Mike Michalowicz: Stop Living Paycheck-to-Paycheck and Build Lasting Wealth in 2026 | Finance | YAPLive | E386

22:00One more guest to the table. I love that. Yeah, it felt so good. Yeah. And then I asked myself, once we had 200 guests covered, that was 14 ,000, I then said, okay, what's a band cost? And a band would cost$10 ,000 or whatever it was. I said, okay, we got the drummer. Once I hit$2 ,000, we got the drummer. Now we got the bassist. Now we got the lead singer, you know? And so it's important to put these little milestones so we feel that we—so we experience the progress. Yeah, yeah. Yeah, that's how I did it. That's a really beautiful story and, like, awesome that you did that for your kids. Okay, so let's talk about why traditional budgeting doesn't fail.

22:33So, like, you budgeted for this wedding and you set it aside. What was different about what you did there versus traditional budgets? Right, traditional budgets usually have a common pot at the bank. So it's a separate documentation, usually a spreadsheet, that says I'm going to save X number of dollars for this wedding, say$50 ,000 and so forth. And then we have a singular pot where the money's stored. Maybe it's in a money market or some form of investment, which is fantastic. Here's the problem. We have to enforce willpower not to take from it. And we will justify taking from it. We'll resolve, I should say, the cognitive dissidence that we have when we take the money by giving some form of justification.

23:13So let's say in my pot I have$200 ,000,$50 ,000 for one kid's wedding,$10 ,000 for auto repairs and home maintenance and different things. and now something comes up and my roof is leaking. And so I got to replace the roof. And I'm like, well, I got a pot here of$200 ,000. Yeah, some of it's for the wedding, but the wedding's like not going to happen. And I'll start justifying it and I'll replace that roof. And now I'm back to square one. Conversely, and we actually have an account called The Roof because roofs need to be repaired or replaced in its entirety, usually every 25 years. So we have a 25-year vision for it.

23:50And to replace our roof, we're thinking it's going to be a big budget, so we have that dollar amount set aside. If my roof is leaking and I want to replace it and there's not enough money in the roof account, I can still take it from my son's wedding account, but I can no longer subconsciously ignore that. I have to say to myself, I just stole from my son's wedding. So now a subconscious behavior becomes a conscious awareness. I'm much more disciplined when I'm consciously aware that I'm stealing for something as opposed to a common pot. Yeah, you realize that like some other goal is not happening.

24:23Yeah, you can't deny it anymore. Yeah. Yeah, and it's okay. Sometimes you may choose to do that, but I can no longer deny it. Yeah. There's another thing is if you have multiple people involved in the finances, so we have, my wife and I both manage our finances. It used to be I was the primary lead and my wife was secondary, so she'd ask almost like permission, saying, hey, I'm thinking about going out with friends. Do you mind if I go out? Do we have enough money? With the accounts divided up as we have them, she just logs in the bank and says, yeah, there's enough money. We have a—her name's Krista.

24:53The Krista Fun account. I have a Mike Fun account. She doesn't have to ask me. So there used to be this weird parent-child relationship. I'd say, no, you can't go out. Or here's your lollipop. You can go out. It's like bizarre. It's kind of creepy. And now we're a team looking at the account, and there's not enough money in the account. There's a conversation about it. We see we can't do this now. Do we decide to override the system or not? That's how it works. Yeah. I know that you mentioned there's a bunch of behavioral things that humans just are, you know, likely to do if you have one big bucket of money and you don't split it out.

25:28Yeah. So let's talk about those. You've got one of them you mentioned, but I'd love for you to go deeper on it. You call it Parkinson's Law? Yeah. So Parkinson's Law is based upon a theory by this guy, Northcote Parkinson, from the 1950s. And he observed something really interesting, and we already alluded to it, is that when a resource expands its availability, we consume more. The classic economics curve says that demand dictates supply. So the more people want your podcast, the more you're going to produce podcasts. The more people want to sponsor a show, the more you're going to charge for it.

25:58And he argued that is true in a certain number of economic cases financially, but in most cases, humans behave in the reverse. It's not demand dictating supply, it's supply dictating demand. And the classic example is with, well, you can do it with soda cans. 100 years ago or 200 years ago when soda came out, soda cans were what we consider almost a shot glass. Like it was a small little can. Then they got these, I think they're 16 ounces or something. But I don't know if you've seen cans recently. They're huge. It's a freaking bazooka. You could kill someone with this thing. It's crazy. And the thing is, human behavior hasn't changed.

26:31The container dictates consumption. We used to drink that small shot. We used to drink a full can. We are now drinking this full container. And societally, the caloric intake is massive, and our waistlines are expanding massively as a society. The interesting thing about Parkinson's, he said, if we simply went back to the shot glasses, you won't drink the whole can. You won't get multiple shot glasses. You'll finish off the shot glass, and you're done. So the container dictates the supply. When it comes to our finances, if you have one bank account, that is your shotgun bazooka of a container.

