you to have multiple accounts can be frustrating. And then you get a lot of pushback from bankers. Like what are you doing? There's definitely a mountain to climb, but once you're on the other side of it, it is really easy because most of the time, it's not like you're using multiple debit cards all the time, I guess, on some things like maybe OPEX and marketing or something. But for most of the accounts you're setting up bills to the OPEX account and it’s kind of on autopilot to a degree. I think there's definitely work on the front end, but once it's in place, like David said, it just brings so much clarity. It's totally worth it. At least in my book.
One of the things that I wanted to mention before we move on is something that I tell a lot of Land Masterclass coaching clients is when it comes to just starting off in real estate, a lot of people feel like they're under this pressure that they have to commit to sending out mail every single month. Otherwise, they're not serious.
And I want to just speak just some hope in that situation. I'd sell all of our coaching clients that, hey, depending on where you're at, in terms of how much working capital you have, you can do one campaign, work that campaign into fruition. Meaning you get deals, you turn it around, you list those, set those properties for sale, and then you sell those properties or at least the bulk of them, maybe 80% or 90% of them.
And then when you have a big chunk of revenue sitting in the income account, at that point, that might be when you commit to doing your next direct mail campaign. You can do your allocation rhythms when it's healthy to do it. You don't have to just say, I'm going to commit to $2,000 a month in marketing, no matter what from day one. I would've really benefited from that advice.
So, I just wanted to share it with the audience that, hey, you can run your business, starting off campaign to campaign and go slow and just make sure that you have overhead. Like OPEX I think for the land business is something like $500 on average or something. It's really low, but it's the direct mail costs that are really expensive. And so, you can do a $5,000 campaign or whatever, if you have it, and just do a big campaign even once a quarter, if that's what works for you. So just to give you guys some freedom there, you don't have to commit to doing a bunch of crazy stuff all at once. You can eat the elephant one bite at a time.
David Richter: I love that too because you said campaign to campaign. So that made me think like, “Do you want to live deal to deal or campaign to campaign?” You're going to have to choose at the beginning when you first get started, you're just getting started out. So do you want to create the bad habit of living deal to deal and being like, “I'm going to commit to $2,000 because that's what this marketer told me I used to do?” Even though it's their marketing company, that's sending out my mail and collect like $2,000 every month. It's like “I have to do this campaign in order to be successful.” Is that really? What is success to you? Is it having the money and the freedom to be able to spend time with your family or do the things you want to do? So, I think it's a trade-off: campaign to campaign at the beginning or deal to deal?
Seth: Yeah. That's kind of funny. I've noticed an interesting trend, some of the big voices in the real estate space who advocate for this “Just send more mail, just send more mail, just do more, more, more.” A lot of times they also have a financial interest in you sending more mail because they have a mail house or a list service or something where there's going to be a little “ka-ching” every time you send more mail. So, it makes sense that they would suggest that. Yeah, like Jaren said, realize you don't have to abide by that. I mean, I'm sure there's truth to it, but keep in mind, sometimes you need to make your own best judgment for your situation and go at your own pace too.
Well, David, I appreciate you talking to us. So, Simple CFO Solutions. I know I mentioned a little bit about that at the very beginning, but is there anything else you want to mention about the service that you guys provide or how that works?
David Richter: Yeah, we implement Profit First for our businesses. So, we've got two programs or two tracks that we take people down on. Profit First implementation, that's like a 90-day thing where it might be more of a newer investor or someone who wants to transition to our second track and wants to get Profit First up and running first. And that second track is our fractional CFO service. Like the monthly ongoing holding your hand, basically with Profit First, holding you accountable, helping you know the past finances, your current ones and then helping you project to and keep you on track with those TAPs, those targeted goals in order to get you to where you really want to be.
So, that's what we do in a nutshell. Making sure you have the right systems in place because you want to focus on the deals, we'll focus at the CFO level on making sure your finances are in the right place. And you've got the right systems.
Another thing that people come to us as a big hurdle is they say, “I just started my real estate investing career. I just did my first deal. When should I start this?” And of course, I have another story. I have the Profit First REI podcast and I had a guest on. And this is a guest who's doing a ton of deals in real estate and he's got the coaching and whatnot too. But this is someone I respect because he's actually teaching what he does while he does it. And he said, I found Profit First several years ago, super profitable with it now, set up every single company with it. He said, though, I calculated if I would have started this day one from my first deal or right before I started, I'd have $5 million more in my account right now. And that is just about for me. I’d have to pick myself up off the floor during that episode.
And so, now I tell people if you're just starting out, that's the best time to start because you're starting off fresh from the first deal. How awesome is that? From your first deal, you can be profitable the rest of your real estate investing career. So, it doesn't matter if you've done a thousand deals or one deal or no deals. Start it now because from now on you can be profitable from every deal that you do.
Seth: Yeah. We're going to have a link to you guys’ website in our show notes at retipster.com/101. You can find that as well as links to a lot of other things that have come up just in the course of our conversation here.
But again, David, I just want to say, thanks and I appreciate the work you're doing for real estate investors and entrepreneurs all over. I look forward to hearing and seeing more of your content in the years to come.
David Richter: Yes. Thank you very much for having me. I just want to spread this message because I've seen how it impacts people's lives and their businesses. So, I appreciate you allowing me to come on here today.
Seth: There you have it folks, that was our interview with David Richter. Do you have any closing thoughts on that, Jaren?
