Practically every financial advisor will tell you that if you want to build a healthy nest egg, it’s important to “pay yourself first” as soon as you receive your paycheck. That’s an important principle we’ll discuss in our Thought of the Day. Later in today’s interview, well-known entrepreneur Mike Michalowicz shares his painful discovery that paying yourself first as a business owner is just as important if you want to have a healthy company. He explains why and shares how to do so. That and more on today’s show.
Bob’s Thought of the Day
- If you’ve ever flown on an airplane, you’ve heard the pre-flight announcement advising that in the event of a loss of cabin pressure, you should put on your own oxygen mask before placing it on your child. This seems counter-intuitive for any parent; what parent wouldn’t want to help their child first? Yet those instructions exist for a reason: you can only help your child when you yourself can breathe; you can only help others when you yourself are healthy.
- Any respected financial planning expert would recommend you follow the same principle for your personal finances: as soon as you receive your paycheck, take out the amount you’ve chosen to save or invest before you do anything else. Many experts advise making this an automatic transfer. In fact, that’s the meaning of the word “automatic” in David Bach’s bestselling investment book The Automatic Millionaire.
- It’s easy to believe that we’ll take what’s left after paying the rest of our bills and invest it. But more often than not, we don’t follow through with this. If we pay ourselves first, we can learn to adjust our spending.
- The principle of paying yourself first works not only in finances, but in other areas of life as well. For instance, respecting others begins with a healthy amount of self-respect. Those who value others genuinely value themselves. This does not contradict the Go-Giver philosophy of focusing on bringing value to others; it simply means that in order to give to others, we must have value to give.
- Be sure and have your own act together and there’s a much greater chance that you’ll have more to give others, including the most valuable gift of all … yourself.
Interview with Mike Michalowicz
- Profitability brings stability. If you want to continue serving customers and making a difference through your company or business, you must be financially sustainable.
- 83% of small businesses (defined as those making $25 million or less in revenue) are surviving week to week. The result is that if they don’t receive a deposit this week, they can’t make payroll or pay expenses.
- Mike shares a personal story about coming clean to his family about his financial failure as a younger man. A turning point was when his 9-year-old daughter ran from the room, brought back her piggy bank, and volunteered to help the family.
- Profit is not an event; it must become a habit. Every transaction, every moment, and every single thing about your business must facilitate profit. Profit is the result of a series of small wins that add up over time. It’s not one giant event that happens at some point down the road.
- The most important question is not “How big is your business?” Rather, it’s “How healthy is your business?” There is a culture of bravado that puts the emphasis on the size of your company rather than its health. However, rapid growth without financial growth will kill your company.
- The Profit First philosophy emphasizes flipping the core accounting formula that everyone knows: sales minus expenses = profit. This sounds logical, but it doesn’t work behaviorally. The reason is that in this formula, profit falls last. When something comes last, it gets ignored.
- We must flip this formula to this: sales minus profit = expenses. Whenever sales are generated, take a predetermined amount that you want to set aside as profit and put it in a separate checking account. When you take out profit first, you are inherently forcing yourself to become more innovative, find new ways to extract more value from your business with less expenses, become more frugal, and reverse-engineer your profit to make it permanent.
- Profit First by Mike Michalowicz
- The Pumpkin Plan by Mike Michalowicz
- The Toilet Paper Entrepreneur by Mike Michalowicz
- Profit First Podcast
- Connect with Mike on Twitter, Facebook, and Google+
About the Book
The Go-Giver tells the story of an ambitious young man named Joe who yearns for success. Joe is a true go-getter, though sometimes he feels as if the harder and faster he works, the further away his goals seem to be. Joe learns that shifting his focus from getting to giving — constantly and consistently creating value for others — leads to exceptional returns.
Rapidly going from national bestseller to global phenomenon, The Go-Giver has gained a devoted following with over a million copies sold. It’s utilized as a resource in major corporations to small businesses, in schools and churches, in book clubs, and more. Nearly a decade since its original publication, this timeless story continues to help its readers find fulfillment and greater success in business, in their personal lives and in their communities.
I loved this podcast – though it is one of MANY in the series that has resonated!
I am putting the theory of profit first in to practice and I can already see the changes. However, it led me to thinking about the element of paying bills. The one thing that wasn’t mentioned was tax. Here is the UK, as I am sure the US, tax is calculated on the amount of profit you assume. If you put profit first, does that then not potentially increase your tax liability!
I’d love to hear your thoughts on this. In the mean time, I await the next podcast with baited breath – I love them!
Thank you, Jen. So glad you enjoyed it, and that you’re enjoying the podcasts themselves. Very grateful to know that. Regarding your question, it’s not something I have the knowledge to personally answer so, if I may suggest, visit Mike’s site at MikeMichalowicz.com and submit your question there, and/or ask your local accountant. Again, many thanks for your very kind words about the podcast!