BiggerPockets Business Podcast 97: Put Profit First: How to Compound Your Business and Personal Income with Rocky Lalvani

BiggerPockets Business Podcast 97: Put Profit First: How to Compound Your Business and Personal Income with Rocky Lalvani

39 min read
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Rocky Lalvani came to the United States as a small child. Like many immigrants, Rocky’s parents arrived with a small amount of money, around $25. As hard workers, they were consistently talking to their friends and relatives about how to make more money so they could have the coveted “American Dream. This is how Rocky started his education in money and finances, and what pushed him to become wealthy.

Now, Rocky teaches businesses and entrepreneurs the Profit First system, which is exactly what it sounds like. A business usually calculates profits as sales – expenses = profits. Rocky argues that this is an inefficient way to see your true profit, and what the actual calculation should be is sales – profit = expenses.

You may be asking how to minimize expenses so the above formula can work. The solution to this isn’t that you need to manipulate the numbers so your expenses equal the difference between your sales and your profit, but that you need to minimize your expenses when possible. But what about fixed costs? What about startup costs? As Rocky puts it, you need to have a customer before you start having expenses, something businesses rarely realize is not only possible, but profitable.

Rocky also goes into his #1 tip for accumulating wealth and dives deep into why the phrase “the rich get richer” tends to be true. He also goes into how businesses can allocate their profits correctly, have the accurate amount for taxes, and pay themselves first so they’re making money while their money makes money!

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Listen to the Podcast Here

Read the Transcript Here

J:
Welcome to the BiggerPockets Business Podcast, show number 97. Here’s what people don’t realize. When you look at a compound curve, it’s not the beginning. In the beginning, it’s like, oh, I just put a little money and it looks like it’s going nowhere. Right? But if you don’t do the beginning of the curve, what you give up is the end of the curve. And the end of the curve is where the money is.

Speaker 2:
Welcome to a real world MBA from the school of hard knocks, where entrepreneurs reveal what it really takes to make it. Whether you’re already in business or you’re on your way there, this show is for you. This is BiggerPockets Business.

J:
How’s it going everybody. I am J Scott, your co-host for the BiggerPockets business podcast, and I am here again this week with my lovely co-host, Carol Scott. How’s it going today, Ms. Carol Scott?

Carol:
I’ve got to tell you what, I am so incredibly grateful and optimistic, that I feel like we are finally at a point where things are on an incredibly upward trajectory. We’ve even started planning some summer vacation things, and we just might really get to do them this year and start seeing more friends and family and doing all kinds of good things. So, very, very grateful and looking forward to everything that’s happening right now.

J:
Absolutely. I’m keeping my fingers crossed for our summer vacation this year. Okay, we have an amazing episode today. I mean, I talk about episodes being jam packed with golden nuggets and great advice and tips, but this one really is absolutely, beginning to end, tip after tip, after tip, after tip. Our guest today, his name is, Rocky Lalvani. He is, well, I guess he is a certified profit first professional. What that means is if you’ve been listening to our podcast for a while, we’ve had a guest on twice as name’s Mike Michalowicz is the author of a book called profit first. In that book, he teaches us how we can make our business profitable literally from day one. Rocky is someone who actually helps business owners and investors implement the profit first system to ensure that their businesses are again, profitable from day number one.
On this episode, Rocky talks to us about all the things we need to do to ensure that we can implement profit first in our business, whether it’s our business or our investments, and how we can actually start to become profitable from day one. We talk about some amazing ideas that will literally change the way you think about money and about your business. We talked about the compound effect. We talk about the domino theory. We talk about Parkinson’s law. We talked about the Pareto principle, and a whole bunch of other theories, and principles, and ideas that will really change the way you think about money and business and profit.
Then we dig into the details about how we as entrepreneurs and investors can start to build wealth today. Not tomorrow, not next month, not next year. In fact, a lot of what we talk about today on this episode is not waiting until tomorrow, not waiting until next month or next year. Starting today, because the earlier you start, the sooner you will build wealth, and the sooner that your wealth will compound and get you to where you want to be. Make sure you listen to the very end of this episode, where Rocky starts a response with, if you do nothing else today, and then listen to what he says after that, because it’s a life changing tip.
Just an amazing episode. Make sure that if you want to find out anything more about Rocky, about the stuff we talk about in the show, about getting in touch with him, his website, his podcast, check out our show notes at biggerpockets.com/bizshow97. Again, that’s biggerpockets.com/bizshow97. Okay, without any further ado, let’s welcome. Rocky Lalvani to the show.

Carol:
Rocky, welcome to the BiggerPockets Business Podcast. We are so looking forward to an amazing discussion today. We know that you can absolutely relate to our community and vice versa. You have so many things in common, and you are just a wealth of knowledge, so thank you again for sharing your time with us today.

Rocky:
Thank you, Carol and J for having me here, I’m excited for the conversation. It’s going to be the highlight of my week.

J:
I want to start with your background because there’s a very specific reason why I’m excited to have you here today. You have implemented or help other business owners and investors implement a system that is near and dear to my heart and that I absolutely love. Tell us a little bit about you, where you come from, what you do and why you’re here today.

