"Profit First" - Ensure Supplementary Income Actually Builds Wealth

The whole point of supplementary income is closing your retirement gap. Mike Michalowicz shows you how to structure your consulting finances so profit actually gets set aside for investing instead of disappearing into expenses.

Here's why Profit First is essential for Encore Income professionals: most consultants generate revenue but never build wealth.

They invoice $75,000 annually but somehow end the year with nothing invested. The money came in. It also went out—eaten by business expenses, lifestyle creep, and the vague sense that "I'll invest what's left over."

There's never anything left over.

Michalowicz's solution: flip the traditional accounting formula. Instead of Sales - Expenses = Profit, do Profit First.

Sales - Profit = Expenses.

Pay yourself first. Invest first. Then run your consulting practice on what remains.

It's simple. It works. And it ensures your supplementary income actually supplements your retirement instead of just subsidizing a more expensive lifestyle.

The Problem: Traditional Accounting Leaves Nothing for Retirement

Most corporate professionals starting consulting do this:

This is called Parkinson's Law: expenses expand to consume available income.

Michalowicz shows you how to beat it.

The Core System: Pay Yourself First

Profit First works through behavioral psychology, not willpower.

You set up multiple bank accounts and automatically allocate every dollar that comes in according to predetermined percentages:

The Five Core Accounts:

1. Income Account - All revenue lands here first. This is the clearing house. Money doesn't stay here—it gets allocated immediately.

2. Profit Account - Your pay-yourself-first account. This is what goes to investing and closing your Freedom Number gap. Untouchable except for quarterly distributions to yourself.

3. Owner's Pay Account - Your actual compensation for the work you do. This is separate from profit. You're paying yourself a salary for consulting.

4. Tax Account - Set aside tax money immediately so April isn't a surprise. Corporate professionals often forget this—your consulting income isn't W-2, so taxes aren't withheld.

5. Operating Expenses Account - Everything else runs from here. Software subscriptions, client dinners, business supplies.

The Allocation Percentages That Actually Work

Michalowicz provides target percentages based on business maturity and revenue level. For part-time consulting (which is what Encore Income is), here's what makes sense:

These percentages force discipline. If operating expenses exceed 25%, you can't expand them—you have to cut costs or increase revenue.

If you want to invest more than 15%, you increase the profit percentage and decrease owner's pay or operating expenses accordingly.

The system constrains spending and protects investing.

Why This Matters for Closing Your Freedom Number Gap

Let's be specific about what Profit First does for retirement planning:

The difference isn't revenue. It's allocation discipline.

Profit First ensures the money you generate actually moves toward your Freedom Number instead of evaporating into lifestyle and expense creep.

The Bank Account Strategy

Michalowicz's most powerful insight: human behavior responds to what we see in our checking account.

If you see $50,000, you'll spend like you have $50,000. Even if $40,000 is earmarked for taxes, investing, and future expenses.

His solution: multiple bank accounts that make allocation visual and automatic.

When $5,000 lands in your Income account, it immediately gets divided:

• $750 → Profit account (investing)
• $2,000 → Owner's Pay account (your compensation)
• $750 → Tax account (April won't surprise you)
• $1,250 → Operating Expenses account (run the business)
• $250 → Income account (stays as buffer)

Now when you check your Operating Expenses account and see $1,250, that's actually what you have to spend. Not $5,000 minus some vague mental math.

This isn't about discipline. It's about making the right behavior automatic and the wrong behavior difficult.

How to Implement This Without Overcomplicating It

Michalowicz recommends opening accounts at different banks to create friction. That works, but it's overkill for part-time consultants.

Simpler version:

Minimum viable Profit First for Encore Income:

• One business checking account (Income + Operating Expenses combined)
• One high-yield savings account (Profit—transfers to Roth IRA quarterly)
• One savings account (Tax—pay quarterly estimated taxes from here)
• Owner's pay goes to your personal checking account (separate from business)

Every time client payment hits your business checking, immediately transfer the percentages to the other accounts. Set calendar reminders if you don't automate it.

This takes 5 minutes per payment. It ensures you're actually building wealth instead of just generating revenue.

What I Like About This Book

Michalowicz writes in plain English with real examples. No accounting jargon. No complex formulas. Just behavioral finance applied to small businesses.

The book is also refreshingly honest about why traditional accounting fails—accountants optimize for tax efficiency, not behavior change. Profit First optimizes for human nature.

Also, unlike most finance books, this one acknowledges that willpower doesn't work. Systems work. The bank account strategy is a system that makes the right behavior automatic.

What I Don't Like

Michalowicz can be repetitive. The core concept is simple—pay yourself first through allocated accounts. The book is 200+ pages explaining variations on that theme.

You could get the essential system from the first 50 pages. The rest is reinforcement and case studies. Some people need that repetition. Others find it excessive.

Also, some of his percentages assume you're running a full-time business with employees. As a part-time consultant, you'll need to adjust. His framework is sound; just adapt the percentages to your situation.

The Bottom Line

Is this book going to make you more money? No.

Is it going to ensure the money you make actually closes your retirement gap instead of disappearing into expenses?

Absolutely.

Supplementary income only matters if it supplements. Profit First is how you make sure it does.

Fortune favors the bold. But fortune also favors those who actually keep the money they earn instead of watching it disappear into expenses.

— Scott Fulbright

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