93 Why You Have to Pay Profits to Yourself First with Mike Michalowicz

"If we don't pay ourselves first, we start resenting our business. It starts owning us." - Mike Michalowicz www. LewisHowes.com/93 Get more from Lewis! Get my New York Times Bestselling book, Make Money Easy! Get The Greatness Mindset audiobook on SpotifyText Lewis AIYouTubeInstagramWebsiteTiktokFacebookX

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Lewis Howes?

  This is episode number 93 with Mike Michalowicz.

• 0:07Lewis Howes?

  Welcome to the School of Greatness. My name is Lewis Howes, a former pro athlete turned lifestyle entrepreneur. And each week we bring you an inspiring person or message to help you discover how to unlock your inner greatness. Thanks for spending some time with me today. Now let the class begin.

• 0:33Lewis Howes?

  What is up everyone? Thanks so much for hanging out today. Man, it's been a, it's been a fun last couple of weeks with the School of Greatness podcast. Had some awesome guests on. If you missed 90 and 91 and 92, they were all inspiring and I just love the guests that I get to bring on and I get to learn from them. And I get to share with you all their inspiring wisdom and experience. So I'm super pumped because we're getting close to 100 and I can't believe it. I just started this thing like a year and a half ago and we're almost there. So very excited. Thank you guys for all the support, for sharing this, for subscribing, for leaving reviews that you guys leave on iTunes. I just am so appreciative.

• 1:14Lewis Howes?

  So thank you guys very much. Want to give you guys a quick fact about me because you've been asking to share more personal facts about me. Some of you may or may not know that I actually went to a private boarding school. That's right. When I was in eighth grade, I moved away from my hometown of Delaware, Ohio, very small town in central Ohio, about 20 miles north of Columbus. And I moved away into a dorm with about 10 other guys, maybe about 15 of us in this middle school, boys dorm. And then the high school I went to as well in St. Louis had about 100 guys in the dorm. So I lived in a dorm for three and a half years until I,

• 1:56Lewis Howes?

  my, my mom moved out to St. Louis and I was a day student. So it was a boarding school that had day students, people that lived in St. Louis. And then also students from all over the world, speaking lots of different languages. From different cultures that we lived together in a dorm. And don't worry, it was coed. So it wasn't just an all boys school. I don't think I would have been able to go. But it was my choice to go. And I was one of the most amazing experiences I've ever had in my life was leaving home when I was 13 and learning from all these individuals and this school experience. So that's a little fact about me. Uh, we've got a guest on today's name is Mike Michalowicz, and I butcher his name constantly. So hopefully that's the way to say it still.

• 2:40Lewis Howes?

  Uh, we've got a very cool interview because he talks about his, his new book, which is called Profit First. And it's a simple system to transform any business from a cash eating monster to a money making machine. That's right. And it was, I was fascinated actually by the, the interview because Mike has a different approach about running a business where you actually profit first, you pay yourself first and you put that aside. And then whatever's left over, then you use that for your expenses, for your marketing, for your, um, everything that you want to do to promote your business. It's very interesting the way he thinks about it and, uh, some great case studies he shares in this book and in this episode. So

• 3:26Lewis Howes?

  take some notes and, uh, prepare for an awesome interview. And without further ado, guys, let's go ahead and dive into this episode with the one and only Mike Michalowicz.

• 3:42Lewis Howes?

  Welcome back everyone to the School of Greatness Podcast. Super pumped to have my man Mike Michalowicz on. What's up, Mike?

• 3:49Lewis Howes?

  Louis, how you doing, brother?

• 3:50Lewis Howes?

  Doing well. I'm, uh, I'm excited to tap into this information because, uh, it's really interesting how you shifted things around in running a business and the, the ways that you've supported people with this new book you have called Profit First. And kind of flipping this old system and old mentality that all of us kind of have been taught or have been doing, or I would say most of us. And this approach you have into this new system and this new formula for making money and profit in your business. So I'm really excited to dive into this and, uh, thanks so much for coming on.

• 4:27Speaker 02

  Oh, it's an absolute pleasure. I'm flattered to be here, really, truly.

• 4:31Lewis Howes?

  Yeah, and now, let's just go ahead and dive in because we've got a lot to cover and I want to make sure that everyone gets this information. But in the book, you kind of set the context with this, what you call the recency effect, which is the whole reason why this formula, they call the profit first system, came about really, was understanding this recency effect. Wouldn't you say that?

• 4:55Speaker 02

  Yeah, yeah, and the recency effect was something I realized in behavioral science, and it's not something that I necessarily studied by kind of fell across, that we as business owners, or actually in any aspect of life, when we see the availability of something, if we see a large amount of money in our bank account, whatever happens recently, we think that's the standard going forward. So we see lots of money in our bank account, we're like, hot dog, business is cruising, you know, it's gonna be awesome. We see no money, we're like, ah, business sucks, I don't know how I'm ever gonna get out of this. And our interpretation is out of what we see in the moment. One example I love to share is with like toilet paper, or other resources, time.

• 5:40Speaker 02

  Like, if we see a full roll of toilet paper, we consume more. Our perception is, oh, there's an unlimited supply. When there's nothing left, or very little, we navigate with what we have. So, the lesson is this, that our behavior is dictated upon what we perceive in the moment, recently, and if we see an excess, we spend an excess. But, we can leverage this to our advantage, that if we see a small amount of stuff, we inherently become innovative. Less toilet paper, you let you figure out, navigate with less toilet paper. If there's less money, if we intentionally deprive ourselves of money, if we reserve profit and tuck it away, hide it away from ourselves, and there's less money for expenses, we'll actually start adjusting our business to run more efficiently with less money.

• 6:21Lewis Howes?

  Hmm, okay, and this came about from watching a late night infomercial, didn't it? You like came up with this?

• 6:28Speaker 02

  I did.