26:59We need multiple small shot glasses, and you'll just take that little shot. That's what Parkinson teaches us. That makes sense. And then there's loss aversion. Yeah. Loss aversion is so interesting. Loss aversion is once we possess something, we'll go to extremes to retain it, even though it's illogical. But we won't go to the same extremes to gain it. So we'll do more to retain than we will to gain. Classic example, you drove up in a nice car. I was admiring your car. Oh, thank you. Yeah, I love it. Hot pink Porsche or purpley pink. Purpley pink Porsche. It's gorgeous. And so this Porsche pulls up.

27:31And a Porsche will be a dream car for me. I do have another dream car I love. But if I bought that Porsche, I would put it into my garage and save it. But say I, and drive around and show it off and polish it. If I didn't have enough money saved and couldn't pay for it, and the dealer calls me and says, we're going to call the, claim the car back and take the slips back. I will maybe take a second job. Maybe I'll drop insurance. Maybe I'll stop driving. I'll just keep it in my garage because it's my baby now. But here's the thing. I'll do extraordinary things to retain it. Second job, drop the insurance.

28:02but I won't do those things to get in the first place. That's loss aversion. When we have a certain life standard, it is very hard to reverse that. So now I live in my new beautiful home, I'm not going to lose that. And so we will go to extreme measures to keep it and sometimes illogical. I'll take on debt. I'll borrow money. I'll ask my parents if they're going to just lend me a little bit of cash. I'll ring up the credit cards and it will crush us. But we wouldn't do those things to gain it in the first place. We have to realize this is wired into us. And with an awareness, you have some control and authority over it.

28:32the better move is not to gain the things you can't really afford yet. It's to slowly build toward it and have a cushion that when perhaps your income drops, that you can sustain because you have some kind of savings. Because you will logically try to retain something you have that you can't afford. So don't try to grow your lifestyle very quickly, which most people try to do, to pace their income. As your income creases, build a cushion for yourself as you're moving along. Let your life increase. That's our natural tendency. We want better and better. but save a cushion so that if you ever have a dip, you can sustain that for an extended period.

29:03Is there some sort of rule, like I should be able to pay for this 10 times or like, is there some rule that we could follow? Generally, the optimal rule is minimally three months of full life expenses covered. So whatever your life expenses are that you have is sitting in savings ready to spend minimally. Six months is ideal. Here's what the research indicates. If I save for three months, I'll live in the loss aversion state usually for about one to one and a half months, about half that time span, and start saying, oh, my gosh, I'm eating the savings. Then we'll start adjusting our lifestyle.

29:35So that remaining one and a half months of cash I have will stretch for another three or four months. So three months of savings can usually last six months. Six months of savings can usually last a year to year and a half. Today is a much more volatile economy. I'm encouraging people to have six months of full expense savings minimally so that you can sustain if you go into a dip. That's good advice. Okay, the transgressive motive. What is that about? Yeah, so we have a natural tendency to rebel. So if, listen, if you came in here and tell me, this is how absurd this would be. Yeah. I'm like, oh, it's so good to see you.

30:09By the way, the way you dress, you could be a little more professional wearing a suit. In your mind, you'd be like, who the F are you? Now, you will say to my head, oh, thanks for the advice. That was very kind of you. But inside, we rebel. If you said to me, like, Mike, what are you doing? Like, this is the worst outfit ever. Like, Mr. Paley White is wearing this. Like, you're reflecting. Why don't you wear a better color for yourself? I was like, oh, that's so great. And in my head, I'm like, what a total pain in the butt you are. We rebel against advice. And we rebel against any authority asserted to us.

30:39I have a saying with businesses, if you, as an owner, tell your business employees to comply, they will seek to defy. So when we're given instructions, we resist. So when we are put in constraints, and budgets do this inherently, we often resist. Many budgets I've seen, systems will have categories like, things like maybe tithing are in there. So basically what those budgets are saying is, we don't know if you tithe, but that's a common thing to do. You should be tithing. Well, actually, I don't tithe. And I see that and I'm like, what are you doing telling me to tithe? And a subconscious rebellion kicks in saying, I don't know if the system's for me, or I start to push it away.

31:16So budgets have implicit, or non-implicit, but suggested compliance. And then therefore I'll defy. So just be aware of that rebellion that's inside. The best system to build is a system that you create for yourself. So if I tell myself, you know, I shouldn't dress like this. I should have colors a little more complimentary and make me a little less pale. If I said to myself, I'm like, that's a good idea. Because I said it myself. So build a system around your own desires and interests. So when I read The Money Habit, I don't have any suggested accounts. I have ways to observe your own behavior so you can create your own accounts and your own budget effectively.

31:52That makes sense. So I know one of the things that happens, especially for people who are living paycheck to paycheck, is this panic at the end of the month. Like you get your paycheck and it's a high. And then 10 days before the month ends, you're in a panic because you can't afford all your things. What is happening in that payday high to panic cycle? Totally. This is rooted on, I think, the most important principle that the entire book's based on. By the way, in the book, I don't talk about the behavioral principles. That's not important. I talk about the applications. I touch on one a little bit.

