The Top 5 Lessons from The Money Habit by Mike Michalowicz.

In this video, we're going to go over the top 5 lessons for mastering the money habit, and you're going to learn the one most important behavioral mechanism. And I guess a second bonus, you're also going to learn the one action to take place that will transform your business forever. You know me, I like to use the overhead. So we're going to refer to this. We're going to go over the core principles here. But the first thing I want to talk about is that budgets are less effective than behavioral management. The traditional approach to money management is to have a budget to predetermine where you're going to spend your money and to refer back to this. It's often historically it's been done in spreadsheets. You can do it through an AI model now. Through apps and different programs. There is a couple inherent challenges with a budget, and likely it's the reason why it doesn't work for most people. The biggest reason budgets fail us is it doesn't work with our natural path. So the story I like to share is this is quite a few years back now, but I decided I'm going to really commit to exercise every day, 5 days a week. And starting on day 1, I said, I'm just going to show up and do it. And I did. Then day 2 came around. Gosh, was I sore and said, you know what, let me recover today. And then I'm back in it the day after. And I missed because of another justification or reason. That's human nature is that when something is painful for us to subconsciously or consciously seek avoidance is easier not to do anything. So a spreadsheet or a budget is like enforcing this script, this process, like exercising or perhaps a diet. And it's not in our natural path. And that's the biggest challenge. So for me, what I noticed is when I wake up in the morning, I would go to the bathroom, make a cup of coffee, and then start going through my reasons why I shouldn't be working out. Usually it was I forgot because I was reading the news and and I had to rush off to work. Well, I noticed in that pattern of waking up, going to the bathroom, making a cup of coffee, it was so predictable I could put an intercept there. So what I did is I put my sneakers on my toilet seat every night before I went to bed. And now the only way I could use the bathroom was by grabbing my sneakers. And with my sneakers in my hand, it was enough to say, okay, just put 'em on your feet. With my feet, it was enough to walk down to the gym. And then get the exercise going. It triggered this behavioral momentum. I call this a behavioral or a pattern intercept. It's something that you predictably do, you're already wired to do, and now we insert something there to channel us to the outcome we actually want or are committed to. In psychological terms or behavioral terms, they call this a commitment device. It forces you to consciously be aware of decisions you're making and not avoid what you intend to do. Now, budgets are not on our natural path. Most people manage your money by logging into your bank account, see what the bank balance is, and based upon how you make decisions. We need the intercept, the commitment device, to be at the bank level. Now, there's other challenges with budgets too. They come with a preconceived notion of how you are expected to behave. Maybe it has accounts for tithing, for example. Is that something that you already do or are committed to? So there's an inference of expectation, but it may not be consistent with what you do. There may be references to a mortgage when you're paying rent. There may be expectations for saving for retirement when you already are retired, or maybe life's channel or course doesn't have you expecting a retirement and you want to live more in the now. It doesn't have typically the flexibility. There's these implied components. So that's why most budgets don't work. The data shows that about 90% of people that try to stick with a budget fail to do that. So no budget. Instead, we're going to do is set up a behavioral intercept at your bank account with multiple accounts to pre-allocate money to. So tip 1 is managing behavior is better than trying to apply new behavior by using a budget. All right, let's go to my overhead. And what I want to show you are the foundational accounts to set up at your bank to manage your money. And this is what it looks like. Instead of having one account, we're going to set up 6 foundational accounts. One is called income. The next is needs and wants, dreams, fixed or future. And then the final one is emergency. And how this works is money flows into your income account. These are deposits of your household income. So everyone contributing to the household that you are applying this process to. Then we allocate money out on a percentage or fixed dollar basis to feed these different accounts. Needs are for the essentials of living, the necessary components. Wants are for the many luxuries or desires. So I need to eat food. So you need groceries., but I want to eat out. That's a luxury. And dreams are the bigger visions for our lives. This may be