• 6:29Lewis Howes?

  And what was that exactly?

• 6:30Speaker 02

  It was cool. I was watching this guy, and he was talking about obesity in our country, actually globally, and said the problem is simply this, it's too many calories. We're not exercising enough, we're not burning enough, but we're consuming too much to get started, and therefore, you do the math, take in too much, exhaust too little, and you're gonna get fat. So I said, the principle is simply this, reduce the size of the plates at your house. And why that works is we can continue our habit. Our habit has always been to fill up our plate and eat what's on our plate. If we throw out our current plates and get plates that are half the size, you will still fill up your plate and eat what's on your plate, but it puts these guardrails in place to take on less calories, to eat less.

• 7:13Speaker 02

  And in business, so I correlate this to business, immediately take out our profits, hide it away first. And now it's like a smaller plate, there's less money for expenses.

• 7:23Lewis Howes?

  You still fill it up.

• 7:25Speaker 02

  Yeah, you still fill it up, you still consume it all. But because there's less of it, you're not gonna put on, you're not gonna get an obese business.

• 7:31Lewis Howes?

  I like that, I like that a lot. So, so explain the old formula and then now the new formula.

• 7:36Speaker 02

  Yes, the old formula, it's called GAAP, it exists today. It's actually, it's enforced by the SEC for public companies. Almost every small company uses it. And simply this, sales minus expenses equals profit. That's why they call profit the bottom line. Income's at the top, take out all your expenses in between and profit's the leftover. But that's the absurdity of it. Profit is the leftover, it's an afterthought. At the end of the year, was there any money? I, I, I propose a new formula and it's this. The profit first formula is sales minus profit equals expenses. Now, the concept of this is sell as much as you can, just as you always would. But first, extract a percentage to be profit, 10, 5, 15%.

• 8:19Speaker 02

  Reserve that away, now the remainder is expenses. You have to find a way to make your business operate on the remainder. And as the recency effect points out, you will find a way to make it work.

• 8:29Lewis Howes?

  Yeah, you'll get more creative, you'll, you won't just overspend, you'll, you'll, you'll spend on what you need to. And you'll stretch it to make it last for what you need to, right? You'll stretch the toilet paper, you'll stretch it to, every last wipe.

• 8:46Speaker 02

  It's exactly, it's funny, but it's

• 8:48Lewis Howes?

  Use less and less to get wipes.

• 8:51Speaker 02

  Absolutely true. It's absolutely true.

• 8:52Lewis Howes?

  Oh, man. Okay. Um, now, what does the, you know, you talk about opening a couple of different accounts. And in order to make this work, you're basically automatically taking out a certain percentage first into the profit account that you don't touch and you don't even see. And you make it really challenging to get that money. Isn't that right?

• 9:10Speaker 02

  Yeah. So I suggest when it comes to profit and reserving money for taxes, you know, the temptation is to borrow, you know, air quotes, borrow from ourselves. I suggest take that money, move it, move it to a second bank. And here's the deal, no convenience options, no online banking, no checkbook even. The only way you can withdraw this money is you drive over to that bank branch. The manager comes out and they write you a cashier's check, a banker's check. And by making you have to go through all this deliberation, deliberate process, uh, all these iterations to get the money, you're less likely to borrow it. And one example, my addiction is Twizzlers. I, you know, I'm addicted to candy. It's not in my house because if it's in the house, I will be eating it relentlessly.

• 9:53Lewis Howes?

  Right.

• 9:53Speaker 02

  So the temptation, it's, it's at the stores. I just don't go to the stores that even carry it because I, I'm that weak when it comes to Twizzlers. With our money, same thing. Don't have it accessible. Don't keep it in your current bank account where you do your operate, your, your business banking. Because the day that things are a little bit tight, the temptation will be to borrow from yourself. And that's where this whole system falls apart.

• 10:11Lewis Howes?

  Hmm. I like that. Yeah. And the, the challenge is that, you know, this is interesting in a lot of ways. And I'm going to want to dive into this here in a second, but the challenge is that something that I've always thought is like, if I just continue to make more money and generate more sales, then my business is going to be better and healthier. But there's a difference between how big your business is and how healthy it is, correct?

• 10:36Speaker 02

  Yeah. I, I just laugh because, uh, how big is, is it question is the one that's been around forever. And people go phallic with this instantly and maybe there's some phallic ties, you know, how big is it?

• 10:46Lewis Howes?

  Is this a sexual question?

• 10:47Speaker 02

  It sounds that way, isn't it? Yeah. And, uh, but the, the old adage has been when you and I, you know, we're entrepreneurs, we meet each other. I say, well, how big is your business? And I won't often say the words just like that. I'll say, you know, how many employees you have now? Where's sales looking like? Who bringing on new customers? But the, the bragging rights has been around size. And then the mindset becomes that bigger is better.

• 11:14Speaker 02

  Uh, and I, dude, I was so stuck in this mentality. All I cared about was bigger, bigger, bigger, bigger. So I could brag about the millions of revenue coming in.

• 11:25Lewis Howes?

  But how much you're actually making and saving, right? That's the problem.

• 11:28Speaker 02

  Never talked about that. So my business, uh, the second year, second, we're two and a half years into the business when it was acquired by a Fortune 500. And, which sounds amazing, right? And, and it was, uh, we were doing, we were on a run for seven and a half million in revenue. Bootstrap, there was no investing, which was just rocketing. But behind the scenes, shitty, right? So we, uh, I was barely taking a paycheck. Uh, we had a credit line of $250,000 and, and we needed to amp up the line just to keep things going. Our monthly nut was $200,000 and growing for, you know, stuff. And if we, so if we didn't have, uh, if we didn't bring in a project one given month, like, I had to find 200,000. I don't know where to find that money.

• 12:11Lewis Howes?

  Right.