32:23But this is based upon what's called optimal foraging theory. so before humankind was the neander the modern humankind was the neanderthal and we were hunters and gatherers now here's what the neanderthals didn't do i wouldn't say hey i'm hungry uh let's go get steak ugh no i'd say uh we hungry uh we go hunt woolly mammoth and you and i are out there or you know we hungry let's go gather berries and stuff you didn't go for a small portion just to satiate you went for the big hunt and the reason you went for the big hunt is there's a massive caloric burn. If we're out gathering, we're putting ourselves at risk.

32:56There could be saber-toothed tigers or whatever's out there coming after us. So we have to protect, gather. We're putting the rest of the community at risk. We have to come back. If we're going out for the hunt, we're racing and chasing a big caloric burn. So you go on a massive hunt. When you capture the food, say we go for a loy mammoth and we capture this beast and kill it. Now we're at risk because the food will perish. We have this massive beast, but we know if we don't eat it now, it's going to rot away. So what you do is you start burying some of the food, you smoke the food, but we also know there's a very short period before it rots.

33:29So you go into a gluttonous state, you start consuming an overcaloric intake, eat, eat, eat. Then the very last phase was now there's no food left, you start eating what's been stored. And when that's gone, we better go and hunt again sooner, we're going to starve to death. That's called optimal foraging theory. Capture in mass, preserve what you can. And if you can't preserve it, consume it fast because you need those calories, and when the food's gone, going to hunt again. Fast forward to modern humankind. We still live by that law exactly. Now, the massive hunt is a paycheck. The paycheck comes in once every two weeks.

34:03For some people, weekly. Some people even once a month. But once every two weeks is the most frequent. Do you know the optimal payroll that people should receive is three times a day? If I paid you in the morning, again in the afternoon, and one more time in the evening, you would actually manage your money better. But that's absurd, and no employer can afford to do that because there's costs associated with that. So you get it once every two weeks. We just capture the woolly mammoth. Our wiring is now, there's two things you can do. Preserve it, but there's not many ways to preserve it. You can put it at a bank account, but it's rotting away.

34:32It's sitting there or consume it. And since the money's just sitting there, the essence, the feeling is consume, consume, consume. This is rotting away. Some people preserve it by putting in a 401k. When something's inaccessible, then we actually don't worry about it. So the money goes in the 401k, it's preserved. So our mind is wired. Once it's smoked or buried, it's okay. But when the mice in the checking account, it's like, this is going to go away. I better consume it while I have it because it's gone. We prove that to be true because by a week or two, it is gone and we're approved. It's rotting away.

35:02So then we go into, oh my gosh, I don't have enough calories. I need to go on a hunt again. And we go into this panic state toward the very end and we go on the hunt again. So what do we do? We have to improve the preservation mechanisms. We need little 401ks. What happens is when we get the hunt, the kill, paycheck comes in, we carve it up very quickly into different accounts. Those accounts are effectively smoking or burying that woolly mammoth, pieces of it, and we put it into different accounts. It actually satiates us and gives us comfort. We say, oh, okay, I put some money in the mortgage.

35:33The mortgage is covered. I don't have to worry about that. And it actually takes away that stress of I need to consume it now or it's going to go away. Then you start consuming in a more optimal way because the money starts dripping to you from these different accounts. You use it more prudently, and we repeat this process over and over. Yeah. That's really interesting. As you were talking, one of the things that I think about for myself as I've become more successful and make more money, I'm an entrepreneur. A lot of entrepreneurs are tuning in. When I get a lot of money, the first thing I think about is I got to spend this or else they're going to tax me on it.

36:04Totally. That's part of optimal farging theory. Yeah. Yeah. I'm afraid. And so, by the way, taxes will come. We're told in our business, if you spend the money on different expenses, you can reduce your taxes. Yeah. Some of that's prudent, for sure. Like, I hope your vehicle or some of your vehicles are actually going through the business to reduce your tax consequence. Some of it just can't legally be done. And yet, entrepreneurs still say, if I just simply spend or find a way to spend, and it actually compromises other elements of our life. Yeah. Here's the most crazy thing, and this isn't profit first.

36:34We encourage people to set up a tax account. So money comes in, and money goes into his tax account. And then when tax time comes, we pay from that account. What's so interesting is it reduces that sense of loss aversion because the money's already been allocated to it. One of the most crazy things, Hala, is every quarter, when I wrote Profit First, I was expecting people to say, hey, I have more profit than ever before. Thanks for writing this book. I actually get people writing, calling me, and sometimes showing me in my office, which don't need to do that, but some people don't, saying, I just paid my taxes.

37:03The company paid it. I feel so good. And I was like, why is this? I'm like, oh, because of loss aversion. So that car that's in the garage we were talking about, that if I can't pay it, I will drop the insurance or if I can't afford it, I'll take a second job. When it comes to taxes, if I put taxes in a tax account and never came into my own pocket, I don't feel like it's being taken from me. A quick analogy is if I sit in here and I said, hey, Holla, this was awesome. Here's$100, just thanks for doing this. It may feel awkward I gave you a hundred bucks, but you're like, oh, well, a hundred bucks, thanks, Mike.

