Are You Profitable?

Shares 5

One of the industries I invest in is property and casualty insurance. It’s a brilliant model for a couple of reasons:

They very rarely lose money.
Everyone needs it.

The main reason I invest in it, and why I think it’s a great example for how you should be approaching your personal economy, is they’re almost always profitable.

Think about hurricane seasons in the past — a storm (or storms) devastate a part of the country and insurance premiums go up all over the country. Why does this happen? So the company issuing the insurance can remain profitable.

The incredibly simplified logic behind insurance companies is: we take more money in than we pay out. In fact, insurance agents are often compensated on their loss ratios which involves how many of their insurance clients actually made a claim on their policies. A low loss ratio means the insurance agent was extremely profitable for the insurance company.

When I travel around the country talking about “building a bigger life, not a bigger lifestyle” I often discuss the ‘L Factor’. The ‘L Factor’ is the difference between what you bring in and what you pay out. The larger that difference over a long period of time, the bigger life you’ll be able to create for yourself. It stands for Life Factor.

The ‘L Factor’ is essentially a measure of how profitable you are.

For a vast majority of the general public, there is no ‘L Factor’. People with little to no room between their income and their monthly expenses, basically living paycheck to paycheck, have no profit to account for at the end of the month.

You should always have more money at the end of your month, NOT more month at the end of your money.

Imagine an insurance company that took in $250,000 a month and paid out $300,000 a month in claims (every month). Suffice it to say that insurance company wouldn’t be around very long unless they either increased their premiums or decreased the number of claims they paid.

Similarly, there are two ways to increase your personal profitability:

Increase your income.
Decrease your monthly expenses.

While I’m not a personal fan of carrying a lot of debt, having monthly debt payments is perfectly fine AS LONG AS you are still profitable at the end of the month.

So the question becomes, how profitable do you want to be?

If your goal is to be show at least 5% profit, then make sure you’re putting away at least 5% into your 401k or ROTH IRA or Money Market account every month. If the goal is to show a profit of 10, 20, 30% or more, it requires a very intentional use of the money you make.

The profit you book at the end of month should be used to:

Build Wealth through investments
Eliminate Debt
Do Good
Save For Future Expenses

Ultimately, your profitability will show up month after month in trackable form if you’re keeping up on your net worth statement. We use Personal Capital as our go-to method for tracking profitability month over month. Our personal goal is to get to a point where we use less and less of a percentage of our monthly income for expenses while growing our monthly income.