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.
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- Profit First Podcast
- Connect with Mike on Twitter, Facebook, and Google+