Rocky:
I’m here today probably because of profit first, and I’ve been working with Mike as a certified profit first professional for about 18 months now with his group. The principles though that come out of profit first, I’ve been doing my whole life. Literally, the system that he uses isn’t something new that he invented, it’s something that’s been around forever. What he did was adapted to business owners. You’ve probably heard of Dave Ramsey. He’s got the envelope system. Well, it’s the same principle as the envelope system.
Dave didn’t invent that. Grandma and grandpa used to have their envelopes and their jars, and when they got money, they would allocate it, and they would spend accordingly and they constrained themselves. That’s basically what I do. I don’t know if you want to hear my backstory about being an immigrant or?

J:
Absolutely. Yeah, we-

Carol:
I would love to hear that.

Rocky:
I’m an immigrant to the United States. Most people think I’m Italian. I’m not. I’m from India. My parents came here when I was two, and they were starting life over again for their second time. Back then, there were currency restrictions, so they only had $25 when they left. Clearly, we were not on the right side of the tracks. When they came over, a lot of their friends had come over around the same time, and what I watched as a kid was going from the wrong side of tracks to the right side of the tracks in a relatively quick period of time.
They would all get together and they would talk about how do you create the American dream? How do we use money? How do we make money? So, money conversations were normal within those groups, where people were sharing salaries. Someone would say, “I bought a new car.” The first question would be, how much did you pay for it? That kind of bluntness with money, and so I just grew up being comfortable around money. Somewhere along the way, I said, I want to be a millionaire because I was always taught that you have the opportunity to have anything you want.
As a kid, I was one of those weird people reading the Wall Street Journal, trying to figure out investing, trying to figure out real estate, and listening to the adults have those conversations. Then the other thing that’s in my background is I was an early adopter of tech. When I was in high school, I had an Apple computer, one of the early ones, and I was learning VisiCalc. VisiCalc is the first electronic spreadsheet. As a high school student and I was going into fortune 500 companies showing accountants how to go from paper ledgers to electronic spreadsheets.
For me, everything I do is spreadsheeted. When we flip a house, when we do deals, it’s all spreadsheeted template. We go to the grocery store, it’s a spreadsheet. It’s designed in the order of the grocery store so that you can get in and out, and you’re not distracted by everything that’s going on around you. That’s kind of everything in a nutshell.

Carol:
Absolutely love it. It sounds like you have such a relatable background. You really came from not a lot. You were not afraid to go out there and get it because these discussions were a part of your every day upbringing. My goodness, if all of us adopted that mindset in our growing up in the bringing up our families and moving forward, probably what a much better place we’d all be in, right?

J:
If you want to know one of the big reason I wanted to have you on the show, it’s exactly what you just said. I am a spreadsheet guy. Carol will attest to the fact that there is nothing in our lives that I haven’t captured in some way, shape, or form on a spreadsheet. I love that, and I love that attitude of organizing your life, your financial life, and your business life, and your investing life in a way that you can capture and explain to other people. Because if you can’t organize it in a way that other people can look at it and understand it, you’re not going to be able to look at it and understand it and internalize it either.

Rocky:
That’s true, even Thanksgiving’s on a spreadsheet.

Carol:
I love that. That is so cool. Okay, so, Rocky, we really want to start off our discussion today with one of your absolute best tips. Can you share something with us that we need to know that might change our lives right now?

Rocky:
There is one and only one reason I’m a multimillionaire, and it is because when I got out of college, I automated my savings. Exactly the things talked about in Profit First, right? As soon as I got out, I got a job, and they said, well, we have a stock plan. I said, okay, put 2% in there. Well, we have a credit union, put 50 bucks in there. We’ve got this type of a savings plan. I said, put some money in there. Then, when I got my paycheck, my dad had handed me a T. Rowe Price brokerage account and said, “Here, this is for you.” There wasn’t much money in it. Maybe 800, 900 bucks. They set up automated from them.
As soon as my paycheck would hit, they would take out like $25 times five and put it into five mutual funds. No matter what happened, it was just happening in the background. Even though I made a lot of stupid money mistakes, the fact that I started the compounding process at 21 and let it run and kept upping those numbers year by year, it just happened in the background. Boom, it works. You got to do it.

J:
I love that. It’s funny because I wrote a Facebook post about this a couple of weeks ago, that my best tip for anybody that’s young and starting out is be an asset collector. Go out and buy stuff. There’s so many of us, and I’m in this boat as well, where money will burn a hole in my pocket, but I’m not going to go buy cars, I’m not going to go buy furniture, I’m not going to go buy toys, I’m not going to go on expensive vacations all the time.
When money is burning a hole in my pocket, I go and buy an asset. I go and buy some stocks. I go and buy some bonds. I go and buy a piece of real estate. I go and buy some gold. I go and buy some cryptocurrency. I go buy, maybe even something esoteric like Beanie Babies that might become collectibles one day and expensive. If you start doing that when you’re young, some of those things, yeah, might go away. Maybe the cryptocurrency is never worth anything. Maybe the Beanie Babies aren’t worth anything.
But if you diversify and you just start spending on assets, you’re going to look back in 10 or 20 or 30 years and say some of those really paid off. I’m sorry, I apologize. I’m talking here when I want to be listening, but I just love the fact that we’re on the same wavelength here.

Rocky:
And it’s true. Here’s what people don’t realize. When you look at a compound curve, it’s not the beginning. In the beginning, it’s like, oh, I just put a little money and it looks like it’s going nowhere, right? That’s the way the beginning of the curve looks like. But if you don’t do the beginning of the curve, what you give up is the end of the curve. The end of the curve is where the money is. That’s where it goes. If you think about it, and let’s make it relatable, to save your first thousand dollars might be hard. To save your second thousand is easy.
To save your first hundred thousand is hard. Your second hundred thousand’s easy. Your first million is hard, your second million’s easy. If you don’t start and you don’t have the time, what you’re giving up is the millions at the end, and people can’t see that long tail connection with money, and that’s the problem. But if you understand that and you go take action immediately, it’ll happen.

