The Money Habits That Separate Broke People from Wealthy Ones | Mike Michalowicz

Our next guest is the multi-New York Times bestselling author Mike Michalowicz. You're in for an absolute treat. We're going to look at his most recent book called The Money Habit. I promise you, if you think about money, you want more money, you want your money to work better for you, I promise you this episode is the one for you. Mike, a huge welcome to the Habits of High Performers podcast. How are you doing?

Well, it's a huge honor to be here with you, James.

It's a pleasure to have you on the show. Look, we've had all sorts of people on the show, from people running countries to small companies to large companies. But when I think of you, you're like the mastermind when it comes to human behavior, why we do things, and how we install habits that actually set us up for success. And many people that are listening will know of your book from many years ago where you helped entrepreneurs fix their businesses with your book, Profit First. What made you realize that people actually need the same system for their personal money?

Well, the realization was it started with my own challenges But then I saw a kind of a pattern reveal itself and it became undeniable what it is or what the pattern was. Most people who start a business, James, start a business for financial freedom, and that's defined by not worrying about bills, personal freedom, not worrying about time, and then impact. I want to serve a community. And interestingly, almost a handful of businesses would achieve that, but the vast majority wouldn't. So I was like, is everyone struggling to figure this out? Are we all stupid? If we want to achieve financial freedom, why aren't we there? And these other components. And I was looking one day because I struggled with it myself and looking one day and I noticed, my gosh, most businesses are not profitable because the formula is wrong. And that's why I wrote Profit First. We're told that profit comes last and behaviorally, it's human nature when something comes last, it never happens. But then I noticed another, and this is what brought about The Money Habit, another pattern was that a business's health is only as healthy as the financial at home is or the financials at home are. So, if the business is doing well, but the home is struggling, it starts to leech off the business or vice versa. I've seen people prepare for their future at home, save for retirement or whatever, however they want to activate those funds, and the business is struggling to take flight. It starts to eat off the home. So, that was the realization. My gosh, we need to nail the numbers on both fronts. And that ultimately became the impetus why I wrote the book.

Hey, James here. I wanted to take a quick moment to let you know about something. Look, I get asked to deliver keynotes and workshops for teams and companies all over the world, from London to Antarctica, from America to Australasia, from armies to small businesses to large corporates to sports teams. But I go in and deliver keynotes around the mindset of high performers, around the habits of high performers, about how we navigate change. If you would like me to come and speak to your team or speak at your conference or deliver a bespoke workshop, please get in touch with my team. Caroline@jjloughlin.com will be able to help. I'll also make sure that we put that in the show notes. That makes so much sense, Mike. I work with particularly athletes and some CEOs, but what happens off field impacts what happens on field. Like, you can't get away from it. So, I totally relate to that. And in The Money Habit, which is your latest book, latest bestselling book, I'm going to put a link, by the way, in the show notes for the listener to grab it right now.

Oh, thank you.

You say that financial success, it's not about knowledge, it's more about habits. What would you say are the most destructive money habits you see people repeating?

I love that you attributed my work to habits and recognizing because that's I believe most change happens through understanding habits, not changing them, but understanding them. So the most destructive thing I've seen is where people actually try to force habit change and they can't sustain it. They often do it through willpower. So the most common thing I see when it comes to finances is I log into my bank account every day. I'm trying to manage my money that way, and I really shouldn't be. My bookkeeper or accountant has told me look at these statements, balance and reconcile your checking account, do these different activities. And I really need to fight my way to make that happen. And it's not sustainable. If you have to change who you are to get a different outcome, it is extremely difficult. And yes, we can pull it off, but it requires discipline, effort, repetition. Most people fail. It's kind of like diets. Most people I know that are overweight or struggling with weight, do want to lose the weight, and most of them know that a diet will solve that, and most can't do it. And why can't most do it? Because it's requiring them, us, to change a pattern we have. Well, with finances, most people log into their bank account to see how much money is available, make determinations at that moment of how they're going to spend the money. So I argue that's the best thing you can do. In The Money Habit, I show people how to channel their habits as opposed to change them. And the beauty of this is if you don't need to change, but the system redirects that behavior to an outcome you want, well, now you're golden because just keep doing what you're doing. And that's how The Money Habit is structured.