• 12:11Speaker 02

  The stress was insane. And I found that this is the entrepreneurial adage. It's, it's always to talk about your size. The, the winner is the guy with the biggest business and that's nonsense. The question that I propose in Profit First is we all have to ask each other, how healthy is it? How healthy is our business? What's the bottom line look like? I'd rather have a $200,000 business and it's all virtual. My overhead's combined is $10,000 and I'm taking home 190 as opposed to a $5 million business. And I, as the owner, I'm taking home 70,000.

• 12:46Lewis Howes?

  Right.

• 12:47Speaker 02

  Uh, and the reason I, I know someone that's doing 5 million and taking home 70,000 and the stress for this guy is insane, insane.

• 12:55Lewis Howes?

  Yeah.

• 12:55Speaker 02

  It's bigger means more responsibility, more stress. It doesn't necessarily mean a healthier bottom line.

• 13:01Lewis Howes?

  Yeah, I have, I have a good friend of mine who's actually been on the show, uh, who is doing a lot better now. And it's like, everything is changing for him, but for five or six years, he was bringing in a million in, in sales in his business and only paying himself $43,000. And he was always stressed because he, he had to cover the overhead and pay his employees. And everything else. I was like, dude, you gotta start paying yourself. Like, I'm not an expert at this stuff yet. Like, I'm still trying to figure it out myself, right? But you gotta pay yourself first, and you gotta pay yourself, in my mind, at least a hundred grand for all that you're creating for everyone. You're creating all this wealth and, and resources for everyone else, and you're not taking what you're worth. And I was just like, you're crazy, man.

• 13:45Speaker 02

  I agree.

• 13:47Lewis Howes?

  He's finally doing that. He's finally paying himself that. And like, everything is way smoother, but it took him years to like, understand this principle. Um, and I'm sure there's never like, we're never gonna figure it all out. I'm sure there's always gonna be the next step, the next thing to learn and discover, but you gotta pay yourself first, I think.

• 14:06Speaker 02

  You know, I,

• 14:07Lewis Howes?

  You gotta be selfish, right?

• 14:09Speaker 02

  Yeah, and it's not even selfish. Like, if we don't pay ourselves first, we start resenting our business. It starts owning us. I, I have a great example of this. I, I do, when I do a public speaking, you know, type of event, I'll ask the audience, I'll say, uh, who here has some great employees? And, you know, people raise their hand. So I'll point a few people in the audience. I'm like, what's the name of your best employee? And the person says, Joe. I'm like, uh, what's your name? And he's like, it's, it's, you know, Dave. Okay. Next person, what's your favorite employee? It says Sue. I say, okay, what's your name? It's Mark. I say, how come no one is saying their own name? How come the best employee? And it's wired into us to think the best employee is someone else. And then I ask them, well, what do you do for your best employee? Do you ever miss their payroll? Do you ever cut their, their salary? Do you ever tell them,

• 14:54Speaker 02

  um, that they, they can't go on vacation or take Christmas off? Like, no way, I would never do that. Then like, why the F are you doing it to yourself?

• 15:02Lewis Howes?

  Right.

• 15:02Speaker 02

  Because you, when you own a business, there's no one that works as hard as you, that's as driven as you, is committed, can sell as well as you. An owner is always the best employee, almost always, the best employee.

• 15:14Lewis Howes?

  Right.

• 15:15Speaker 02

  But we don't treat ourselves that way. And that's where the relationship and the resentment for our business forms. I agree with you, Louis, 110%. If you own a business, you have to pay yourself as the best employee. You got to pay yourself first.

• 15:28Lewis Howes?

  Hmm. I like that. Interesting. What does T A P S stand for?

• 15:35Speaker 02

  T A P S stands for, the acronym is TAPS. It stands for Target Allocation Percentages. I studied companies from small businesses, it's considered small businesses, 50 million would be the highest, down to branding startups, zero in revenue. So, a guy that does 100,000 to a company that does 50 million, everything in between. And I did an analysis of 1,000 companies and found that the healthiest of these companies run at certain percentages. And interestingly, a business that does a million dollars in revenue, I found some companies were taking upwards of 20% of top line revenue for owner's pay. So, a million dollar company, that person was taking home 200,000. But on top of that, they were also taking a 5% profit distribution at the end of the

• 16:18Speaker 02

  year, another 50,000. On top of that, they were taking another, I think it was 15% reserved for tax responsibilities. So, when the owner got their tax bill, he didn't have to dig into his pocket. Took it out of the company, right? Yeah, the company paid it for him. That's the whole reason we have a company, to give us financial freedom. The company had reserved it. And they were running the business off the remainder. So, a million dollar company was only incurring maybe 50% or 40% in operational expenses, payroll, rent, all that stuff. So, I did this for all different sized companies and found that there was different ranges of revenue and that different TAPS revealed themselves. So, a company that does under 250,000, usually the owner's taking a substantial amount of money because they literally are the only employee.

• 17:03Speaker 02

  They do everything. They do everything, they're a freelancer effectively, they're not really an entrepreneur yet. But a company that does a million, like your friend, typically they're taking a smaller percentage, but upwards of 20%. And a company that does, say, 10 million, usually the owner's taking about 10%, so maybe a million dollars in revenue. Again, the healthiest companies. So, what I tell businesses, you need to know what your TAPS are. And in the book, Profit First, I just have all these different ranges documented. And then what we can do is we take our current business, as long as we know the revenue and everyone knows their own revenue, you just run the taps against it and it'll tell you the percentages you want to target. But the key is this, that's simply a target, it's not a starting point. You know, you're a former pro athlete, like, I'm sure you didn't, you weren't born and

• 17:48Speaker 02

  running on the field that first thing. I'm sure you put on some muscle and weight and you had to age a little bit.

• 17:53Lewis Howes?

  Years of experience.