37:32If I gave you$200 and say, hey, thanks for this, But, oh, by the way, I need$100 back. You'd be like, hold on. You just give me$100 and you're taking something back. Now it's, like, super weird. Yeah. And that's what taxes feel like. I just earn money and the government takes it back from me. Yeah. But if I never give you that second$100 in the first place and just give it to the government, it doesn't feel as painful. Yeah. And that's exactly what we did. I remember when we implemented Profit First, one of the things that we changed is whenever I get my sponsorship money, now it gets sent in, like, two buckets.

37:57One is, like, my money and one is tax. And then we just split it 50-50. And, you know, if there's stuff I don't owe, it's just kind of like a bonus at the end of the year. And I suspect it reduces the pain. It does. It does. Yeah. It does to a degree. I know it's there, though, you know? I've had people, yeah, you know it's there, but it does reduce some of the pain. And I've noticed some people, like, say their tax bill is$100 ,000 and they saved$110 ,000. There's$10 ,000 extra. They feel like they're getting a bonus. Exactly. It feels like a bonus. That's a good thing. This sounds like it's a shell game.

38:26And logically, it's a shell game. But it's actually a behavioral management system. And that's what people don't understand. Yeah, and it prevents you from, like, realizing, like, at some point, oh, my God, I didn't save money or I didn't put money aside or spending what you actually don't have because that money eventually won't be yours, right? That's right. So you break down six accounts. Income, needs, wants, dreams, fixed future, and emergency. Yeah. Do you want to explain each one? Sure. It's based upon Maslow's hierarchy of needs. So Maslow identified that you and I have basic physiological needs to survive.

38:59We need to be breathing air right now, drinking water, eating food. So, like, if someone came running in and threw a bag over my head, it's plastic, and starts choking me out. Interview's over. I'm struggling to get out of this thing because my life's in jeopardy. And what Maslow pointed is no matter what state we're in, if the foundational needs aren't being met, we have to revert to it. But once they're adequately met, we move to the next level, which is safety needs, shelter, and so forth, and then belonging to be part of a community, just like you have here. And then ultimately self-esteem or self-actualization, I should say, is the highest.

39:29Well, when it comes to survivability, we need those physiological needs. We need to eat. We need food. We need water. We need shelter. So that's what the needs account is. The income account, which is the first account, is simply a depository account. Money flows in there. It's deposits of your household income. If you're the sole breadwinner, it's the money you're earning. If you have collective earners, it's the collective money that's being contributed to the household. That's our starting pot. But historically, that's just the one big pot, and we know the danger of that. That's a woolly mammoth, and it's rotting away.

39:58So we need to carve it up. The first account we carve to support our basic needs. And in my book, I identify based upon your income level, if you're a young but profitable person making$100 ,000 more a year, the percentage you put toward needs may be less than if you're making$50 ,000 a year. If you're making$50 ,000 a year, 80 % of your money may be going to support your core needs to live in the United States. But if you're making$100 ,000 a year, maybe it's only 60 % or 50%. core needs are like groceries uh you know shelter rent exactly wants is i want to eat out and some people will conflate the two they'll say well i need to eat out so yeah so always if you don't know which level it's in it's always the higher level um i know someone that has multiple homes i say well i have these homes so i have to pay the mortgage i need a mortgage i'm like it's a basic level need for all humans to have three homes they're like no i'm like okay that's beyond it.

40:53We all need a home of some sort. So you have to differentiate those two. And if you don't know, it's worth a higher level. So wants are the mini luxuries. Dreams are the bigger luxuries. So dream may be, you know, I need to eat food. I want to eat out. I would love, I dream about having a personal chef. Like that's kind of how you differentiate this stuff. Usually dreams are a longer term savings. Wants are usually something you spend on a weekly or monthly basis. And needs are usually more of a daily basis, basically. Yeah. Fix or future is this. Most people that start this system and most people in the United States are in debt.

41:27So a fixed account is that we're allocating money intentionally to get down unsecured debt. So credit cards, anything that's not asset-based. But a loan for a house, generally houses, not all, but generally a house will appreciate over time. There's value in that. I believe taking a mortgage or some kind of loan is appropriate for it. When it comes to a car, yes, most cars depreciate, but it sustains its value over a period of time, and we do need that for transportation. I think that's appropriate. But other things like credit card loans and so forth that are unsecured, we need to get rid of that.

41:59It's a big burden, and there's no value. You can't say, well, you know, can I sell my credit card debt to someone else? Maybe they'll give me some money for it. No, but you can sell your car to someone else or your house. So, well, if you have credit card debt, we're going to have a fixed account to pay for that. Once your unsecured debt is addressed, we're going to move to a future account. This is reserving not for retirement necessarily, but some future event of significance. Do you have children? Not yet. Okay. So I got three kids. I remember my wife and I, when they were approaching their 18th birthday saying, we want to take them to Disney and we want to go large because it's the last time they're going to be home before they're out of the house.