That's amazing. And so, essentially, what I'm hearing as well is that your identity, what you identify as, really shapes the habits that we engage with. So, if you don't identify in a— empowering way, you're going to struggle to do the things from a financial perspective. It's going to be willpower, which eventually will give in.

Yeah. You know, it's funny, when I'm on stage, I just happen to have a keynote coming up, so I was kind of preparing for this in front of this group of people. I will use a line effectively saying, "Who here avoids the methods we're told to do, accounting, reconciliations, and so forth?" instead just logs in their bank account and based on how much money you have makes determination of what you're going to do with that money? And a few hands will go up. And I'll say, okay, you're probably lying to me right now. Like I'm asking everyone to raise their hand because there's those alligator claws that go up. And inevitably, most people admit to it. And I say something that's usually very empowering, but it's unexpected to them. I'll say, you know, there's a label for that. If you're doing something like that and not following the rules, There's a label. It's called being human. And when I reveal being human, that you can feel the sense of relief. It's like, yeah, I am normal. I think most people that struggle with money, personal or in their business, think they're the odd man out. Like, oh, it's just me who struggles. I'm defective. And I'm here to say, no, it's the systems that we've been told that are defective. In business, we're told that profit comes last, and yet almost no business is profitable. It's less than 17% of businesses are sustainably profitable. We're told at home that you got to reconcile your bank account, you got to control that debt, stop to spend, all these different things. And yet, we're accumulating more debt, we're struggling more. And I think we're trying to fight who we naturally are and we got to stop that.

Yeah, 100%. And I like this idea of structure because when high performers don't have structure, they tend to never get to the end goal or achieve the highest potential. Same with money, I imagine. So, for the person that's listening, Could you walk us through the exact system someone should implement this week when it comes to structure with their accounts or their money?

Yeah, absolutely. And I'll preface it, if it's okay, with why we behave this way because then the structure will make sense.

Okay.

So, the money habit is rooted in a concept called optimal foraging theory. Now, what's that? Optimal foraging theory was a study of prehistoric man and fast forward today in our reptilian portion of our mind, we still behave this way. But basically what it was, if you and I were in the same tribe and we're hungry, we don't say like, hey, you want to grab a steak tonight or something? No, it's like we got to go on the hunt and we're going for a woolly mammoth or we're going to go for as many rodents as possible, but we're going to go for a big capture. If we were gathering, we would go for all the berries, all the vegetation. You collect it in one shot because, A, you're burning calories when you're on the hunt. Secondly, you're at risk. You're not in the protection of the tribe, you're putting yourself out there. So, it's a very risky gamble. Then, once we get the woolly mammoth and take it down, a new problem presents itself. We got to carve this thing up, eat it fast because we know it's going to rot away. So, the food, the meat in this case, perishes extremely quickly. So, the optimal foraging theory says hunt in mass and when you get the kill, eat it quickly because the best way to preserve calories is to consume them. Now they're inside you, or use some preservation mechanisms. And at least in Neanderthal days, that was like bury stuff underground or smoke it or something. Not smoke it like a joint.

Yeah, smoke it.

Just make sure that translated properly.

So good.