a private chef. I, I need to eat food. I want to eat out. I would love to have a chef. Fix or future is a selection. Either you're in a recovery phase where we're allocating money toward recovering from debt, or you're in a future-focused phase where you are saving for future events, or perhaps other, what I call, seasons of your life. But whatever the function is during that period, we're going to call the account only fixed or only future based upon what it might be allocated. The emergency account is to address the most predictable element that you have in your life, which is the unpredictable. I can guarantee that something unexpected will happen. Tip 1 was budgets often fail us— manage your behavior. Tip 2 is set multiple accounts. Now, why do we set up the accounts to be like this? We are pre-allocating money to its intended purpose. So as money flows in, we allocate it to different accounts, and we know what money is available for what purpose before we spend it. And since it's a commitment device, it's at the bank, we know clearly what money is available before we spend it. And yes, I can say, you know what, I need groceries and pay rent, but I have a dream of going on vacation and there's not enough money. So I'm just going to steal from my emergencies account, steal a little bit from my needs account and put it into dreams. And while technically you can do that, no longer can that be subconsciously denied. It now is a conscious decision that you're taking from your emergencies and that you're taking from your other accounts to fund this dream. And so now you have an opportunity to reconsider that. So you can break the system, but you can no longer break the system subconsciously. Okay, let's continue on. Now I want to talk about this account specifically, the fixed or the future. How does this work? If you are in what I call the recovery season, meaning you have past debt that we need to recover from, we're going to focus on a fix. Now, why do we call this a season? This is the big part of tip number 3. Most people say they're in debt or they have debt. It's an identity component, and therefore we comply with our identity. It's something that we lean into, we live into. But if we say we're in recovery season, that means it has a period of time before it expires. It's a temporal state. And seasons constantly or regularly change. So you're in recovery season means that you're just in a period that's going to transition out. It may sound like a subtle difference, but understanding you're in recovery season puts your identity in alignment with moving forward into perhaps other seasons. Now the other seasons to be aware of are the activate season. This is where we actively spend more money intentionally than we're earning. To live in the now. There's a fund season. This is where we're intentionally saving more money than we are spending with the intention of saving for future events and activities, perhaps of significance to us. And balance is a delicate chord between living in the now and preparing for the future. Unlike weather seasons that have this predictability to it, you can bump from one season to the other Overnight, you can be in the recovery season, and once you're out of it, you might be right into the fun season. And he's, we wanna go on this big trip and we have the means, we're gonna go into the activate season. And then you may jump back to the fun season and move on to balance. I think the best analogy was I was in New Jersey and the winter was coming down upon us, but I had an event down in Australia. The seasons are exactly reversed. And literally within 24 hours, I went from the middle of winter to the middle of summer. So seasons can jump around like that, and they don't have to be in a certain order when it comes to our finances. So there's recovery season. There is what we call the fund season. Again, this is preparing for the future. There's the activate season where we are with intentionality using funds we have faster than we're accumulating them to live in the now, to have a particular experience in many cases. And the last season is balance. And this is where we're striking the delicate chord between funding and activating. Tip number 4: if you have debt in your business— I'm sorry, or your personal life. I work with so many entrepreneurs, it's often blended into one, but you don't have to be a business owner by any stretch of the imagination. If you have debt, we need to eradicate debt. There was work done by B.F. Skinner back in the early 1900s called operant conditioning, which identified if we get some early wins in a process, we're more likely to stick with the process. So a very good technique is to use that snowball, which is where we focus in on the lower dollar sum amounts, irrespective of the interest rates due. So it could be a very low interest rate, low dollar amount, which honestly is almost like free money. I owe a few hundred dollars at 1%. Owing a few hundred dollars at 50% is a lot more expensive, or owing whatever the dollar amount could be. But what we're simply identifying is can