• 17:54Speaker 02

  Yeah, practice, I'm sure you played high school ball, college. Like, you gotta step up to it. In our business, we need to do the same thing. If you instantly start playing the pro league version, you're gonna get crushed. You have to build up to it. So I suggest, knowing what the taps are, targets, but start with caps, our current allocation percentage. And if you've never taken a profit before, don't start with 15% or 10%, start with 1%. Then every quarter, every 90 days, amplify it. Every 90 days, add another percent, then another percent. Slowly start building up and allocate more and more over time, so you can adjust to it, so you can build that profit muscle.

• 18:32Lewis Howes?

  I really like this. Yeah, I would say that a lot of the people listening, there's probably a lot of people that are inspired to have their own company and to be an entrepreneur, but then there's also a lot of entrepreneurs who are making, you know, 300,000 a year, upwards to 5 to 10 million, some people who are listening. So, probably around the seven-figure range, or high six-figure range, they're making in their business. For those individuals listening, what would you recommend to start out as, you know, how much, first, how much they should be taking percentage to pay themselves? Let's just call it a million dollars, or a year. And, or does it increase and decrease? Is there a scale, a sliding scale, depending on how much more you, the company makes?

• 19:16Lewis Howes?

  And then, you know, kind of like, give them a little roadmap, a simple roadmap of how to set this up. I've got a bunch of other questions, and obviously you talk about this in the book, but just to give people kind of the context of what they could be creating, how much time it takes to set this up, and what it looks like.

• 19:32Speaker 02

  Yeah, so there is a sliding scale, and I'm not trying to do a self-promotion here, but I'm totally doing a self-promotion here. If you go to MikeMcCallum.com, or read Profit First, the book, I have the chart that says the sliding scale, these taps that you should target.

• 19:46Lewis Howes?

  Cool. And I can, I'll link it up in the show notes as well, if there's a specific link, or...

• 19:50Speaker 02

  There is a specific link.

• 19:51Lewis Howes?

  Okay, cool.

• 19:52Speaker 02

  Perfect.

• 19:55Speaker 02

  But the simple system is this, if you're an established business, look at what kind of profitability you had last year, determine that as a percentage of your revenue, and then add 1%. And for the next 90 days, that's going to be our pre-allocation of profit. And after 90 days, we're going to add another percent, then another percent. So every year, you're adding 4% to your profit. But you're also adding 4% of the top line. This is 4% of your top line, not 4% more, but 4% of your top line income is now going to your profit. 4% more every year of your top line income is going to your own pay. So if you were a million dollar company last year, another 40,000, 4%, is going to be going into your income this year, another 40,000 will be going into your profit.

• 20:37Speaker 02

  So we're turning up the dial, and we're starting to turn up pretty quickly. But it also means that money has to come out somewhere. So as we increase our profit by 40,000, our income by 40,000, we have to decrease our operating expenses by 80,000. And if you just turn up the throttle instantly, cutting your expenses that fast is going to be a brutal change. But if you do this by 1% a quarter, $10,000 price increase, which would be 1% of a million, 10,000, I'm sorry, $10,000 profit increase, $10,000 income increase for yourself. That's a $20,000 cost cut you have to do over the next three months. It becomes more manageable. So you do it, you do it in this scaling kind of technique. When you ask like, how, when do you start implementing this? Start today.

• 21:22Speaker 02

  You know, the folks listening in now, the first step is, set up additional accounts at your bank immediately. If you have one checking account, maybe one savings account, set up a profit account, set up a tax account, set up a pay account for yourself immediately. Start transferring this money over immediately. Start these low percentages, whatever you've been doing historically, plus 1%, so you can start getting into the rhythm. But there's no need to delay. And if you delay, it's just you're waiting on your profits. You've got to start taking profit today.

• 21:50Lewis Howes?

  Now, is there ever a case that the profit first system won't work or doesn't work? Is there just, uh, that there's just too much debt or it's gone too far?

• 21:59Speaker 02

  So, yeah, so that's, I've yet to find a case where it doesn't work, but there is some specific challenges where people get off the tracks. One is if they have debt. So people say, well, I want to be waiting until all my debt's gone before I'm profitable. The lesson is this, the only way you can eradicate debt is by being profitable. Meaning if you're break even and you have debt, you'll never pay that debt off. You have to be profitable.

• 22:18Lewis Howes?

  Hmm.

• 22:19Speaker 02

  So, so if you have debt, it's even more important that you do the system. And as you start allocating money toward profit, here's the distinction. At the end of the quarter, I suggest you do a profit distribution, that you take money for yourself. But if you have debt, when that profit distribution comes out, it goes to service your debt.

• 22:37Lewis Howes?

  Hmm.

• 22:38Speaker 02

  And, um, in the government's eyes, you're still profitable. And this is, it's kind of the, the paying for your sins experience. When, when you have debt and, and you start accumulating profit and use that profit to pay off your credit card or whatever it is, you're still gonna get taxed on it. And people say, well, hold on, I didn't take anything. It went to paying the credit cards. But the reality is when you incurred that debt initially, those expenses and paid with your credit card, you got a tax benefit. But you got a tax benefit off the credit card's company's money. It wasn't your money. So now you're paying for those sins, so to speak. As you're accumulating profit, you are gonna have to pay the tax responsibility for it and eradicate your debt at the same time. This is how it works. But once that debt is finally eradicated once and for all, the next time that profit distribution comes out, it's going into your pocket.

• 23:21Lewis Howes?