So here's the crazy thing and why this applies to the system and how exactly we set it up. Our mind is still wired that way. The major hunt is no longer, you know, woolly mammoth or all these vegetables and stuff. What it is is a paycheck. That is the collection of something that's important and significant to us for our survivability. But our mind says that is going to fade away. Now, we know logically money is fungible. If you leave it in your bank account, it sits in your bank account. It's likely not going to deteriorate quickly. And our mind, though, or at least the subconscious level, says this is rotting. So, we go into consumption mind. So, when we see a large kill, lots of money, we go on a large spend naturally because that's the best way to preserve that money because it's put to utilization. Well, the problem, of course, is it's very reactionary behavior. Most people, paycheck comes in, we live high on the hog for the first day, and then We are skimping to get by until next paycheck. It's this very reactive thing. So, what you need to do is one of two things. Carve it up by preserving it in some capacity, burying it or smoking it, or optimally eat so we always have calories in us. Here's the crazy thing. Research indicates the optimal payment frequency to address this behavior, this peaks and valleys behavior, is if we got paid twice a day, if we got paycheck in the morning and sometime after lunch, and it was spread out over that every 2 weeks or every fortnight, whatever this frequency is, we'd actually become optimal around it because we're not going into this gorge mentality and preserve. But no one's going to do that because there's costs associated with that. No company is going to issue a paycheck every 2 weeks. So, what we're going to do is we're going to go into preservation and preservation is When the money hits your bank account, the first thing we do is carve it up and hide it or bury it or smoke it. So we put it into different accounts. There's accounts for needs. This is the essentials for living. Accounts for wants. This is the mini luxuries. We need consistent rewards. Then dreams, that's the large luxuries, the big aspirational things. Fixes, if we have debt or other expenses that we need to recover from, past expenses. Or future. So we— that account could be named either. Future is preparation for future events or activities. And the last account is called emergency. So money flows in, it goes into— when money lands, I call it the income account. It lands on one tray. We then carve it up before we touch it into these different accounts. Then when we have to pay for our rent or mortgage, it's a need, it's an essential for living. We pull from that account. When I want to go out to dinner, that's a want or desire, and I'm pulling from that want account. If I want to go on vacation this year, I'm pulling from the dreams account. So, that's how it functions.

I love it. And to me, this just makes so much common sense, yet I imagine it's rarely common practice.

It's unfortunate. It's true. The funny thing is, I'll tell you how common sense is. This goes back to biblical times. So, this is the envelope system. It's the pay yourself first principles, a lot of these core principles. In biblical times, they talked about concepts like tithing, which was the idea of when you receive money, allocate a portion toward the church or to return to your community prior to spending any funds. So, reserve for your responsibilities first. And fast forward, Richest Man in Babylon, Think and Grow Rich. There's all this modernization of the same concept. The power of the system is it's envelopes, it's pay yourself first or allocate first. But there's something I think even grander, and it's called a commitment device in psychological terms. I call it a behavioral intercept. And what this means is there's certain patterns we follow. And when I query that audience, who checks their bank account daily? I say, that's human. I then tell them, by the way, that's your biggest advantage. Remember, we want to redirect what we're doing to drive the outcome that we desire. So another little story. About 20 years ago or so, I said, I'm going to start exercising regularly. And I was a little bit off the wagon on that and said, I got to commit to this. And so what I tried to do was to willpower my way to health. I'm going to work out like an animal. I'm going to eat well, all this commitment. And that did work for about 24 hours. The first day I had a great workout. I ate well. But the second day I was so freaking sore. I'm like, I'm never going to work out again. This is stupid. And I fell off the wagon quickly. Then I looked at something different. I noticed that when I wake up in the morning, I go to the bathroom and then I make myself a cup of coffee and my day would kind of start going from there. And I was skipping my workout somewhere between that trajectory. So then I said, okay, I guarantee when I wake up in the morning, I will use the bathroom. So I started putting my sneakers on the toilet seat. The only way I could use the bathroom was where I grabbed my sneakers. That's a commitment device. A pattern you already follow is intercepted with something that you will redirect you or bring you to the outcome you want. And with those sneakers in my hand, I put them on my feet, I'd walk to the gym. With our finances, if you log into your bank account every day or once a week, whatever, that's amazing. We have to set up these envelopes, these different accounts at your bank. I can do this on a spreadsheet. I can use some fancy app and those are all great, but if that's not where you're going, they won't intercept you.

