Financial discipline is essential as a Solopreneur, knowing where every dollar goes in your life can help you grow your business and will allow you first and foremost to profit from your business.

A lot of Solopreneurs suffer from a distinct lack of financial education when it comes to paying themselves while taking into account, business and living costs.

Today’s returning co-host is the author of a simple but powerful system that will set you up to profit first from your business.

So, Mike Michalowicz is one of my favorite people, despite having never met him. The Author of “Profit First”, he’s smart and fast on his feet.  In this highly politically incorrect (but quite amusing) episode of The Solopreneur Hour, we chat about how Profit First came to be, share a batch of very politically incorrect stories, then find our way back to some really meaty financial content.  For me…a “best of”.  For you…it depends on how thick-skinned you are. 🙂

“Live lean first, then start to worry about what to do with your money”Michael O’Neal

Mike and Mike Discuss:

  • The Envelope System [14:28]
  • The Profit First System [47:45]
  • Financial Behavioral Techniques [56:53]
  • Parkinsons Law [59:23]

Loss Aversion

People prefer to avoid losses to acquiring new gains. Most studies suggest that losses are twice as powerful, psychologically, as gains.

It’s a human behavioral wiring, which when we possess something, losing it is very difficult, and we do illogical things to retain it.

Solopreneurs come across loss aversion when dealing with taxes. Once we possess something and it’s pulled back there’s a negative association. when we make our money and have to hand over a proportion to the government out of our own pocket, there’s now loss aversion.

But if your business reserves it in advance, the emotion of loss aversion gets subverted. Pre-accounted money was stored. Now instead of coming out of your own pocket, it’s coming out of the business accounts, your business is now doing you a favour, it has become a behavioral trick and become a positive association.

“Losses loom larger than corresponding gains.”

Parkinson’s Law

As the supply of the availability increases, our demand for it increases, but as it decreases we become more frugal, innovative and use less of it.

The generalization of Parkinson’s Law states the demand upon a resource tends to expand to match the supply of the resource. An example Mike uses for this is an everyday product, toothpaste.

When you go to brush your teeth, you have a brand new tube of toothpaste. It is very likely you will fill your toothbrush with a long bead of toothpaste. As you get down to the end of the tube of toothpaste, you squeeze out the last little bit to brush your teeth. Either way, your teeth get will get brushed. But when you have a large supply of toothpaste in the tube, you use a lot.

Links and Resources
Previous Mike Michalowicz Episode
Episode 411 was brought to you by Hostgator!