  Hmm. You know, some of the stuff I love, yeah, for some people listening, they may seem like this is a little overwhelming, or again, managing finances is not my thing, or I'm not an accountant. And I'll tell you what, like, I get a little intimidated by this sometimes. Like, there are definitely moments where I've been intimidated by one, the amount of money that's come in, in my account. I'm like, holy crap, this is incredible. Uh, you know, like, cause there's, there's been years where I was broke and didn't wasn't making any money. And then all of a sudden, I just like, my first year really in business, I made a million dollars in sales and I was like, what do I do with this? I was like a puppy chasing a dog, uh, puppy chasing a ball, right? I was like, I don't know what to do with this. When I get it, what do I do next? It's like, do I just throw it up in the air myself and play with it? Do I find someone else to give it to? Like, what do I do?

• 24:06Lewis Howes?

  And, um,

• 24:09Lewis Howes?

  So the thing is though, that and I'm still like intimidated sometimes like the more money my business makes, I'm like, uh, I don't know what to do. Like, do I keep reinvesting it? Do I pay more myself? Do I hire people? Like, you know, that's, I don't want to have all of this entire, uh, all these employees to manage. So it's like, there's all these questions that I have still. I'm still learning and discovering and figuring out business myself as I'm in it. And the greatest lesson is like making mistakes and, and, you know, reading books and learning and figuring out different, different systems that you can apply. So what I want to say to everyone listening is like, take it one step at a time and allow yourself, if it's scary, like allow yourself to be scared for a moment. And if it's scary for you, then have someone

• 24:52Lewis Howes?

  else support you in setting this up with you. So bring someone on who's an expert, find an accountant, whatever it may be, and say, hey, I want to apply this system and I want to really like, start small. Uh, here's the things I need to do. Will you read this book with me? Uh, let's support me with this. Like really find someone to support you to take that, uh, to give you that peace of mind is what I would say.

• 25:12Speaker 02

  You know, there's nothing like accountability. When, when you hit the gym, if you really want to get into it, hire a trainer, work out with a peer and you'll, you'll be perfect. So I found the same thing, just as you were just saying, is, is match up with another entrepreneur that's going through the process to be peer support. And, uh, the accountant and bookkeeper thing, I believe in so much. I actually set up a website, Profit First Professionals. These are, not every bookkeeper accountant gets this. A lot of bookkeepers or accountants will say, ah, just do it the old way. You know, that's the, it didn't, it didn't work, but that's the way we've always done it. Um, so I'm finding that there are certain bookkeepers and accountants that understand how to employ the profit technique we're talking about and how to drive profitably

• 25:54Speaker 02

  in your business. And you match up with a quote unquote trainer like that, these people are now going to be pushing you hard. So as a, as a resource, you can use something like that, Profit First Professionals finds these folks for you.

• 26:06Lewis Howes?

  Gotcha. Yeah, definitely check that out. And these guys are all vetted or the least you've

• 26:09Speaker 02

  Yeah, we vet them out. Yeah. So like, you know, accountants are reading this concept saying, oh my God, I believe this. I support it and I'm doing it. We're going to add you to the list because there's people looking for you.

• 26:19Lewis Howes?

  That's cool. Very cool. Um, you talk about a moment where you were watching Suzy Orman. That was a life-changing moment for you. What was that moment?

• 26:28Speaker 02

  So I never watched Suzy Orman, I've never read any of her books, I've never even seen her TV show, but I'm flipping the channels and she's on channel 13, that's the public channel where I am, and on there, she is speaking to an audience of people that have debt or are financially constrained, and she said a line that just resonated with me, and I'm gonna paraphrase it, she said, "If you want to be financially wealthy and healthy, you have to get more joy out of not spending than you get out of spending."

• 26:56Lewis Howes?

  Hmm.

• 26:57Speaker 02

  And to me, that was this big aha, that it was ju- it's just, if you, thi- this is an emotional game we're in, and it's funny, my colleague, he's down the hallway, he just pointed at himself, uh, he came on board with me, uh, a few months ago, and he, he's established a very nice position for himself financially, because he pointed at himself, because he gets more emotional joy out of saving money, more satisfaction out of that.

• 27:21Lewis Howes?

  Hmm.

• 27:22Speaker 02

  And, but most of us get more joy out of spending.

• 27:24Lewis Howes?

  Hmm.

• 27:25Speaker 02

  "Oh, I got in something new, I got a new item," and that, we get in a trap, and when, when she said this, it was just this big awakening, that if I can change my relationship to be joyful out of saving money, I'll be financially successful for the rest of my life.

• 27:40Lewis Howes?

  Hmm.

• 27:41Speaker 02

  And that's how I, so I developed this profit for system around rewarding ourselves for saving, not rewarding ourselves for spending.

• 27:46Lewis Howes?

  Now, I mean, if we're saving, are we just hoarding money? Like, why aren't we, we're not, are we not contributing to the economy and to the world by spending, you know, isn't this what we're supposed to be doing, is spending?

• 27:58Speaker 02

  So I guess it, it sounds like that's like what, what, uh, someone wants us to believe.

• 28:03Lewis Howes?

  Are we just, if we're just saving it, what's the point of saving it? We're, we're to die someday, might as well spend it, right?

• 28:08Speaker 02

  Right, right, no, it's, it's how we spend it. Um, I believe if our business spends less, you know, there's an adage that takes money to make money, I say bullshit. I believe the less money we spend, it forces us to become more efficient, because money gives us, money is an amazing tool, it gives us resources, uh, it gives us, you know, websites or whatever we need to get our thing done. The more money we have, the more things we can do, but our natural tendency is to become more diverse, more spread out, we become thin. The less, it's ironic, the less money we send, spend, it means the less things we can do. Well, if we do less things, it means we need to service less types of problems. And if we service or fix less problems, it means that we have to focus on a more narrow customer space.

• 28:51Speaker 02

  It, it puts, it forces us to become niched, and that's where actually the wealth is. So by spending less, we actually do less, uh, we have to become better at doing less, and therefore we make more money. So it actually, i- i- it sparks the economy, starts flowing more money into us. Then, as the, as the wealth accumulates in personally, spend it however you feel fit. Uh, the, the whole reason is, is our business is to give us financial freedom. So, I, I, I don't have advice for you personally. Enjoy your money, enjoy your money, uh, amplify yourself. But, when it comes to our business, the less we spend, the more, it's better it becomes.