J:
Yeah, the whole compound effect is so valuable. I’m sure you’ve probably thought about, and you probably teach just compounding a penny a day. I see you shaking your head. Talk to us a little bit about that. Make a concrete example here that I think will really resonate with people.

Rocky:
There is the example of the penny doubling every day. If you start with a penny and you say, I want to double this penny for 31 days, where do you end up at the end of 31 days? Do you know the number?

Carol:
I don’t know the number. J, do you?

J:
I have a feeling. What do you think, Carol? A penny doubled every day for 30 days.

Carol:
Do not put me on the spot. I’m mathematically challenged. I’m going to say $3.70. I have no idea. Clearly, no idea.

Rocky:
J’s got … What’s your number?

J:
I think it’s something like $20 million.

Rocky:
It is. It’s 21 million.

Carol:
Wait. After how long?

Rocky:
31 days.

J:
30 days. You take a penny and double it every day, two pennies the second day, four pennies the third day, eight pennies the fourth day.

Rocky:
Yeah.

Carol:
Are you kidding me right now?

Rocky:
No.

Carol:
Oh my gosh. That’s incredible. My mind is very much blown. Explain.

Rocky:
Here’s what you have to do. Day 31 is say roughly 20 million. That means day 30 is 10 million. Day 29 is 5 million. Day 28 is two and a half million. All of it comes at the end. Day. One is a penny. Day two is 2 cents. Day three is 4 cents. Day five is 8 cents. Day six is 16 cents. Day 7 is 32 cents. Oh, whoop-de-doo, 32 cents. This is stupid. I’m not doing this anymore. You just gave up $21 million.

J:
This is the reason why we always hear it’s easier to make money when you’ve got money than it is when you’re starting. That first million’s really tough. The second million’s a lot easier. The 10th million’s even easier than that. Right?

Rocky:
It’s true. Once you figure out these certain basic principles, you will find that they apply to every part of life. I don’t know if you’ve read Gary Keller’s book. I see you shaking your head. It’s the-

J:
The Millionaire Real Estate Investor.

Rocky:
No, The One Thing.

Carol:
Oh, of course, Jay Papasan.

J:
Jay Papasan has been on our show.

Rocky:
Okay. If you think about it, it’s the same exact principle with his domino theory, right? You’re just knocking down a bigger domino and it doesn’t take that many dominoes to knock down the Empire State Building. Probably not even 31, right? It might be 15. I don’t know the exact number, but when you figure out these principles, they apply everywhere, and it’s figuring out those principles.

Carol:
Absolutely, love, love, love it. I’m sorry. I’m still reeling. My mind is blown at my lack of mathematical skills. Anyway, J, you take it from here. I’m still calculating in my head.

J:
Okay. I want to talk about, and we’re going to get into some of these skills that we’re talking about and some of the specific tactics and details, but I want to step back a little bit because you are a, I don’t know the right word, certified trainer, but you help business owners and investors implement profit first, which is the system put forward originally by Mike Michalowicz in his book, Profit First, one of his five or six books. He was actually on a few months ago talking about it, and you help business owners and investors implement this profit first system.
Can you talk to us a little bit about what that is and why we as entrepreneurs and investors should care about it?