So we need to set up those 5 accounts.

Yeah, well, it's 6 including income. So the income account is a serving tray, if you will. So when you celebrate a holiday or something and you have a big serving tray of the meal, that's our income account. So all household income, maybe there's one source or multiple, goes to this account. Then to your point, yes, there's 5 accounts: needs, essentials, wants, the mini luxuries, dreams, the grand luxuries. Fix or future, depending on if you're recovering from debt or preparing for the future, and emergencies. And the interesting thing about emergencies, as I was writing this book and doing my research, the number one bill that people get that they're least prepared for is an unexpected bill. It's the emergency. And that's why that—

The broken down washing machine, the health emergency, the car that breaks down.

Yeah. The house water pressure that stops. This morning, my wife called and says, "We have no water pressure." I'm like, "Well, there you go." That's our emergency for today.

I love it. That's reality, right?

Yeah.

And so, a couple of questions on that. One, I'm just assuming, and I should never assume, but one, these things are automated. And two, if they're automated or not, is there a certain percentage you would recommend for people to put into each of those?

So, they can be automated and I think ultimately should be. But when starting, at least the first few iterations, there is an argument why the manual process helps you. And the reason it does is because of the dopamine and serotonin release. So, when I log into my bank account, anyone listening in right now, if you log into your bank account, you'll see a number there. And if you have one account, you'll see whatever that dollar amount is and your mind will start processing, "Oh, that's the woolly mammoth I just killed. How do I consume this?" Conversely, if you then take that and you carve up the account, you do the transfers manually into these different accounts, you'll get a serotonin release because your mind will say, "Oh, you just reserved money for your needs, essentials. Your needs are covered or being addressed." And then they'll allocate money to wants and say, "Oh, there is some money available to go and enjoy a dinner out," or whatever your definition of a want is. And admittedly, in this part of the system, once you do this on a percentage basis, you may realize, "Oh, I've been overspending on dinners. Like, I can't afford." but your mind has assurity and confidence. So those are good kind of behavioral brain drugs, if you will, that get released over time. Automation is the new discipline. Like, automation is the best. It just, it can be automated. And there's, there's extraordinary banking platforms and banks that do that. The, um, yeah, so that's, you got another part of the question and I can't remember what it was.

Yes, that's brilliant. So that's the automation side. Start manually, get the actual Release of the dopamine, it sets up the habit loop. That's brilliant. I love it. And actually, before that, go to that second part of the question again. Robbins, Medanis, so Ploy Medanis and Tony Robbins have this hierarchy of needs very similar to Maslow.

Maslow, yeah.

But what you've just shared about how you structure it and how you think literally hits those accounts, hit all of those. So, the first one's certainty, which is your needs. That's right. Variety, which is kind of like your wants and your dinners out. And then the next one is like significance. So, the future and paying down debt and maybe buying your dream home. I love how what you're saying matches up with our human needs. These are things we can't get away from.

Yeah, that's exactly how I wrote it. So, you read between the lines. It is directly translated from Maslow's work. And I actually deploy a lot of his work in my books because that's the definition of how you live our lives. And what's interesting is we revert back to our needs when we are starved of them. But once they're satisfied, even just a modicum of it is satisfied, we revert to the higher levels, the aspirational things. So, a lot of people, when their check comes in for the day, they'll say, "Well, I got to— today, I got to eat food. That's essential. So, I'm going to—" buy food, groceries, or maybe go out to dinner. But I also have been thinking about that TV. So that could be a much more aspirational thing. I've been thinking about that new electronics and why I have enough money now. So our mind works in these very short timeframes of needs, wants, desires, but not for the long term, not for our life for sure, not even for the next month down the road, barely even to the next paycheck. So we just focus on right now, I need to eat, plus I want that TV. But now, as the money diminishes, we revert back and say, oh my gosh, I don't have enough money to eat. And we go into this kind of starvation mode, which then triggers this negative association with money and it causes downward spiral. By carving the money up first, we start working within the confines of what's available. So, it's a reality check, but still gives you the opportunity to have those aspirational things, perhaps not through the frequency of the past, definitely in a much more moderated state. Yeah, 100%.