42:34And so we started allocating money for that. That was a future saving. So that's something big for the future event. Some people are saving for some form of retirement, which I'm not a fan necessarily of fully retiring. I don't. Really? Yeah. I've been talking to a lot of people that have been there. So I'm in my 50s now, my early 50s. I've been talking to people in their 60s and 70s who've retired and it ain't easy necessarily. And the general feedback is perhaps slow down the pace, but if it's your passion, stick with it to the very end is what I'm hearing. The last account is emergency. the most predictable expense for everyone is an unpredictable event.

43:11I can guarantee it's going to happen. A health crisis, an accident, the boiler is going to blow in the house, which recently did our house. And so we all need an emergency account because I can guarantee something unexpected is going to happen. Yeah. And the emergency account, is that different than the six months of savings? Yeah, six months of savings is for an extended period without income. An emergency is where there's a surge demand while you're still earning an income. And you just can't tell what it is. And in the book, based upon your income level,$50 ,000,$100 ,000, I have all the way up to millions in earnings, and your season.

43:55Like, some people are recovering from debt. Some people are looking to secure their future more and more. Some people are saying, listen, I want to live large now because of whatever. And I am kind of living in that moment right now. I just want to kind of live big. And we're doing it. We're doing some amazing things. You have to identify the season you're in, match it to your income. And there's different percentages, I suggest. Yeah.

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46:25It's a type of work that you may be good at, but over time, it actually drains you. And then you have two working frustrations. It's the work you don't like to do, and it drains your energy. I uncovered that my two geniuses are invention and galvanizing. My two competencies are discernment and tenacity. And then my working frustrations are enablement and wonder. So once I found this out, everything just like clicked for me. Number one, I realized why I was butting heads with my executive team because wonder is the frustration for me, whereas my business partner has wonder as a strength. I wanted to get things done, rally the group, keep things moving.

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50:44Talk to us about each one and how you can tell if you're in each bucket. Yeah. And they're rooted in behavioral psychology. Okay. So when I was interviewing people for this, I worked with collectively, either directly or through group coaching about a thousand employees of different companies and hundreds and hundreds of entrepreneurs. And I'd ask them about their situation. The majority, I would say is upwards of 70 % have debt of some sort. That's not secured debt. Like it's credit cards or whatever. Loans from family and friends. Student loan debt is - Oh my gosh. Yeah. That was the most common.

51:16It's maddening. And they would say, I have debt. There's a behavioral phenomenon that if you say I have something, it's a possessive state, it actually becomes you. So if you say I have a purple Porsche, it's your possession. It's actually part of your identity. If I say I have debt, that's part of my identity. It's part of who I am. And when it's part of your identity, it becomes a permanence. And that's the dangerous part. So when people say I have debt, that they are also saying I'm always in debt. It's very hard to eradicate. So I said, okay, that's not a good word. We need to put the word recover.

51:49So So if I'm in a recovery state, that means an active move toward improvement. The other thing is seasons are not permanent. So I said, oh, recovery season is a positive temporal state. That's so smart. Yeah. So when I say, oh, you don't have debt, you're in a recovery season, how long is this season going to last? It's like, oh, that's right. There's a timeframe to it. So that's why those terms exist. Seasons are recovery, coming out of debt. The next one is funding. Funding is where we're intentionally saving more than we're spending of our income to prepare for some kind of future experience.

52:23Activate is where we're spending more than we're actively earning. So we're actually downing our money savings with intentionality because perhaps we want to live larger in the moment. And listen, that's appropriate at all stages. Or maybe you're starting a business. Does that count? Yeah, that totally counts. Okay. Yeah, like that's a life dream. I want to do this. or I want to, I just want to take a year off and rediscover who I am or anything. So that's a form of activation. Then the final stage is, or season is balance. Balance is where I'm actively trying to live in the now, but also preparing for some future events.

52:58The interesting thing about seasons though, is you can choose the season you're in and move through them quickly. So in nature, seasons usually are three months in the Northeast at least. You know, you have winter, spring, summer, fall. And they go in rotation. In our business finances, they can ping pong around. And I was like, oh, that doesn't happen in nature until I realized it did. I was just in Australia a couple weeks ago. Here, winter's kicking off. They're in the middle of summer. And within a 24-hour flight, I came back to New Jersey to temperatures in, like, the low 20s. And I'm like, oh, I just left temperatures in the mid-70s to come to the 20s.

53:33And it happened like this. Also, listen, you can be home. and it's the middle of January where we hit sometimes the single digits and it's like a 70 degree day in New Jersey and then it drops back down. So seasons can ping pong around very quickly, even in nature, but in our personal finances, they absolutely can ping pong around and they don't go in sequence. You can move from activate, maybe back to recovery, to balance, to fund, and it jumps around. Yeah, that makes a lot of sense. Let's try to apply these seasons to real life, okay? Okay, yeah. So if you get a$5 ,000 work bonus. Nice. How should somebody in each financial season treat that money?

54:13So if you're in recovery fund, activate balance, how does that get treated differently? Yeah. So if you're in the recovery stage and you're actually getting out debt, you could use a portion, but don't use all of it, to reduce your debt in one big tranche. In a case like that, there's two kind of psychologies. BF Skinner did research around operant conditioning and basically said, if we get early wins in our life, we're more likely to sustain that behavior. So if you have a small debt or two and you can wipe them out with that$5 ,000 or a portion of it and you haven't wiped out any debt yet, it's actually smart to do that because you'll believe you can wipe out debt faster.