Rocky:
Profit first is basically a cashflow system. If you think back to my early story, what I did was I took money off the top and I paid myself first. Well, that’s exactly what profit first is. Now, the problem is most accountants give you the wrong equation for profit. They tell you sales minus expenses equals profit, and that means profit’s a leftover, it’s the last thing. It’s something that you find out, usually at tax time when you go to your accountant and you say, “What’s going on? And they say, “Well, you were profitable last year. Congratulations. Here’s how much you owe in taxes.”
In the first question, the business owner is, “Where is that money?” The accountant laughs at him and says, “You spent it.” Then the second question that usually comes up is, how am I supposed to pay that tax bill? Where am I going to get the a hundred thousand dollars? I can’t afford this. Then they freak out. The people who use profit first don’t have these problems, because they know what their profit is upfront, and when that happens. Mike’s in the recruitment business. Mike used profit first. He had a blowout year, one year.
So, his sales took off. What happens with most people though is they don’t talk to their accountant except the tax time. Their quarterly tax payments are based on the previous year. Well, Mike’s sales went through the roof and so he wasn’t paying in enough quarterly. So, tax time comes, the accountant doesn’t call them for three weeks because the accountant does not want to have this conversation. Right? Finally, she calls him, Mike’s, what’s the deal? She’s like, I’ve been dreading calling you. She’s like, you will a lot in taxes. He goes, “I know my sales went up.”
She’s like, “How much?” And she’s like, Almost six figures.” He goes, “No problem. I’ll drop off a check tomorrow.” She’s like, “What?” She goes, “In my 20 plus years of doing this, no one has ever said that to me.” Mike says to me, “I had more money in my tax account than I needed to cover that bill.” So, he got a bonus too. Even though we hate tax time, even though we hate paying taxes, business owners who use profit first have confidence that whatever that number is, they stroke a check. They sleep at night. They don’t freak out.
That’s what the system does. The reason it works is because they changed the formula to sales minus profit equals expenses. We take our profit first. We know what it is immediately, because you can look at your profit account and see what it is. We take out for owners pay first. You invested in this business. You do all the work. Why are you the last one to get paid? You need to put yourself first because you need to be in a strong position to run your business. Then we take out for taxes before we start spending.
Basically, it’s a cash flow system. The money comes in, it goes into the first account, which is your income. That means you as the business owner who have a bad habit of never looking at your financials because their rear view picture are looking at your bank balance. So, you look at your income account, you know how much money came in and then you allocate it. You take a certain percentage and you put it in your profit account first, because profit comes first. You put a certain percentage into your pay account so that you know that you can pay your bills at home and your spouse is not screaming at you.
The third amount goes into the tax account, so you, like Mike, and all the other people who use profit first, can cover tax time, and then whatever’s left is your operating expenses. This way, you know what you truly have to spend in your business because you can see it in real time. The reason this works is because of another universal principle called Parkinson’s law. Most people have never heard of Parkinson’s law. But what Parkinson’s law basically states is we will use up all of the resources allocated.
This applies to everything. You got a kid in high school, right? He’s got a book report due. He’s got three weeks to do it. How long does it take him? Three weeks. You got a book report and it’s due in 24 hours, you get it done in 24 hours. Now, the reality is the kid didn’t take three weeks to do it. He wasted the first 18 days, and then started slowly, and then he maybe did it. Same thing happens in business, right? If I come to you and say, “Hey, we’ve got to flip.” Okay, what’s my budget? Your budget’s a hundred thousand.
How long can I take to get this done? Four months. It’ll take 105,000 and probably four months in a week or two because that’s reality. But what if I came to you and said, Hey, my budget is 20 grand and I’ve got three weeks to do this. Business owners are resourceful. They know how to get stuff done when they are constrained. We’ve got to put the constraints in and that’s what Parkinson’s law does. That’s what profit first does. By taking all your profit first, your taxes, and your pay, you’re constraining yourself.
If you think about just people, even employees, right? You’ve all heard of lifestyle inflation, right? We always tend to live at a little bit more than our paycheck is. The more you can constrain that, the better off you are. Now, people didn’t come to me and say, “Wait a minute, how am I supposed to work on less?” This is where the second principle comes in. And this is the Pareto principle that everybody knows, the 80/20 rule, right? If you think about it, if 20% gives us 80% of the result, 40% gives us 96% of the result.
Screw the last 4%, keep 60% of your time and money, and you’ve just got to shift your whole mindset thinking, and you’ve got to figure out where is the 40% that’s giving me the 96%? That’s what I do for my clients. I find the pools of profit within their business or their real estate that gives them that best return.

Carol:
Okay. This is so awesome in theory, Rocky. In theory, love, love, love it. But I do have a very clear, I think follow up question. So, you’re saying that we need to be committed to pulling money out of our business every week or every month regularly, and that’s the highest priority, but let’s say for example, we’re in the early stages of just launching a business. We’re not bringing a whole lot in yet. Realistically, we simply need to spend a whole lot more than we’re making in those early days to move forward. How do we reconcile that and how do we make that work with these principles?

Rocky:
Where does that premise come that we have to spend a whole lot of money to make money?

Carol:
Well, I’m not saying we definitely need to spend a whole lot to make a whole lot, but when it comes down to the fact that you need to spend something before you’ve got anything coming in, if you need supplies, for example, to deliver whatever product it is to your customers, how do we make that happen if we don’t have money coming in yet?

Rocky:
Well, so we’ll split this into two things. First of all, my good friend, Paul, started his business in 2020. He understood that profit is a habit, not an event, and so he started taking quarterly profit distributions from his company in his first year. You guys probably have heard so many stories of people getting involved with real estate with no money, and yet they turn it in. Why? Because the people who were involved were resourceful. They didn’t say, I got to spend money to make money. They said, I’ve got to figure out how to do this being more resourceful than asking for more resources.
If you’re spending like that, and we all do it, right? You get a new business owner, what does he do first? I need a business card. What does he do second? I need a website. No, what you need first is a customer handing you money upfront so that you have the money, and as soon as he hands it to you, you allocate it to the appropriate places and then you know what you truly have to spend. Yeah, this works no matter where you are in your business stage.

J:
I love that, and it makes sense. Now, here’s the question I have just from a mathematical standpoint. If you implement the formula sales minus profit equals expenses, you’re basically saying that, in your business, you’re making the decision to modulate your expenses based on the money that’s coming in and the money that you are allocating as your profit, as your savings. That tells me that, for the most part, your business growth is constrained, not by your desire to grow. It’s not constrained by external factors.
It’s constrained by how much you’re bringing in and how much you’re taking out in profit or savings. What if I want my business to grow a lot faster? Does that necessarily mean that I need to take less out or I need to be making more?

