Contribute to Retirement
Reason #11 for Implementing Profit First in 2024 - Contribute to Retirement
As small business owners we know that the work never truly ends – unless you retire! But wait.. Retire?! How will I ever be able to do that?!
With the Profit First method – we can plan for your retirement by intentionally contributing to it! Profit First is all about sustainability in cash flow for your business. By being profitable (first), you can set goals and intentions – like retirement contributions – just the same as paying your operating expenses and guaranteeing your salary.
Profit First helps set routine and structure to how you SPEND and SAVE your cash (revenue) in business. Let’s take a closer look at the steps of how Profit First can help you contribute to your retirement.
1. Prioritize Smart Cash Flow
Profit First Method:
In the Profit First method, you allocate a percentage of your income to “profit” (savings) first before allocating expenses, taxes, etc.
How-to Retirement:
Allocate a specific percentage of your income to a bank account that will be used to fund retirement(s). This ensures that saving for retirement becomes a non-negotiable priority.
2. Create Multiple Accounts
Profit First Method:
Basic Implementation involves setting up multiple bank accounts for different purposes: profit, owner's pay, taxes, and operating expenses.
How-to Retirement:
Determine what will be funded out of your Owner’s Pay account – your regular salary, benefits package and retirement contribution. Next, set up a dedicated retirement savings account (e.g., IRA, 401(k), or other retirement plans).
3. Allocate Consistently
Profit First Method:
Finding rhythm is key. Every week or biweekly cycle, distribute your revenue (cash) according to predetermined percentages.
How-to Retirement:
Determine a fixed percentage of your Owner’s Pay allocation for retirement savings. Automate this process if possible to ensure consistency.
4. Control Spending & Access
Profit First Method:
By allocating funds to “Profit First”, then Owner’s Pay and Taxes, you constrain your available funds for other expenses, forcing you to be more disciplined in your spending.
How-to Retirement:
Be fiscally responsible with the rest of your Owner’s Pay allocation, so you aren’t tempted to overspend or need a rescue from your retirement accounts! Limit your access to the retirement accounts by setting them up properly in the beginning.
5. Review and Adjust
Profit First Method:
Quarterly it is important to review and adjust the allocation percentages to reflect changes in income trends, expenses, and financial goals. Every quarter we recommend reviewing P&L statements, projected revenue, and costs to audit for alternatives or a shift in strategy.
How-to Retirement:
Periodically review your retirement savings and tax strategy, and hire a professional advisor to look at your options, based on your risk tendency. If your financial situation changes, adjust the percentage allocated to your retirement savings accordingly to stay on track with your retirement goals.