54:48It's operant conditioning. But it's not logically optimal. The optimal debt is the most expensive debt. So whoever has the highest interest rate. So if you're already working on your debt and you get a chunk of money, go after the high interest rate debt because that will give you the most long-term relief. It's the smartest move. But save a portion of it. I usually suggest 10 % to maybe 20 % to reward yourself because if we deprive ourselves of rewards, then we become cynical of a system and we're less likely to sustain it. So I'm saying if there's a cookie on the table and some of that can satiate these demands, you have slice that cookie, not in half.

55:23Slice off a small piece for you very quickly. Give it to the other people. But give yourself some of that treat too. That makes sense. Yeah. If you're in the fund season, similar method, a big chunk of it goes toward whatever that future savings event is. But a little bit should go toward the now also to have that reward. If you are in the activate season, you may choose to activate all of it. Activate is a unique season in that we're intentionally downplaying our savings, and we're going into intentionality knowing that we don't need to save more for a period of time. So saving any of that may actually not serve you well.

55:55So if you're in the Activate season, you get$5 ,000, this may be your moment to live large or to extend that Activate period and use that capacity. If you're in the balance period, some of it goes toward the future, some of it goes toward the current, and you kind of split it in half. Yeah. I'd love to hear your perspective more on retirement because a lot of entrepreneurs tuning in, we're like responsible for our own retirement. When you work in corporate, you just have a 401k, you kind of just put money in it. And that's sort of taken care of. Yeah. And as entrepreneurs, it's really all on us.

56:25And some of us are making a lot of money and kind of are, even me, like I think about my retirement and it feels really abstract because I'm making a lot of money and I'm like, well, I don't need to worry about that because I'm making so much money. But I do need to worry about it, right? Yeah, yeah, yeah. So how do you think about it? I'll give you some more modern teachings that people are sharing, and I'll give you a perspective that I haven't heard anyone share. Okay. So one is when you hit retirement age, your health span will perhaps be on a decline compared to where you are now. So if you're in your 20s or 30s, you're the optimal in health.

57:02When you get to your 50s, I don't care what you do for exercise and stuff, things start aching and hurting. It just does. Trust me, it's coming. It's coming. And once you're in 60s and 70s and perhaps 80s, you may start a decline and you can't be as active. And it's a shame that people are saving for their 70s and 80s to do all these amazing things, but they're not physically capable. Now, listen, technology is coming about and all these things with AI and medicine research, that may change. So this is just what I see in the current state, but it may change. So actually, leveraging more of that money for the now may be better.

57:32Yeah. The second component, which we already talked about, is people that go into this kind of full stop generally seem to resent the fact they went into a full stop. They've lost meaning and purpose, and that becomes a big emotional cost. So even if they have their health, even if they have funds to live a new way without purpose, it becomes fleeting, and it's like, is this all there is? And that's actually anguish you're living under. Here's the thing I haven't heard anyone talk about in this context. It was fascinating. I was talking to this one guy. He says, photograph every single day of what you're doing and maybe even record a quick note about it.

58:07So 365 photographs for the entire year. And he goes, what will be so interesting is it's the ultimate form of memory. When you look back at those photos, you'll remember what you did and you'll start seeing what a rich life you lived. So if you preserve what you've done, it expands your memories. I believe, and I'm starting to feel this, at the end of life, what's going to be most important is all the things remembered. And right now, when you're in your 20s and 30s, it would be a shame if you forgot all the great things you did. You know, I look back to, like, my college days. I'm like, oh, I remember, like, the two epic parties that were the best parties ever.

58:40I remember a couple of friends I had that were extraordinary friends. But I don't remember, like, the day-to-day stuff. But I do remember it was fun back then. I wish I preserved it. So I actively take pictures on my phone every single day now. And we'll get a picture when we wrap up here. And I'll look back and say, oh, remember this was Hala? It was so fun. We were talking about her purple Porsche. We went for a ride in it. And it was like, I'll just remember. I love this. Yeah. I remember the things that happened. And it makes the current moment richer because you remember the past. And it prevents like recency bias, even like with friends and memories.

59:11Yeah. Because you just really remember everything that happened all year. A hundred percent. Yeah. It's not ever forgotten. Yeah. Yeah. So debt is a big problem for people. And I know you give some advice in terms of how to, you know, pay down your debt, what not to do, what to do. What's your thoughts about that? Yeah. So a common technique we talked about is based upon BF Skinner's work is this concept of paying off your lowest debts first to form the neural wiring to continue behavior. And that's absolutely a smart idea in the beginning. So if you have a lot of debt, sort your debt out by the amounts due.

59:48And if you can wipe out some early debts, that's a beautiful thing because you'll believe truly that you can wipe out debt. But if you continue that pattern, you may not be optimizing. And if you have very expensive debt, high interest rate debt, that can crush you. There's another form of debt I've never heard anyone talk about. It's called consequence. Okay. I had a loan from a friend of mine for$30 ,000 at zero interest rate, but he was a friend of mine. And so I put zero interest. This is a very inexpensive debt. I can take my time paying this back. And he called up. He's like, dude, where's the money I gave you?