Rocky:
One of the biggest things that causes failure is growing too fast, because you get ahead of your cash flow, and when you get ahead of your cashflow, it’s done. It doesn’t matter. So, you’ve got to sit down and run the numbers, do the spreadsheets, just like J and I always talk about. People think that by taking profit you’re constraining your business. I don’t believe that. I think that’s a false assumption. I always make fun of Uber. How do you have a company with so much money, no cars, and you still can’t show a profit? It’s absurd.
They just have a very different mentality of thinking about things. Imagine if they had just taken one penny out of every dollar they made, would you miss the penny? No. Do you know how profitable Uber would be today? At one penny out of every dollar that came in their front door, super profitable, it’s a mindset shift. The way you start is by taking small amounts, we talk about the penny out of the dollar. That’s all you need to start with. You can still grow your business, but you don’t need to spend always to grow. There’s other ways to do it.
People who spend to grow are lazy, right? That’s why they need to spend money because they’re being lazy. They don’t want to think about it, they don’t want to figure out a better way. They don’t want to take the time. They just want to solve a problem by throwing money at it. That’s fine. Go ahead and do it. But it’s not going to build a strong foundation.

Carol:
So, so, so true. This is great. Rocky, I think you’ve mentioned, you’ve had your hand in real estate investing in a little bit. Can you tell us just a little bit about that? And then I want to mold it into the next part of our discussion.

Rocky:
There’s a lesson here with my real estate journey. When I was in high school, as I said, we grew up an immigrant, like if I wanted nicer stuff, I had to learn how to do it. So, I learned how to tile, how to do plumbing, how to do electric. I re-roofed my dad’s house. I got my real estate license when I was in college and sold property so I was always around real estate. Then I got out of college and life got good with a job. Good is the enemy of great. I kind of stepped away from real estate for a long time because I couldn’t figure out the numbers of the rentals and how to do all of that, and I missed all the compounding, right? That’s the biggest thing I kicked myself for. I should have bought properties back in the ’90s.
After the 2008 crash, I was like, okay, maybe I need to diversify and do some other things, and I started getting involved in real estate, and someone actually had to kick me to get involved. I was like, I should buy a rental. My friend was talking to me, and they were living in a rental and they hated it, and they were paying a lot of money. I was like, “Well, if you want to live in a house, I’ll buy one and you can rent it from me.” They were like, “Well, give us a couple months. Let me think about it.” Three months later, I get a phone call. Uh-oh, I’ve got to go find a house because they want to move in.
I had a client that wanted to be my tenant. I’m like, okay, this takes care of all the tenant headaches. That kind of is what got me started. Then right after that, there was so much in the way of foreclosures. I’m like, let’s try. So, we started with our first flip and we just started figuring out and putting systems in place. When I started my flips, I had one rule, and I had a partner for my flips, I said, “We can flip these houses, but I’m not lifting a hammer. I know how to lift the hammer, but I will not lift the hammer. We’re going to put people in, we’re going to build teams, and we’re going to let our teams do this properly. And we’re going to find the right partners so that I don’t have to spend all my time.”
That first flip, we put a lot of effort into time figuring stuff out. But once we figured out our systems, most of my flips now are about 20 hours of my time. Meaning, it’s phone calls, it’s go do this, it’s planning out the big picture, and then handling the problems. I have a few more rentals and it’s been good. It’s been fun. I make a lot of money and life is good.

Carol:
Fantastic. You clearly get it, right? Obviously, I just wanted to set the stage because there are several of our community members here on the BiggerPockets Business Podcast who do have their hands in real estate also. So, you’ve lifted the hammer, you had your real estate license, you have rental properties, you flipped all of those things. I’m curious to know, can profit first principles also be used for real estate investors or other people with variable income. How do we customize the system for real estate agents, for rental investors, for flippers and other real estate professionals?