• 29:29Lewis Howes?

  Interesting, interesting. So what do we do with that money, once we've saved, you know, millions and millions? What do we do then? We've got a profit account that's just been making and saving money for years, like, then what? Do you ever spend it?

• 29:42Speaker 02

  I did, and so, uh, that's almost how I ruined myself. So I'll tell you what not to do. Don't go out and buy three luxury cars the same day.

• 29:49Lewis Howes?

  Oh my gosh.

• 29:50Speaker 02

  I bought, and, and a Viper to boot. Don't, um, don't move into the most expensive town in your communities with the intention of buying the biggest house. Don't join the club, don't become an arrogant dick like I did. Um, I was so full, once I sold my second company, I was so full of myself believing that this is the norm. I felt compelled to prove to the world how successful I was, and that's the mistake.

• 30:15Speaker 02

  There's an old saying in poker, that the guy that's, that's showing he has the strongest hand is bluffing. Because he has a weak hand, and the only way he's gonna win the table is if he can scare everyone else off the table. So he pretends to be big. The guy with the weak, uh, with the strong hand will pretend to be weak. He wants everyone else to stay on the table so he can take their money. Well, in life, it's the same way. The people that have to show their success, aren't successful. The people that don't feel compelled to show success, have the innate confidence in themselves, they're the most successful. So, I, I've learned, when I need, when I use money to show success, I'm not successful. Now, as well, as I'm going through my second generation of experiencing wealth, I'm learning that it's all about enjoying it,

• 31:00Speaker 02

  serving others, expressing myself, but not needing to show off.

• 31:04Lewis Howes?

  Hmm. Yeah, I like that. And you know, some might say

• 31:10Lewis Howes?

  that, well, don't have to show off in some ways to be credible and to, you know, if I'm building a brand, don't we want to make sure that there's social proof and all these things that increase our influence and awareness? So I think there's a like a, it's kind of like a dance between

• 31:28Speaker 02

  It's a dance.

• 31:29Lewis Howes?

  showing, but not being egotistical about it and not bragging, but also setting the context for what you've created in a grateful way. Right?

• 31:40Speaker 02

  I agree. I agree. The essence from my experience is being absolutely authentic, though.

• 31:45Lewis Howes?

  Yes.

• 31:46Speaker 02

  I know a lot of people, or I shouldn't say no, I've crossed paths with enough people to know now that there's a lot of BS out there and the desire to influence others. We put up a fake front, but then when the truth is found out, the entire thing collapses. There was a TV show, you've probably heard of these instances. There was a TV show recently where this guy says he's an Army Ranger. He has all these outdoor survival skills, blah, blah, blah. And he's on television only to find out that he was never an Army Ranger.

• 32:15Lewis Howes?

  Shut up.

• 32:16Speaker 02

  And the whole thing, yeah. And the whole thing fell apart and the guy who got ripped off of the television immediately and it collapsed. Now, the question for the consumers, what else is he lying about? And we have to be very careful of that, of putting up this front to want people to emulate this, even though it's a fake front. So I hear you saying, there's a little bit of a dance, but I think we can, I think our authenticity trumps it all. And if we show the ugly warts we've had, and maybe we're sitting in a great position today, recognizing that it's not always smooth travels, that there is going to be bumpy times and showing both sides, I think is even more

• 32:57Speaker 02

  appealing than the, everything's fantastic, everything's perfect, you want my life type of mentality.

• 33:03Lewis Howes?

  Yeah, absolutely be authentic. You know, throughout this interview, I've been like, you know, I'm still figuring my finances out and, you know, I feel like I've got a handle on things to a certain degree and I'm, you know, I'm not struggling. I've, I'm making money. I've got employees that are making good money and, you know, I feel like, okay, but at the same time, I'm like, you know, I'm probably burning more money than I should be and I should really take a look at like what I'm spending and why am I spending those things and are they as efficient as they can be? And part of me is kind of like, well, you know, Who cares? I should just make more money and then it won't matter because I can, you know, afford to spend those things if I just like make twice as much money. But I really like the idea of like, well, if that's the case, then I'll probably be spending a double the

• 33:46Lewis Howes?

  amount of expenses because I'll be like, well, let's bring this on and this thing and you know, this person and not being as efficient with my resources with my creativity. So

• 33:57Speaker 02

  awareness, huge awareness.

• 33:58Lewis Howes?

  Yeah. So I definitely, you know, see that like my business, you know, I feel like extremely blessed and grateful where it's at. But it's like, man, there's probably like 10, $15,000 a month that I'm spending that I probably don't need to. And, uh, you know, I probably need to be saving more and profiting more first, like in the system. So I'm definitely going to take a look at this and have my, my, my, uh, financial manager, which is my mom, uh, who works for me full time. She's gonna definitely dive into this and I'm gonna say, mom, do this, open these two new accounts and put more money in the profit first. So.

• 34:31Speaker 02

  So you know what? What a great ally to have someone that loves you and also managing your books. This is someone who's gonna put, yeah, put it first. And here's what's the great thing about the system. It changes shoulds to musts. And, um, once you implement this system, the, the process of saying 10% has to go here, it forces that conversation to change to, okay, I must cut expenses.

• 34:52Lewis Howes?

  Yeah. I like that. Go ahead. Sorry.

• 34:55Speaker 02

  Yeah. So just what you're, the, the thought process you're going through there saying, well, if I can, I can just grow out of this is the trap. That's what I call the survival trap. Most entrepreneurs believe they can grow out of it. And so then it becomes this perpetual growth. But to grow fast enough, you need to spend fast enough, they think. So they start spending more and sure enough, they're growing a little bit, but they're spending faster. So they say, shit, I gotta grow more. So they start pushing more growth and then the, the expenses climb at such a fast rate that growth now becomes the only option. And it's a death, it's a death.