we find those low dollar amounts and wipe them out quickly? According to B.F. Skinner's work, operant conditioning, an early win, tearing up the statements and so forth, it feels good. We feel more invested in the outcome. But there's a thing called the debt avalanche, and that is logically the far superior approach because we're working on the high interest rate debt. So $100 at 1% versus $100 at 50%, that 50% at $100 is way more important. Now, if it's $100 at 1% and it's $1,000 at 50%, that snowball actually says, let's hit the $100 first so we can get the early wins. The avalanche says hit the $1,000 first because that's by far the most expensive debt. We'll tackle it. So what we do is we blend the two. In the very beginning, if you haven't been working on eradicating your debt, we'll use the debt snowball to get a couple early wins under our belt, but then we switch to the avalanche because that gets you out of debt the fastest and with the least expense. Okay, so now you're familiar with these things. There's one last thing I want to share, and it's removing temptation. The dreams account, the emergency account, even the fix or future account— fix is usually used to pay debt, so we're actively spending that down— but these two accounts we want out of sight, out of mind. These accounts we want regular access to. I, I don't even know. Let me just see if I have it on me, my own debit card to show you how I use the system. Oh, it's the ink has been paid off. I scratched off a little bit, but this is wants and you can just see it right up there. It says wants. So this is, you can see it's a well-worn card. It's a card I only use for wants. I have another one that's only for needs. And what happens now is when I go shopping, I pull out my wants debit card. When I'm purchasing something like a dinner out or something. That account, of course, immediately reflects the balance. And the beautiful thing is the communication with myself or my wife. When we want to go out for dinner, we look at that account and say, is there enough funds to do it? If not, can't do it. And there may be funds in needs, but that's paying for our groceries and our mortgage. There's enough money in the dreams, but that's paying for our future. So there's this clarity on what's available for what purpose. So what we want to do though, is these dreams ones. To prevent ourselves from stealing from ourselves is to lock the account or hide it away. So if whatever bank you're working with, you like working with them, transfer this money to another bank. By the way, I recommend a bank called our DreamFirst Bank. They've been excellent. They support the money habit system for personal finances. Um, and so you can just look them up and start working with them. But dreams and emergencies, we hide as second business and our second bank. And the idea is to have it out of sight, out of mind, ideally lock it down. So if you have a partner that's managing your finances with you, one thing you could do is have your spouse only has the username for the account for this hidden account and a remote account, and you only have the password. And this way you have to work together to get access to it and you don't cheat the system. There's other ways of doing it. I talk about it in the book, but the idea is to remove the temptation because when money's sitting here accumulating, these will over time hopefully be pretty sizable funds. It's very easy to draw it for a quick need or want when you really shouldn't, and you'll be breaking the system. So hide these away. If we try to use willpower like a muscle, it fatigues over time. It won't stick. Okay, so that's the 5 main tips I got to you. Uh, we talked about the philosophy of budgets versus behavior. Behavior wins every time. So behavioral management. We talked about the 6 accounts, and here they are listed right here. We talked about the fixed or future account specifically and the seasonality. We talked about managing debt. So now you know the debt snowball for 1 or 2 transactions if you have a lot of debt. And then we want to do the debt avalanche is the primary. That's the ditto. I was afraid the word debt— gosh, no shortcuts— debt avalanche. And this is the preferred method in the long term because it gets rid of debt much more quickly. And now we talked about removing temptation. I did promise you a behavioral technique and also the, the one kind of core account that you need to set up. Here's the behavior. It's already listed here. It is human nature that we need to ensure, based upon Maslow's hierarchy of needs, that our core needs are addressed first. If For example, if you are dying of thirst, you have no water, and you come upon me, I'm like, hey, would you like this big juicy steak? You're like, I need to drink. That's all that matters. Or I say, hey, you want to hang out with some friends for a little bit? No, I need water, and we'll do anything for it. But once you have food and meals and stuff and you're taken care of at the base level, now shelter becomes more important. Protected from the elements. Or perhaps even commuting