Rocky:
Okay. Those are three different customization. Let’s go through them quickly one by one. Let’s start with the rentals. When you go buy a rental, you sit down and you come up with a set of numbers, and you say to yourself, well, here’s my vacancy factor, and you say to yourself, here is my maintenance factor. And then you may say, here’s my long-term upgrade factor, right? Then you’ve got your monthly payment for your note, and your taxes and your insurance. What do most people do?
They set that up and they say, “This is how I’m going to run my business, “and then immediately they get the first rent check, they deposit it, they pay their mortgage payment and their things, and then they start spending their vacancy budget, and then they start spending their maintenance budget. What we suggest is you set up a separate bank account for vacancy, a separate bank account for your short-term maintenance, and a separate bank account for long-term maintenance.
Now, you can figure out your long-term maintenance. When I buy a house, I can look at this house and go, okay, heat’s five years old. That means I’ve got X amount of years on heat. The roof is 22 years old. Well, that means, in the back of my head, I got to start saving up for a roof. Figure out your numbers, figure out your percentages, and then start allocating your money upfront. Then what happens is, is you end up with a vacancy. Well, now you’re no longer freaking out going, oh, I got to get a tenant. You’re going, hey, there’s a vacancy budget. I can take money out of my vacancy account. I can cover this month because I have the vacancy money.
Oh, I have to do some repairs to the property. Okay. Oh, look, there’s money in my repair account. I can make the repairs. When the time for the roof replacement comes, it’s like, I really don’t want to spend eight grand, but you know what? There’s $8,000. The roof is leaking. The tenants freaking out. Let’s fix the roof instead of causing more trouble. Most people get stuck in those situations. They’re like, it’s an emergency. My roof is leaking. No, it’s not an emergency. I told you six years ago you needed a new roof.
Seriously, this isn’t an emergency. This is an expectation. So, you set up your accounts to put your money aside and you let them build up so that you have the money when the time comes. That’s your rentals. For the flips, the way we do our flips, and this is just how I did. We fully fund the flip upfront. That’s just the way. So, you might get money from a … Whether you’re getting a loan or however you do it, set up an account and put your money in the budget for that particular flip into there.
Then you just track and see how that money starts going down over time. Then, at the end of the flip, we settle up and we literally take our profit distributions. Flips are a little bit easier, but you have to run … Here’s the thing. If you’re doing one flip, it’s really easy, because every time you go to Home Depot, you know it’s for that property. When you’re doing multiple flips, you really need to track what expenses are going to what house, and before and after we do an Excel sheet.
Before we flip, this is our expectation of what this is going to cost us, and after we flip, we come back in and we look at how we did to expectation, because we always want to be making sure that we’re making the right assumptions on the next deal. I can’t know that unless I’m confirming the past deal, because there’s all these little costs that we forget about like the dumpster. Do you have a line item for the dumpster or two dumpsters? That’s 1500 bucks sometimes. We forget all the little, little stuff that needs to get done.
We have line items for just miscellaneous stuff. Most real estate investors are the opposite of me. They go in and go, I can figure out how to get this done, and they go to the edges. We like to build in massive margin. We put margin at every level of the sale, so I’ve got margin on the sale, margin on the repair, margin on the buy, even margin, if I have to replace the roof, we’ll build it into the cost. The biggest thing with the flips, I think, is truly tracking the actual cost of what’s going on to the actual property, and that’s not always easy.
The cool thing with Home Depot though, is they have a system. So, if my guys go to Home Depot, Home Depot sends me a text. They already put the property address in. They track it all for me to make it so that it’s kind of automated and fixed. The third one is variable income. Profit first is perfect for variable income. What we do is we set up an extra account for the variable income, or you can actually just let it sit … We set up a separate account. If you’re a real estate professional, right? So, you might have a month at 10,000, and 10,000 might be the number that you need to live off of every month.
Well, some months you’re going to have zero maybe, and some months you’re going to have 30,000. What we do is we set the base level at 10 and you do your allocation, so off of 10,000, and whatever you get in that month that’s above 10,000, we put it aside into a separate account, and that’s kind of a volt account. When the next month comes up and now you’re at 6,000, well, I can go to that vault account that I was saving up my money and I can pull 4,000 out and I can do my monthly allocations.
Now, what you’re seeing is really smooth sailing in choppy income waters. Does that make sense?

J:
That made perfect sense, tons of valuable information there, but something that kept coming through to me in all three of your examples, or at least especially the first two examples for investors, you talked earlier about one of the biggest causes of business failure is growing too fast, but one of the other big causes of business failure that I’ve seen is not doing a good job of forecasting cashflow, not knowing how much money you’re going to need to spend next month, two months from now, six months from now, 12 months from now.
So, a lot of what you’re talking about to us as investors on both the rental and the flip side, especially the rental side, is forecasting cashflow, knowing how much money you’re going to need. If a roof is five years old, well, you might have 15 years before you need that money. You have 15 years to save. You can save a little bit less every month. Then, if a roof is 15 years old and you only have five years left, now you have to save three times as much because you only have a third of the time so you have to save three times as much every month. Can you talk to us a little bit, I guess, either as real estate investors or business owners about cashflow, forecasting, cashflow management?
Are there any tips that you have to help us get better at forecasting cashflow and ensuring that we’re prepared for things that could happen?

Rocky:
That’s kind of what profit first does for you. If you get your allocations correct upfront and you know your minimum, profit first will handle all of those things for you just in the background, because you’re automatically setting money aside. I think the bigger question is the difference between implementation and your targets. Mike gives targets in the books, and you can calculate your own targets for your specific situation, but where you are today may not be where you need to be. A big part of that is number one, start. That is the hardest thing.
It’s harder to go from zero to one than it is to go from one to a hundred. So, open up the bank accounts and get started. That’s the biggest thing Mike hears from people. People come up to him and like, they fanboy him after he talks. They’re like, “Mike, I love your book. This is so awesome.” Mike’s first question is, “Did you open your account?” And they’re like, “No.” Seriously, go open and just start.
Even if you just put 1% to profit, even if you pay yourself half as much as you’re supposed to be paying yourself, even if you’re putting a little bit of money in to taxes, and then every quarter, just like compounding, crank it up a little bit. Go from 1% to 2%. If you think about it, if I have a business or a real estate group, and I start with a 1% profit, and every quarter I add 1% to it, at the end of three years, I’m at 12%. At the end of five years, I’m at 20%, you got a business with 20% profit margin, that is pretty good, but it didn’t happen overnight. It happens over five years.
This is the biggest struggle that I see. Nobody wants to buy the book, how I became a millionaire in 10 years. Everyone wants to buy the book, how I became a millionaire overnight. Nobody becomes a millionaire overnight. Some lucky people, and even those that do like, they win the lottery, what happens to them? They go broke, because they didn’t build the systems, processes, and mindsets to be able to handle that. You start with where you’re at and then you slowly move to where you want to be.
It’s a process. I tell my clients a lot of times, it doesn’t take us two years to get the targets, and that’s only if you show up and do the work every month. If you don’t, it’ll take us four years. It’s the reality of life, right? The other thing is to actually sit down, and what I do for my clients who need it is we’ll actually forecast out 13 weeks or one year, whatever it is that you’re working on we’ll forecast out what that looks like, and we’ll build a spreadsheet so that you can look at it and see what’s happening in the future.
I have a client who’s in the retail business. They need to place large orders to China, and that’s what we do. We’re forecasting out and we’re automatically saving little bits so that when the time comes to order, the money’s there, it’s already saved, you can see what the forecast out for months is, what the run rates are, everything, and you just have total clarity on what’s about to happen. You’ve got to build it. It’s all specific to your business.