1:00:17It had high consequence. His name is Chris. And over time, it almost cost us our relationship because I wasn't paying it back. I said, oh, my gosh, there's another form of interest. There's the consequence of the relationship. And that could have been the most costly loan that I wasn't paying back and could have burned me long term. So rate by the percentage due, but also what's the consequence to your life? Will a lawsuit come about? Will you lose a friend over this? So consider that. Start off with a couple early wins. But then very quickly, sort out your debt by the highest interest rate and the highest consequence.

1:00:48When you have high consequence, high interest, tackle that. When you have high consequence but lower interest, that still is extremely important and often is disregarded. Actually do that next and then target the rest of the stuff. If you have debt, should you also be saving or should you just be focusing on your debt? Great question. I still save. But I save at a lower rate for sure because I'm targeting my debt. But I'm still saving because I want that behavioral mechanism in place. There was a saying from, I think it was Ramit Sethi, who's a very popular personal finance expert, great friend.

1:01:21And he said, I think it was him, he says, the new form of discipline is automation. Automate the process. So when money comes in, automatically save, and you will maintain that discipline. Also, according to Parkinson's Law, if you save before you receive the money, so like a 401k, you will adjust your lifestyle because there's a smaller closet to store your stuff in. You'll adjust your lifestyle to live within that container. So if you can, save before you see it. And if you have an employer, you tell them, I want my paycheck in two forms. One is to my primary checking. I also have this other checking account.

1:01:53Can you carve out 20 % of my paycheck to go there? You will adjust off your primary. That second one have hidden away. It's your magical kind of hidden 401k without being a 401k. And I remember when I was in corporate, the system like allows you to just do that really easily. And I'm a small business owner. I got six employees at one of my businesses. We can do it. Yeah. You just got to ask. Yeah. Yeah. And also, like, certain bank accounts let you do it. I know Relay is a bank account that lets you, like, set up different accounts. I use Monarch Money, and I can set up different, like, little accounts.

1:02:23So, yeah. So Relay is for a business owner. So if you're an entrepreneur, use Relay. I'll give you a little plug here. Banklikemike.com. It's the bank I use for my business finances. And if you have a personal checking account, Relay doesn't do personal, you can go to DreamFirstBank. I still have a link called ProfitFirst.Bank. So you can go to ProfitFirst.Bank if you want to do the personal accounting or banking. Yeah. Oh, I know that you've got a flight to cash. Yeah, I know. So I want to be respectful of your time. And I'm hoping to take a Porsche over there. I'm kidding. I'm kidding. I'll take an Uber in a Porsche.

1:02:56But leave us with some advice in terms of like what's the number one thing that people can do in the new year to optimize their money habits? Yeah. I think the first thing is to realize that people do want you to be wealthy. Like you, everyone watching this, the people around you want to be wealthy. Now, no one says, like, I wish you were rich. But when it comes to participating in life itself, if you are worried about money, you're not fully there. The analogy I use is a doctor. Imagine, you know, I'm having a heart attack or something. You rush me to the hospital. I guess I'm at the hospital and two doctors come out.

1:03:28Doctor one comes out and says, I'm really poor. I have no money. I'm actually desperate. I need patients. In fact, I'll do 50 % off. You're ready to proceed. Dr. Two, she comes out and says, I'm very rich. I'm very wealthy. I charge a premium for what I do because I'm the best at this. I have all the time in the world to take care of you. And this is the exact procedure I do. Do you want to work with me? And by the way, I charge 10 times more than Dr. One. I'll choose Dr. Two. Yeah. Right? I want someone who's wildly confident because they're taking care of me. When it comes to relationships, I want someone that's fully present in my life.

1:04:00I want friends who are really there. And if they are worried about their finances and struggling, there's this ringing in their head that's constantly playing out and they can't be present. So no one's going to say, yeah, I wish you were rich. I wish you had more money. People are going to say, no, if we're friends, I want you to be fully my friend and fully present. So it's ironic. The world wants you to be wealthy. They just don't use those words. So that's the takeaway I want. The method I want you to use to start achieving financial independence is real simple. Right now, think about the thing you worry or wonder about most financially every single day.

1:04:31Do you worry if you can pay groceries? Some of us do. Do you worry if you can pay the rent or the mortgage on your apartment? Or do you wonder if you can go on a big vacation this year? I don't know what it is, but what's the one thing that you think about most? Whatever that thing is, set up one additional account at your bank, or one of the banks we suggested, but at your bank, set up one account and give it that name. So if I worry about if I can afford my mortgage, I'll say, I will set up an account, a new account that says mortgage. And say my mortgage is, just for easy numbers,$4 ,000 a month.