• 35:25Lewis Howes?

  Wow. That's interesting. Yeah. And that's kind of like what you were saying. You're at $200,000. Uh, you know, your nut was 200,000 a month and you were like,

• 35:34Speaker 02

  terrified.

• 35:34Lewis Howes?

  How am I going to bring this in next month if I don't sell?

• 35:37Speaker 02

  Oh, every morning was selling morning, day and night.

• 35:40Lewis Howes?

  Yeah. And I really like the, the, the automation part of this, you know, with Ramit Sethi, I don't know if you know Ramit, but um, in his, in his book, it's really talking about setting up accounts and paying them first in order to, for your investments. So he says, you know, the, you know, I take $2,000 out a month for one account that automatically is taken out of my account and put into another account every month. Like it's a must. I don't, I'm not even aware of it. It's automatically gone. And then I've got $200 for insurance that comes out every month. It's like automatically in this account and then another 500 in my, uh, my, my other savings account or whatever it may be, right? My 401k or IRA. It's like all this money goes into these different accounts automatically. So I don't even see that money.

• 36:24Speaker 02

  Yep.

• 36:25Lewis Howes?

  So it's kind of like, it's kind of like setting that up with a 20% automatically goes into your profit account without you even seeing it, right?

• 36:31Speaker 02

  It's the exact same system.

• 36:32Lewis Howes?

  I like that.

• 36:33Speaker 02

  You mentioned the 401k. It's been the greatest savings mechanism in US history is that automatic withdrawal before the employee actually gets the money.

• 36:41Lewis Howes?

  Right. Cause they don't feel like they just lost all this money.

• 36:44Speaker 02

  Right. Exactly. This is the exact same system. The very first thing is profit first. Goes into that profit account. You don't see it and you live off the remainder as a business. The exact same principle.

• 36:54Lewis Howes?

  Man, it's, it's so simple, but it seemed, it makes so much sense.

• 36:57Speaker 02

  Yeah.

• 37:00Lewis Howes?

  You have a chapter where you talk about destroying debt and I'm extremely grateful that I'm out of debt. My dad used to love being in debt for some reason. He was a insurance, uh, salesman and had a insurance business and was doing extremely well and he loved debt based, I don't even know why, but he's like, he was comfortable living in it because he could leverage off of different things and it worked for him. For me, it created a lot of stress when I had student loans and I was living off three credit cards and I was like, this stresses me out that I feel like I'm not in control of my finances. I don't feel like I've figured it out and I haven't mastered it yet if I'm in debt. Now that maybe that's just a perception, but that's how I was feeling. Uh, so can you share some, some tips or some strategies on how to pay down debt?

• 37:45Lewis Howes?

  Simply without it being a pain?

• 37:47Speaker 02

  Yep, and I've had the same experience. Debt is constant stress and I read a book by this guy named Dave Ramsey. You may have heard of. He wrote a book called The Total Money Makeover. And one of his principles, which I reiterate in the book and give him full credit, is called a debt snowball. And what he suggests is historically, we've been told if you have debt, pick the highest interest rate stuff and wipe that out first because that's where you're spending the most money. And he says, no, that doesn't match human behavior. He says, instead do what's called debt snowball, sort your debt by smallest amount to biggest amount due. Then pay the minimum payment, do everything you can to maintain all that debt, pay the minimum. But any remaining dollar above the minimum, use to wipe out the first smallest debt.

• 38:31Speaker 02

  And you wipe that one out fast. So maybe you have one debt, maybe it's like a hundred dollars that you owe a friend. Maybe the next one's a thousand dollars on a credit card, then you have a student loan for fifty thousand and maybe a mortgage for two hundred thousand. And you know, it can go way more than this, but say you have those four. If we try to tackle the student loan first, with everything we have, that friend debt stands out forever and you know, we can wipe it out fast. Well, the second you wipe that hundred dollars out, it's gone, you now target every extra penny you have on the next debt, that credit card. The second that thousand dollars is gone, all that stuff that was being allocated to the credit card, the minimum plus something now gets snowballed in to pay the next debt. And you start getting this momentum. You tear up, hey, I don't want my friend anymore within a day.

• 39:13Lewis Howes?

  It's also like an accomplishment as well. Like each little one is an accomplishment. You feel good. You're like, okay, the next one. As opposed to, I've got this daunting debt, like my school loans are going to take me ten years to pay off first. Geez, is this ever going to be completed, you know? Depressing.

• 39:30Speaker 02

  Depressing. So it builds this muscle. You have small victories early on. And that's actually a quote I've come up with in my book, Profit is not a vent, it's a habit. I believe that if you ruin of a profitable company, it's small wins. Every day allocating a small percentage, yeah, ten percent of a hundred dollar deposit is only ten bucks. It doesn't seem like much money, but ten bucks every single day, pile that up over a month, that's three hundred bucks. Pile it up over a year, it's three thousand, four thousand bucks. That's a, that's a nice little profit distribution at the end of the year. That's, that's almost a vacation, a nice vacation. So, so it's the small victory. So if you want to eradicate that, it's the same principle. Tackle the small stuff first and hit that hard.

• 40:08Lewis Howes?

  Hmm. I like it. I like it. You say, "Sales without first putting efficiency measures and systems in place is a dangerous game that only leads to bigger expenses and fewer ideal clients." So why is efficiency the magical sauce of profitability? And we've talked about this already, but why specifically?

