Learning To Save Retained Earnings

Tonya has been paying off debt since 2008. She doesn't have retained earnings set aside, and she wants to know how much to save, and how to start. Dave gives her some advice and some percentages.

QUESTION: Tonya from Idaho has been paying off debt since 2008. She doesn’t have retained earnings set aside, and she wants to know how much to save, and how to start. Dave gives her some advice and some percentages.

ANSWER: What we have taught folks to do is to pull a living wage out of he business, and whatever net profit is remaining after a living wage, put the lion’s share of that toward debt. We’re talking about business debt. This is different than personal debt in the sense of how we attack it. When we’re attacking personal debt, we save up $1,000 and then totally pour on the coals on Baby Step 2. On business debt, you need to build some retained earnings so you stay open. Business is the goose that’s laying the golden egg. We have to keep that puppy open.

After you pull out enough to live on—just a basic, raw living wage—whatever net profit you have left, the lion’s share should go to paying off debt. Go ahead and factor in something for retained earnings. You could go 10% to retained earnings, 15%, 20%. I probably wouldn’t go more than 20% because I want that 80% left over to dump onto the debt and really attack the debt. I wouldn’t go 50/50 and build savings that way, but you need to get in the habit of saving and systematically set everyone’s mindset in place to where we’re always going to put aside retained earnings as the business builds.

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