with other people. So these are what's called Maslow's hierarchy of needs. So this is structured after Maslow's hierarchy. Foundationally, we have to have the essential needs met. So you always fund this account first. So as money comes in, we allocate money to needs, and you will feel that the base needs of your life are being addressed. Then we address wants and so forth, and this will actually build behavioral momentum. So I realize this could be a fixed dollar amount or percentages of the income account. So it doesn't really matter what sequence you do it logically, but behaviorally, it matters significantly because we want to see our Maslow hierarchy of needs met. That is the behavioral component that's hidden in the book that I didn't really talk about too much. And the last thing I want to share with you is the one thing that I want you to do. If you do this, will transform your personal finances forever. I realize reading the book, going through all this stuff, particularly at hyper speed, it can feel overwhelming. And the risk is you may not do this. So I want to give you one action that will forever transform your life financially. And it's just trying out the system with one account. Now, here's what I want to ask you to do. Right now, as you're watching this video, what is the biggest financial, recurring financial worry or wonder you have? What do you worry about most? And for some of us, it's every day. Maybe every week or every month, maybe every month you're asking yourself, am I going to be able to cover rent this month? Or the mortgage? Maybe every week, do I have enough money for groceries or utilities or whatever it is? Maybe that's something that worries you. Conversely, maybe you have something that you wonder about. I wonder if we can cover that vacation this year, or if I wonder if I can buy that vehicle I've been looking at, or whatever it may be. But there is at any given time, a primary financial concern. So ask yourself to identify that. Now, once you identified it, do this next simple step. Whatever bank you work with, if you like working with them, continue to work with them. Otherwise, as I shared, DreamFirst is an excellent bank for personal finances. It's the one I recommend. Set up one account named whatever you worry or wonder about, whatever that concern is. So if I'm wondering if I can cover the mortgage every month, call it mortgage. If you're concerned about groceries, call groceries. If you want to know if you can go on that vacation, call it the vacation or whatever it may be, buying the new car. Give that account that name, that specificity. Now, what I want you to do as the second step, once this account is set up, every time money comes in, the, your earned income, the household income, allocate enough money to that account to ensure that cost is covered when it's going to happen. If I got to cover my mortgage every month and just for round numbers, it's $4,000 and we'll pretend there's exactly 4 weeks in a month. I know there's not. Well, every week I got to put away $1,000 and that'll get me to $4,000 at the end of the month. So what I'll do is allocate that accordingly. Now what I've done is I've assured that's covered. If groceries cost me $300 a week, every week I'll put away $300 into that account for my income account. And you can continue this with any scenario that you're considering. What this will do is it'll guarantee me that money is available to cover that inevitable cost. It will actually alleviate worry and concern because I don't have to worry or concern about that. I have guaranteed is being addressed. But there's something more significant than that. You'll then see what's truly available for the rest of your life, and that brings about Cash clarity awareness. Ooh, I'm going out to dinner too much. We can't afford that. Or I'm spending money on my hobby or whatever it is. If this is my biggest worry, I need to consider how it's affecting the rest of my finances and adjust accordingly. It brings about cash clarity. The pathway to financial independence is as follows. First, we got to stop denying we have an issue and we got to look at it and start managing it. We do it by setting up multiple accounts. That brings about cash clarity. An instant awareness of what's going on just by logging into your bank account, which is natural to your behavior. With cash clarity comes cash control. You can decide, I'm not gonna spend money here, I will spend money there, I may want to, or I need to earn more to sustain this lifestyle, or I'm willing to reduce my lifestyle to work in with my earnings. That's cash control. And ultimately, once you have cash control, then you have financial independence. Financial independence is mastery over your finances at any level. And then as you earn more over your life, if that's what you choose, since you have this foundation of financial independence, it'll only serve you more. So there you have it. You have the 5 tips, you have the behavioral technique, and you got the one action that will forever transform your finances. Don't delay. Do it now.