1:05:00What I'll do is every paycheck, say it comes weekly, I'll take$1 ,000 and transfer it to the mortgage account to assure that my mortgage is cared for. Now, here's the magic of the system. You've guaranteed that your biggest financial worry or wonder is taken care of. It will reduce it. But the real magic is not that. It's in what's left over. You'll see, oh, I don't have as much money as I thought. I have to adjust the rest of my lifestyle. It will force you to start taking balance and accounting for your priorities without compromising the rest of your life. That's a real simple way to get started.

1:05:29You don't have to do all six accounts, not yet. Start with one account that you worry or wonder about most. Yeah. I'm somebody who, like, hates finances. I'm the type of person that's like, let me just make as much money as possible so I never have to worry about this. But your stuff is always so easy to understand. And I always leave these conversations feeling like, I got to do this. Like, immediately it's going to make me feel better. Guaranteed. And it's not scary. Like, all your suggestions are so easy to implement. and what you do for entrepreneurs, what you've done with Profit First and what you're doing now with The Money Habit for just everybody in the world is just awesome.

1:06:00I'm so excited to put this to work. That means the world to me. And one last thought is you said, you know, you're not really excited about numbers or the finances. Yeah, not really. I found there's a word for it. It's called human being. You are so human. That's so normal. I'm not into numbers. People come to me and say, oh, were you an accounting major? No. Do you love numbers? No, I suck at them, actually. That's why I built these systems, something that's really simple, that works for people who care about living life, that want to maybe earn as much money as possible, but don't want to do all the management.

1:06:33The system manages it for you. Yeah. I can't wait to put it into practice. Where can everybody learn more about you and everything you do? Where can people grab the money out of it? The best site to go to is MikeMotorBike.com. It's MikeMcCallow.com. No one can spell it. Nickname from grade school because it rhymed. MikeMotorBike.com. And then I'm really proud of a podcast I started. It's called Becoming Self-Made. And I'm studying the journey of these wildly successful entrepreneurs. I want to get you on the show. Oh, I love that. I met with the Savannah Bananas owners. I met with Don Miller, a mutual friend of ours, Amy Porterfield, 1-800-GOT-JUNK, the founder of 1-800-GOT-JUNK.

1:07:08And I found what is their story to success. But the most interesting thing is not success porn, like here's all the things they achieved. We talk about what's the struggle they still feel today that they started off with. And it's unbelievable how much these entrepreneurs still struggle with what we would consider the basics that they should be over. I think it's a very empowering show. What a cool concept. Yeah, it's really interesting. And people get super real. It's a little bit of an Oprah moment at times. So that's called becoming self-made. Amazing. I'll stick all those links in the show notes.

1:07:37Thank you. Thank you so much for your time. It was such an awesome conversation. It's amazing. Thanks for letting me come to your studio. Of course. It was so great having Mike back on the show. he keeps raising the bar on how we understand money. And this conversation hit especially deep because it revealed how much of our financial life comes down to behavior and not income. Mike reminded us that most people don't struggle because they're not earning enough, but because their system is working against human nature and human psychology. And the moment that you flip the system, everything else will follow.

1:08:08One of the biggest takeaways is the power of separating your money into purpose-based accounts. Now with his profit first system, you do this for your business, But now with the money habit, he's suggesting you do this for your personal life as well. And I love it. Instead of one giant pot that fuels impulse decisions and panics, you create smaller shot glass accounts to give you instant clarity. They turn vague intentions into visible choices and goals, and they help you stay in control without relying on your willpower. I am so inspired to go into my bank account and create little buckets for all of the different goals that I have and all the intentions that I have with my money.

1:08:46Mike also showed us the importance of momentum. You don't transform your financial life through massive, rigid sacrifices. You do it through small wins that rewire your identity, like saving$10 a month or wiping out your smallest debt first. That steady psychological lift is what makes your habits stick. And lastly, I loved his idea of financial seasons, recovery, fund, activate, and balance. Each season demands a different strategy. When you label your season, you finally understand which actions support your goals and which habits pull you backwards. It takes shame out of money and replaces it with intention.

1:09:21So if you're in activate mode, you can feel free to spend without any of that guilt. And if you're in recovery, you know that your intention is to pay down your debt. This episode is a reminder that you already have the potential to build cash confidence. The moment you match your system to the way that your brain naturally operates, you stop surviving on payday highs and start building a life where money supports your goals instead of stealing your peace. All right, Yap Fam, if this conversation with Mike Michalowicz sparked a new way of thinking about your money, send it to somebody who needs this conversation.

1:09:51We all know at least one person who could use more clarity around their cash. And if you're feeling this live energy, show us some love, drop us a five-star review on Apple Podcasts and leave a comment telling me what resonated with you the most. And remember, you can watch all of these in-person interviews on Spotify Video and YouTube, and make sure you follow and subscribe so you stay tapped into every conversation as it happens. You can also find me on Instagram at Yap with Hala or LinkedIn. Just search Hala Taha. And huge shout out to my amazing Yap team for pulling off yet another powerful live recording.

1:10:23Appreciate you guys so much. Shout out to Sham for con Joshua on the guest outreach team. And also shout out to Bryce at Record ATX for helping us with this live recording. This is your host, Hala Taha, aka the Podcast Princess, signing off.