Jaren: Yeah, it's pretty evident that I love the Profit First system, it's just given me a lot of life. So, I just encourage you guys, even if you're skeptical about it, just give it a shot. I mean, maybe even start with just one or two accounts and just see if it actually helps you manage the finances. Maybe it's not the right fit for everybody, but definitely for people that are wired similar to the way that I think and approach life, it just really helped me a lot.
Seth: Yeah. I know Profit First is one of those big… Like it almost makes you wonder, what did people do before that? They just weren't paying attention or something, or maybe only the super analytical people who are great at accounting, maybe they did fine, but for the rest of us, maybe the objective was just to make a ton of money, and then it would all work out. But it's not always like that. Sometimes your business has hills and valleys and weird things happen. And it's good to have a system like Profit First to kind of regulate that and make sure you're always covered no matter what.
Jaren: For me it could be because I'm just not trained in traditional accounting or finance, but for me it just doesn't make sense to look at your money that way. And the Profit First world just makes a lot more sense to me. Running your business in a way where it's like, okay, I'm just going to like make a bunch of revenue, and then I'll subtract all my expenses, and then whatever's left I'll just use as profit. What's practically happening in all of that is like that “profit” is spent for OPEX or the next direct mail campaign or the next property.
And then as entrepreneurs, we find that perfect deal. That one that's like, “Oh, I have money in savings set aside for taxes. But by the time I buy and sell this property, the tax man will already make my profit and have money for taxes. So, I go ahead and do it.” And then you convince yourself to do really stupid things and then the property doesn't sell and then you're like, “Oh snap, I got to figure out how to pay taxes.” It just avoids all the stress of all of that.
Seth: Yeah. I don't think the issue is a lack of training for you, honestly. I think understanding accounting and finance is only going to help things, but I came from a corporate world where everybody was very sharp and well-trained in all of that. And plenty of those people, their financial lives were in shambles because even though they know it, they still aren't abiding by it and they don't have the discipline to do it. It's kind of like if you see a doctor who's like super overweight or something, it's like, clearly, they know what to do and they're just choosing not to do it. Or they're choosing to not have the discipline to adhere to that. And it's the same thing with money really. I guess it is a discipline and it takes practice and building habits to do that. That's not easy to do.
I've got a friend who's a huge Profit First fan. He just loves this kind of stuff, like setting up systems and following them. And for me though, it's a ton of work. Like it takes a lot of intentional thought again and again and again and again and again, and it never stops. It's not something that just happens naturally to me. I have to really go for it. I don't know. It's just important to realize that knowing and doing are two completely different things. And if you want the work, you got to do it. It's easy to just let go of the wheel and let life happen to you. Do you want to do our little outro question as usual?
Jaren: Yeah, let's do it.
Seth: Okay. So, here's the question. Would you rather go 30 days without your phone or your entire life without dessert?
Jaren: Well, yeah, probably the phone, because that's only temporary, but it’s not like I really am crazy about dessert. I don't actually really like cake or ice cream, all that much. My guilty pleasure is like fatty kind of stuff like Reese's peanut butter cups or like brownies or something like that. Something that's thicker and on a spectrum from sweet, more like savory dessert almost. But I could probably live my life without desserts. Like I'm not super attached to them.
Seth: When we say dessert, are you thinking specifically the thing you eat after dinner or after a meal?
Jaren: No, I was just thinking anything like sweet.
Seth: So, if we broaden that to any junk food at all, what if we did that? Would that change things for you?
Jaren: No. Because I'm still choosing to go with 30 days without the cell phone because I would much rather have 30 days without a cell phone.
Seth: Oh, so that is your answer? I thought you were saying you wouldn't care about…
Jaren: What I'm saying is I don't really care about dessert, but I would still go with the 30 days without having a cell phone because I don't want anything restricting me for the rest of my life. That would be really annoying.
Seth: No, I didn't understand what your answer was too, but it sounds like your answer is you would rather do 30 days without your phone.
Jaren: Yeah, for sure.
Seth: Yeah. I would do that too for similar reasons. Anything for the rest of your life, unless it's truly trivial and doesn't matter at all, it doesn't have any value to it, that's just a hard thing to sign up for.
Jaren: Yeah, 100%.
Seth: I've actually been trying to intentionally depart from my phone more and more often just as a practice of just not having it on me. Because I know there was a time in life when that was every day, like smartphones weren't a thing and I was fine. But I feel there's a need to check my phone throughout the day. It's like, I want to stop that. I want to just like not even make that an option just because sometimes I really don't care at all. It's like not a sacrifice. And other times it's usually in situations of boredom when I want something to entertain me, that's when it feels hardest to not have that little device just on-call all the time. Thirty days with that, I think it might be kind of hard, but I think I can survive that. No problem.
Jaren: I mean, I have a computer, and I get text messages on my computer, so I don't think we would be, I don't know…
Seth: There are probably certain people in professions where a mobile device is critical. Like you have to have it, at least that's what we tell ourselves. And for other people, it's not really critical and it's just sort of nice to have.
Jaren: Yeah. I'm probably in that second camp.
Seth: Yeah, me too. Cool, man. Well, again, for all the listeners out there, thanks for listening. And you can check out the show notes, retipster.com/101. And again, if you're listening on your phone, go ahead and text the word “FREE” to the number 33777. And you can stay up to date on all the stuff we got going on at REtipster. Thanks again for listening and we'll talk to you guys next time.
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