And do you think there's a rough percentage that people should be putting in, or is everyone quite unique in terms of what that looks like? Yeah, that's right.

That was the question you were asking. Yeah, there is. So, I can't say what the percentages are because it depends on income. So, in the US at least, the average income of an American is $50,000 a year. Where I live in the Northeast, right outside New York City, it's very difficult to live comfortably on that source of income. Conversely, in other areas, it's a little more doable. So we have to understand the income level. And if I am making $50,000 a year, I may be allocating 60 or 70% to the essentials of living, roof over my head, food, water, uh, supplies. Now, if I'm making, say, double that, $100,000, uh, I may not be allocating 70%. I may drop that now down to 50%. Because on the aggregate, it's actually more money going to that stuff, but I can start allocating money out elsewhere. So I have, I think, 6 tiers of money levels where the percentages change. I will tell you this. Everyone needs to have, everyone needs to have wants. We have to have these small desires and outlets. There's some systems that say if you live a life of absolute deprivation for the next 5 years, you can live like a king or queen for the rest of your life. And while that technically may be true, behaviorally, that's nearly impossible to sustain. And the other component with the percentages that comes to mind is we enter a system like this in different seasons. Some people are coming out of debt. Other people are approaching a significant life event. Maybe their kids are turning 18 and they want to activate the funds they've saved to live large for this last summer together. Or maybe retirement or whatever. So, depending on your financial intentions and your income source, those determine the percentages. I have them available for free, of course, but that's kind of how it works.

That's amazing. And I'll make sure, again, just remind the listener and the viewer, go to the link in the show notes, get the book, The Money Habit, today. It's going to help you and probably help many people around you, not just yourself. But Mike, if someone did adopt your money habits that you outline in the book and followed them for a decade, what might their financial life look like compared to someone who didn't?

So, I know because we have at least one person that's done it for 18 years. That's me, ground zero. I will tell you, part of my life has been influenced by my increasing income. So, as I do more work like in this space, I get more notoriety and it does generate more income. So, there is a potential bias there. But I will tell you this, someone that sticks with it, the confidence they'll achieve is the number one thing. There was an article that came out in USA Today, which is a major US newspaper. And they said that financial worry is now a part-time job for most Americans. And they said, on average, the average American is worrying about how they're going to cover an expense or some kind of financial worry for 4 hours per day, a part-time job. I don't experience that at all. I'm also proud to report that we have, through my first work, Profit First, over 1.1 million businesses, including businesses in New Zealand and Australia, that have deployed Profit First. And while I haven't had the fortune of meeting even with a tenth of those folks, I do know stories of thousands of folks. And what happens with Profit First and happens with The Money Habit, we now have thousands and thousands of people doing that too, is there's an immediate sense of control. So your financial position won't get any better. It won't get any worse. It'll be what it always has been. Whatever income you earn and whatever situation you come to the system with, you still have. It doesn't vanish overnight. It's not magic. But you start getting clarity. And with clarity and understanding, you start asserting control. And with control, now you can direct how you're going to address your financial future. Eradicate debt, prepare for future events, whatever it may be. And then, if you choose and if you have the means to generate even more income, that control has set a good foundation. Conversely, the 20 years of me prior to where I am today, there was a period of time I made even more money. I was building and selling some businesses, 2 in a row, and it was hit, hit. So in my early 30s, before I had the system, I had a lot more money. And I blew that so fast. I think I had no financial clarity and absolutely no financial control. So, the before was pretty horrible. I mean, losing tons of money and on the verge of bankruptcy and just total collapse. That actually brought about this system. And once my income achieved similar status to back then, with all this control and clarity, it's been smooth. It's been wonderful. I think the best part though is I think the preparation for the volatility. Who knows what next 5 years is going to be like, particularly nowadays? And, um, the system has prepared me for the ebbs and flows of financial change.