J:
I love that. A lot of what you’re saying is really as simple as forming good habits. We all know forming habits is hard. But what you’re saying is, don’t say that I’m going to floss my teeth twice a day. Say, I’m going to start by flossing my teeth three times a week, and then next month I’m going to do it five times a week, and then the next month I’m going to do it seven times a week, and then I can get up to twice a day, and it’s taking incremental steps to form habits, because at the end of the day, that’s really what it is. It’s forming good habits so that we’re no longer even thinking about what we’re doing. It’s just become a natural part.

Rocky:
Profit is a habit. It’s not an event. It goes back to that. You’re saying that, and I’m thinking about, one of the habits I have is exercise. I go to the gym three times a week. I lift heavy. I have an app. My app essentially keeps me on track, tells me what I need to do so I don’t need to think about it. If I want, my app will track my sets, and then if I do well, it’ll add a pound to it for the next time. If I don’t do well, it’ll tell me to de-load. So, it’s essentially tracking my habits and then automatically making those little incremental changes. These principles, when you figure out these principles, they apply to everything.

J:
Okay. We’re going to jump into the segment of show we call four more, and that’s where we ask you the same four questions that we ask all of our guests. Then the more part of the four more is where you tell us a little bit more about where we can connect with you, where we can find out more about you and what you have going on. Sound good?

Rocky:
Sure.

J:
Okay. I’m going to start with question number one, same question we ask all of our guests, so what was your very first or your very worst, I’ll let you decide which one, job, and what lessons did you take from it that you’re still today?

Rocky:
I’m not going to count my newspaper route because that really wasn’t a job. Although, you know what? I’ll talk about both. My newspaper route taught me how to do good customer service because my clients would say, “Hey, put the paper here, do this, do that.” When I started doing that and listening to them, I started getting better tips. Here I was a 13 year old kid with 50 bucks in his pocket. Mind you, it’s the late 70s. That’s a lot of money for a 13 year old kid, but it was through customer service through delivering, and then it’s … With the newspaper back in the day, you needed to have it done. It was seven days a week, right? You had to show up, you had to be there at 6:00 AM before you went to school, and you had to be consistent with it.
So, it was just that consistency, great customer service, and the constant building relationships with my clients and taking their feedback and changing the way that I was presenting myself to them. Those days were a lot different. People would just tell you straight up. We weren’t as a nice as we are today. Then my first other kind of job was being a dishwasher. I love dishwashing. I still love dishwashing. It’s weird. I don’t know, but I learned how to run a restaurant from that business, because I started with dishwashing, did a waiter, went to the other side to be a cook.
They were in the midst of turning it into a franchise. So, by the time I was in college, they were flying me out, helping open up other restaurants because I was systematizing and processing everything. I could take their processes and create systems around it. Again, it’s the same thing. Show up, do the work, do your best, keep improving.

Carol:
I love it. I have to just call attention to the fact that 13 year old you on your paper route started forming these habits in life lessons that have carried you through all these years, and that you have not only implemented in your own businesses, but that you’re teaching other people to do to this day. So, it is, those early lessons that we have are so powerful. On a side note, I get that you love dishwashing because I love doing laundry. It’s just a thing, right? It’s just something therapeutic, consistent that you can feel good about at the end.
Okay, so question number two is, Rocky, what is the very best piece of advice that you have for small business owners or entrepreneurs that you haven’t yet mentioned today?

Rocky:
I think we’ve mentioned this, but I’m going to make this clear. If you do nothing else today, open one bank account, label it profit, and every month just put 1% of your money into it, right? $1 out of a hundred. If you can’t miss a dollar out of a hundred in your business, we’ve got bigger problems. I just want you to do that for a couple months, and I want you to just start feeling what that looks like. Then come back, watch this episode again and up into 2%, right? If you’ve got to take baby steps, just take it. Trust me, this will work. It will change your life.

Carol:
Awesome.

J:
I love that. I love that. Okay. Next question, and I’m already going to mention, we’ve talked a lot about Mike Michalowicz today and his book, Profit First. He’s also been on the show and talked about his most recent book, Fix This Next. I’m a big fan of books. I imagine you’re a fan of books as well. For all the business owners, entrepreneurs, investors out there that are looking for their next great read, recommend a book to us.

Rocky:
The book that I recommend the most, and it’s a book that I have a lot of my clients go through and I hold their hand as they go through it, it’s called Living Forward by Michael Hyatt. It’s essentially a book that helps you to get out of the drift to create a life plan and then to implement it. The biggest thing that I find with people, especially entrepreneurs, it’s shiny object syndrome. They’ve got a mismatch between their business and their personal lives. They don’t know what they want and their image drift.
What this book does is, it starts out by writing your eulogy. What is it that you want to be said about you? Then how do we create a plan to live that eulogy life? It’s looking at your health, your wealth, your business, your relationships, your spirituality, every single part of your life. Define what you want, write it down, and then go execute on it.

Carol:
Super. I can’t wait to get that one. Do we have that one, J? I don’t think it’s in the bookshelf.

J:
I don’t, and I’m going to get it.