• 40:28Speaker 02

  Money, the money's in efficiency. Manufacturers know this. So I am a co-owner in a manufacturing business in St. Louis and called Hedgehog Leather Works. And as we were building the company, we realized that you can't go back to the client every day and ask for more money for the same product. And at a certain point, they're like, "No." But if you become, if you become more efficient in how you make it, you cut the cost, you can get the same product done in half the time, half the labor, you can make a significant profit. And then it hit me like a ton of bricks. Every business is a manufacturer. Like Lewis, you're a manufacturer. You're manufacturing an experience for your readership and for your following and for your clientele. I'm manufacturing an experience. So to realize that we're all building something.

• 41:13Speaker 02

  Now the question is, how do we get to that same end deliverable faster? Because if we can get there faster and get the same results, if we can get there easier at the same result, it's going to cost us less. So the customer will be still paying the same dollar amount, whatever that dollar amount is. But if we get there faster and easier, we spend less to get there. Huge profitability opens itself up.

• 41:32Lewis Howes?

  Nice. I like it. I want to wrap things up and ask you a couple of last questions here. Because I think this has been some great information and I want people to go pick up the book. It's called Profit First. You can get it on Amazon. But it's a simple system to transform any business from a cash eating monster to a money-making machine. So make sure to go check it out. And I'll have it linked up on the show notes over at LewisHowes.com. So stay tuned for that specific link. But what are the common pitfalls that set people back when using this specific system? Is there anything that holds people back or that doesn't work for people?

• 42:04Speaker 02

  Yeah, so the most common is to, we talked about earlier, borrow from themselves. They start reserving money for profit, they reserve money for taxes, right? And they borrow from that, so they fall there. Another spot they fall apart is they go too big, too fast. They want to play in the pro league when they're not even in the peewees. So you gotta stay, start small and slowly build up. Another area they fall apart is they go it alone. They say, "I don't need my accountant to do profit first. I don't need, I can just do this myself." You need that accountability. You need someone that's not emotionally attached to your business because emotion dictates a lot of our actions. So, you know, get your mom in there who's doing your books. She sees it from a different perspective. Get an outsider that has no involvement in your business whatsoever and they'll have a unique perspective.

• 42:49Speaker 02

  Match up with a peer partner, someone else that's going through this process with you to cry on their shoulder when times are tight, but will force you to stick to your profitability. That's the three kind of common areas I suggest.

• 42:59Lewis Howes?

  I like that, yeah. And it's not, and again, guys, it's not about how big you get. It's about how healthy you are, so how much you can save and how efficient you are. It's what I've learned and taken away from this interview so far. You know, I can make $10 million but be broke. So, I think it's really, it's not about like, "Oh, but it's all about sales and building and growing for me." You gotta be efficient at the same time. If you get to $10 million and you're following the system and you're saving that much, then awesome, then it's healthy as well. So, that's, you know, something I get to take a look at is like dropping my ego of just trying to like generate sales and really look at being a healthier, more efficient business. And in my own personal finances and everything as opposed to just like,

• 43:41Lewis Howes?

  how much am I, you know, profiting over just the expenses and the inefficiency that I'm running of my life as a business, my business as a business, everything as a business. So I really get to take a look at that after, you know, diving into this. So I think I appreciate you for sharing this information and doing the research and all the hard work you've put into to support people in getting out of debt and profiting first. I appreciate that.

• 44:06Speaker 02

  An absolute pleasure and an honor to be on your show. I appreciate it, Lewis.

• 44:10Lewis Howes?

  Yeah, I've got two final questions.

• 44:11Speaker 02

  Yeah.

• 44:12Lewis Howes?

  More personal questions. One is, what are you most grateful for recently?

• 44:20Speaker 02

  Recently, um, this is out of nowhere, but my oldest son, um, I was just, I was frustrated with something he was doing and just started removing ourselves, myself from the relationship. Meaning, just I wasn't acknowledging him, wasn't talking candidly with him and just kind of, just being a jerk. And, uh, just sitting them down and saying, you know what? I'm wrong. And as a dad, it's tough to tell my kids, I'm the wrong part. I'm doing something wrong. As opposed to how my kids are doing something wrong. And, uh, he was great. Came up, we hugged, we talked, uh, and, and reconnected over this one silly thing that I was just being a jerk over. So, I, I appreciate that that moment came about and how he responded. We can learn a lot from our children.

• 45:01Lewis Howes?

  Hmm. Very cool. I like that. And the final question is, what's your definition of greatness?

• 45:09Speaker 02

  Definition of greatness is, uh, truly expressing my authentic self. And that's true for everyone. When I meet someone who's, I don't care what your financial status is. I don't care if you're homeless. I don't care who, who you are. I just care that you are really being representative of who you were put on this planet to be. That's pretty badass to me if you are.

• 45:29Lewis Howes?

  Hmm. Mike Michalowicz, thanks so much for coming on and, uh, make sure to check out the book, Profit First. And I'll talk to you soon, my man.

• 45:38Speaker 02

  Oh, thank you.

• 45:48Lewis Howes?

  And there you have it. I hope you enjoyed this episode with Mike about Profit First. And, uh, I thought it was very interesting. I'm gonna start applying some of these principles myself and testing it out. But I highly recommend checking out the book and saying hi to Mike over on Twitter and Facebook and all those other lovely places. But also go back to the show notes at lewishouse.com/93 so that you can get all the info that we talked about today, all the links, videos, pictures, all the fun stuff that we always link up in the show notes. It's all over back at lewishouse.com/93. Now, I appreciate you guys again so much for subscribing. So much for sharing and leaving reviews and all the things you guys do.

• 46:33Lewis Howes?

  So keep it up. I'm going to continue bringing the thunder with awesome guests, with amazing, inspiring stories, with great content, and it's all free for you guys. So thanks so much for all you do. Can't wait to get to number 100, and I'm so pumped for what we've been creating together. So thank you guys so much. You know what time it is. It's time to go out there and do something great.