That's real powerful. And I can't wait for people to get their hands on this book and actually feel that, because it is a feeling around our wealth and around our future freedom. So you're creating the structure for us. Make a couple of very quick questions to wrap up before we part ways. So number 1, what does a morning look like? As soon as Mike wakes up, what are his habits in the morning?

Oh, I mean, I'm wacky disciplined. So 5:30, wake up, uh, come downstairs, work out in the gym, uh, hit the— we have a— we're blessed to have a sauna, so I hit the sauna. Then I play guitar for 45 minutes. Then I eat breakfast. Practice guitar, not play, practice. Then I go to breakfast. I leave the house at 8:40. I'm at work at my desk at 8:55, and then I'm off to work.

I love that. I love that structure. I see this with all the high performers I chat to. Oh, really? Regimen, health, creativity. They're not into reactivity and checking their phones first thing.

May I ask? Oh, yeah. The funny thing is I don't even check my phone for most of that. That's a good point. I don't wake up and check the phone first thing. I used to. I don't do that anymore.

Well done. And then at the end of the day, what does bedtime look like and any little routines to get a good sleep?

Yeah, so I call it— it's fine with the phones. I call it the 3 Bs. No phone in bed, no phone in the bathroom, no phone in the backyard. And so for what it is, my wife and I will have dinner together and then we usually enjoy some kind of television show together. Right now we're watching Arrested Development again. It's great. Such a good show. And then we just commit. We just talk for a little bit. And then this is crazy. I'm in bed at 8 o'clock at night and lights off by 8:30. And usually it's meditation going and then going to sleep during the night.

I live a very similar life. I go to bed at 9, quarter past 9, but everything else sounds very, very similar. That's awesome. That's awesome. I love it. And very last question. I want you to pretend for a moment that you and I are fast forwarding many years into the future and you're highly aware that it's your very last day here on Earth. And someone very young that you love dearly walks into the room and says, "Mike, I need some advice. How do I go about leading my life on purpose?" What would you say to them?

Well, what I would do is reflect on the entirety of your life to that point and look at the highs and the lows and put circles on those moments. The day you have this big conflict and it just changed your whole life. Was the darkest moment. The day when you saw your mom hugging your sister and just saying, I love you, and whispering in her ear and how you felt the emotional touch. Like all those elements, like whatever they are, those stories, and then reflect on it and say, what does it reveal about your calling? And when I did this for myself, and I do this called a lifeline, I actually do interviews, podcasts. I will always start off with a lifeline and we do this exact exercise of highs and lows. We circle those and we say, what does it reveal? And it seems like our history inevitably reveals our future.

That's beautiful. I love it. I'm going to put a link to your podcast in so people can experience some of those Lifeline Chats.

Yeah, it's called Becoming Self-Made. And I interviewed Brian Scudamore. He's the founder of 1-800-GOT-JUNK. And he's talking about it and he's like, I was picked on as a kid. He said, I had buck teeth, I had glasses on, people made fun of me. And I was the reject. And he's like, I built 100 Year Old Junk so that all the rejects have a community to hang out with. I'm like, God, I get it now. I get it. Yeah, he's a legend. And you hear over and over the Savannah Bananas. That was my favorite interview. This guy, well, watch the podcast and you'll hear why he is who he is.

I'll put the link to that specific episode in the show notes. Oh, cool. Thanks. Mike, I just want to say a huge thanks for taking the time. Thanks for also writing all the books. I'm going to make sure we get a link to all your books in the show notes, but the one that people need to get today is The Money Habit. And I look forward to getting you down here to New Zealand and getting you on a stage. Bring it on.

Oh my God, that would be my dream. Thanks, James.

Let's make it happen. Mike, thanks a million. We'll chat soon. You got it, brother.

Thank you.