Carol:
Excellent. That’s a great recommendation. Okay. There it is. Anyone watching the video, Rocky is showing it to us right now, and it will absolutely in the show notes as well. Okay, so our fourth question is, Rocky, what is something along the way, either for one of your businesses or for yourself or for your family that you have splurged on that was totally an entirely worth it?

Rocky:
My neighbors laugh at me. We have a Yukon XL that sits in my driveway. It moves about once a month. Okay. The reason I bought it is that, if I needed to take my kids somewhere, throw all their friends in, move the soccer team, move the robotics team, whatever we wanted to do, I wanted a vehicle that I could pile full of kids and go do something with them. Literally, we drive it, I think 5,000 miles a year. It was a lot of money, but it is totally worth it. I actually did the spreadsheet, J, of renting versus buying, and renting made more sense, except there was one problem.
If I had to rent that car to take the kids for ice cream, I would freak out that I just spent $125 plus the ice cream, and it would just ruin the situation. I just wanted the flexibility to say, this is what I want to do. I don’t care what the car costs.

Carol:
That is so cool. I’m seeing the equivalent of the Kool-Aid mom, the mom who wants to have everyone over to create that experience that those kids will remember, and that’s what you did by buying that vehicle, and I think that’s the coolest thing ever.

J:
We have two very impractical cars, and we spend way too much of our time renting cars when family comes into town, or when we have to haul something. I love that idea. That’s fantastic. Awesome. Okay, that was the four part of the four more. Now for the more part of the four more, can you tell our listeners a little bit more about where they can connect with you, where they can find out more about you? I believe you have a course that you’ve recently released, so I’d love to hear about that, and anything else you want to tell us?

Rocky:
The best place to find all my work is at profitcomesfirst.com. On the website, if you want to check out the course, it’s called Effortless Cashflow, because we don’t want to work harder. We want to work less and make more. That’s a mantra that goes down. You can find the course there. I do have two podcasts. One is Profit Answer Man, where I literally teach you everything about how to be profitable in depth. I don’t hold anything back. The only difference between hiring me and listening to what I teach is that I’ll do it for you instead of you having to do it, but there’s nothing held back.
My other podcast is called Richer Soul, and that is, once you figure out your money, how do you build the life of your dreams? What is the rest of your life look like? And how do you live that ultimate life? If you want Mike’s book, there’s two free chapters of Mike’s book on the website. You can get two free chapters plus a whole bunch of other free tools that come out with it as well.

J:
Fantastic. Everybody, go check out Rocky’s website, check out his podcast. Make sure you leave him a review on iTunes for both of his podcasts, because as podcasters, we always appreciate that. Rocky, this has been absolutely amazing. Thank you so much for being here. I took so many notes on this episode. We have so many amazing gold nuggets.

Carol:
Pages, and pages, and pages of pro-tips.

J:
Yeah. Carol has been sitting here watching me type for the last hour.

Carol:
I’m looking at my notes. It says gold, gold, gold, gold. It’s awesome.

J:
Seriously. This has been fantastic. Thank you so much. We so appreciate you being here and all the amazing tips, advice, and expertise you’ve shared with our listeners. We look forward to speaking with you soon.

Rocky:
Thank you, J and Carol, and if you’re one of my listeners and you haven’t been on the BiggerPockets platform before, check it out. You know I’m always telling you, when it comes to real estate, this is the place that you’ve got to go to get the greatest advice without spending a fortune. Thank you so much for having me on.

Carol:
Thank you, Rocky. We’ll see you soon.

J:
Bye.

Carol:
Wow. Rocky had so much incredibly great and useful information, and there is one thing. I mean, there were so many things, but one thing that he said that just is like sticking right here. He said, nobody wants to buy the book about how to become a millionaire in 10 years. They want the book about how to become a millionaire tomorrow, and he’s so right. It just doesn’t happen overnight. It comes with consistency. It comes with hard work and it comes with a commitment to create that power of compounding. I thought that was just so absolutely powerful.

J:
Yeah, and another thing he said that I thought was tremendously powerful, and I think this hopefully resonates with everybody is profit is not an event, it’s a habit. Honestly, I mean, I use the example of flossing or brushing your teeth, or going to the gym, whatever it is, that’s what profit and saving money is. It really is starting today and building good habits so that in five, or 10, or 20 years, that little bit of money that you’re saving today is a whole lot more money later, or a little bit of profit you’re taking from your business today is a whole lot more profit later. So, just an amazing, amazing tip.

Carol:
I couldn’t agree more. All right, let’s wrap it up, baby.

J:
Cool, let’s wrap it up. Everybody, thank you so much for tuning in, and we look forward to seeing you and listening to you, or you listening to us, however that works. Again, next week. She’s Carol, I’m J.

Carol:
Now, go open an account and deposit 1% today. Get started, get out there, do it, create your future wealth. Have a really great week, everybody, and thanks for being here. We can’t wait until next time.

J:
Thanks everybody.

 

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In This Episode We Cover:

  • How Rocky became a millionaire through compound interest 
  • What the Profit First system does for businesses and entrepreneurs
  • Harnessing the 40% of your work that creates most of your profit
  • Dismissing the notion that you need to spend more to grow 
  • How real estate investors can use Profit First in their businesses
  • Setting up separate bank accounts and allocating your money
  • And So Much More!

Links from the Show

Books Mentioned in this Show:

Connect with Rocky:

Rocky Lalvani came to the United States as a small child. Like many immigrants, Rocky’s parents arrived with a small amount of money, around $25. As hard workers, they were […]