Your tax return will show you your total income, your adjusted gross income, and your taxable income, but those numbers don’t show the most important figure of all.
Your “taxable income” is meaningless.
So what’s the most important number the IRS doesn’t care about but you should?
Your net profit.
It’s not what you make; it’s what you keep.
What’s your net profit for the year? What’s left over after ALL your expenses, not just the deductible ones?
Your net profit figure is irrelevant to Uncle Sam but super-relevant to side hustlers and anyone else with financial freedom on their “to-do” list.
The family that makes $200,000 a year but spends it all is actually worse off financially than the family earning $50,000 that spends $40,000 — even though they earn 4x as much.
In 2014, median family income was $53,657. Put another way, that’s about a $1000 a week or $200 per business day.
But how profitable were they?
The best measure of personal profitability on a national scale is the saving rate, which is currently 5.2%.*
While that seems low to me, it’s actually in line with other Western economies. For comparison:
This figure is generally calculated by dividing your net “disposable” income by how much you save. (And to their credit, the Bureau of Economic Analysis considers just about every take home dollar disposable.)
That means our median American family is left with $2790 at the end of the year. (Let’s just ignore taxes for now.)
Or put another way, we work all week and make — truly make — about $50.
Is it worth it? The 40+ hours, the commute, the drama, the car, the house? For $50 added to your personal bottom line?
And even added up for 12 months, that $2790 isn’t much of a cushion against hard times, unexpected expenses, or to put toward bootstrap seed money or retirement savings.
Have you ever calculated your “personal profitability” before?
I think it’s a hugely overlooked metric.
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Why Your Personal Net Profit Matters
The greater your saving rate, the faster you reach financial freedom.
Now clearly the more you earn the easier it becomes to sock money away, but personal profitability is simply living below your means — at any income level.
Remember the Rich Dad definition of escaping the rat race? It’s when income from assets exceeds your monthly expenses. That could be business or investment income.
Could you save 10%? 20%? 50%? How many years could you shave off your career by becoming more profitable?
Our median family with an average saving rate has annual expenses of $50,867. (If they save 5.2% of their earnings, they spend 94.8% it).
Let’s call it $50k for the sake of simplicity.
According to the 4% rule, that means they need to accumulate $1.25 million in assets to retire. At their current level of profitability, and earning 8% on their savings/investments, that would take 79 years.
But if the family could improve their profitability, say by increasing their saving rate to 25%, they could cut 20 years off that timeline.
Sometimes the tiny tweaks make a big impact.
And if you’re not excited by a 59-year waiting period (I can’t blame you!), remember this only addresses one side of the equation. There’s only so much spending you can cut, but there’s an unlimited upside on how much you can earn.
How to Find Your Net Profit – Even If You’re an Employee
Calculating your personal net profit is simple, but not necessarily easy.
The basic equation is the same as it is for any business:
Revenue – Expenses = Profit
Revenue, or your income, is relatively easy to figure out. You probably already know how much you earn with each paycheck. Add in your side hustle income and any investment income and you’ve got your top-line number.
Expenses are trickier. I rely on annual summary statements from my credit card providers to get most of the data, because I spend very little cash.
If you want to be very meticulous about it, you can track every expense in a notepad or in Excel.
Try it for a month.
$4000 salary + $500 side hustle – $2500 expenses = $2000 monthly profit
Note: I’ll argue, like Joshua Sheats did, that taxes ARE part of your profitability. You can choose where you live, and some cities/states/countries are more favorable than others.
Start Thinking Like a CEO
You’re the CEO of your own life. You’re in control, even if doesn’t feel like it right now.
And it’s your job to care about your personal profitability because no one else will do it for you.
The buck stops here!
What can you do to improve your bottom line? Earn more? Spend less? Both?
Crunch your numbers and see what you come up with. Did you beat the “average” saving rate of 5.2% last year?
Comment below to see how your personal profitability stacks up against the rest of Side Hustle Nation!
*Economists might point to a different metric, gross savings as a percentage of GDP. At last measure, that figure painted a rosier picture for American families at 18%.