Why do I need a Tax Account in my primary bank account if I’m going to move that money to another bank?
Profit First teaches that you should have multiple bank accounts to manage your money effectively. This is so that you have money set aside for taxes, profit, and operating expenses.
But the bank only deposits funds into one account. So how do you manage all of those accounts?
How do I manage tax and profit accounts?
We advise our clients to have profit and tax accounts at their primary bank AND profit and tax accounts at their secondary bank. The reason for this is bank to bank transfers typically take a few days. Rather than leaving that money in the central bank account, you transfer it to profit and tax accounts at your primary bank. It’s kind of like a holding tank until the bank-to-bank transfer is completed.
It can be a little confusing, but this ensures you aren’t spending money that needs to be earmarked for taxes and profit.
When money is deposited into your bank account, you need to get into the habit of allocating that money to different accounts. Otherwise, you may look at your main bank account and think, “Wow! I have a lot of money! I can spend this on [fill in the blank].”
Should Profit First be implemented retroactively?
Once you understand and implement this concept, you may wonder if you should do this retroactively to determine the allocations for each account.
My answer: no.
The allocations start when you first implement the Profit First system. There is no need to go back and figure out those amounts. It could be a ton of work. You’ll most likely end up with a headache and frustration (which is what got you here in the first place!)
So just start with your next deposit.