The ultimate goal of the Profit First Lifestyle is financial freedom, which I define as doing what you choose to do whenever you choose to do it. Financial freedom means that you have reached a point where the money you’ve saved yields enough interest to support your lifestyle and continues to grow. The path to financial freedom is paved with simple, small habit changes that become systematized and apply to both your business and personal finances.

Now, I did not write this book to teach you about your family budget or your 401K, but I do know this: If you own a business, your personal financial health is in lockstep with the financial health of your business. In fact, the analogy of your business being your child is only partially accurate. A better analogy is that your business is your Siamese twin. Separating yourself from it must be done with absolute surgical precision, and even if the operation is successful you will always share a soul.

So, soulmate, you need to apply everything you’re doing right now (and planning to do) to fix your business with Profit First to your life, too. I wrote this chapter to serve as a take-action-now primer on living a Profit First life. I suggest you also read David Ramsey’s The Total Money Makeover. If there is a Bible for getting your personal finances lined up the right way, I believe his book is it. And who knows, maybe down the road I will write my own “New Testament.”

That said, here is the core stuff you need to know about setting yourself up to live a Profit First life:

1. Face the music. This step should be easier now that you’ve faced the truth about your company’s finances. Add up all of your monthly bills, plus your annual bills and the debt you owe.

2. If you have any debt at all, stop accruing more. Put a freeze on all purchases you cannot pay for with cash.

3. Establish a personal Profit First habit. Set up an automatic withdrawal so that every time you get paid, which should now be twice a month on the 10th and 25th, a percentage immediately transfers into a retirement savings account. If you are carrying any amount of debt, keep the retirement percentage at 1% until the debt is paid off. Use every penny you have after necessary expenses to eradicate your debt.

4. Set up your “small plates.” Create four core accounts and multiple Day-to-Day accounts.

a. Income Account. This is the account into which you make deposits. From this account, allocate money to the other accounts.

b. The Vault Account. Initially, this is the “oh shit” account, the amount of savings you must have on hand to get through the month if—scratch that— when something dire happens. Now, Suze Orman recommends saving eight months’ worth of living expenses, but that’s not doable for basically any human being on this planet, right off the bat. However, you will work toward it slowly and methodically—you know, Profit First style.

A good starting balance for The Vault is one month’s rent or mortgage payment. If you can spare that right now, transfer it to The Vault immediately. Remember, this account must be difficult to access (e.g., different bank, no online banking, no checkbook, etc.). Once you eradicate debt, The Vault will grow and grow, with the intention of having the cash you save here eventually become a source of income. This is where money makes you even more money.

c. Recurring Payments Account. This account is for payment of your recurring bills, including fixed (e.g., your mortgage or car loan), varying (e.g., utility bills) and short-term (e.g., an installment plan for your kid’s braces).

Determine the monthly average for your varying recurring bills, plus 10%. Then total your fixed recurring bills. Add the two totals together plus the cost of your short-term recurring bills: This is the amount you will transfer from your Income Account into your Recurring Payments Account every month. If you have it, transfer that amount now.

d. Day-to-Day Account (multiple, if needed). There are many day-to-day costs in keeping a family running—groceries, clothes, school supplies, Girl Scout cookies, date night, running shoes, Girl Scout cookies, baby-sitting, toiletries, snow tires, Girl Scout cookies. . . sorry. If there is anything that can take me joyfully down the sugar high path, it’s the ultimate in sweet delights: Girl Scout Samoas cookies.

Set up a Day-to-Day Account for anyone in the house who’s responsible for paying for these types of expenses, and transfer the amount that each person needs every 10th and 25th from the Income Account, based on spending requirements. For example, my wife and I both buy stuff for the house—I’m the Costco king, she handles the grocery stores. And we both gas up cars and pay for kid expenses. Get a debit card for each person so that purchases are deducted from the account immediately.

e. Debt Destroyer Account. This account receives all remaining funds and goes toward eradicating debt. Following Dave Ramsey’s advice, make the minimum payment on each debt. Then, regardless of interest rates (unless they are extreme), pay off your smallest debt first. Wipe that sucker out and then move on to the next one. Ramsey wisely says that paying off a debt, however small, creates a mental momentum that will motivate you to pay off the rest of your debt, faster. Remember, we are emotional beasts, not logical ones.

If you are carrying debt, I want you to cut up your credit cards. Remember, it’s much easier to go with human behavior than it is to fight it, so removing temptation is the best solution.

However, I do have one exception. An entrepreneur’s income can be highly unpredictable. You could have an amazing month followed by a zero-dollar month, followed by a not-bad month, followed by a why-do-I-bother month. If you follow Profit First, your Owner’s Pay Account should address this and your income should become consistent. But in the beginning, it probably won’t be. And if you’re a start-up, you may not get any cash at first. For these reasons, I believe in keeping one credit card line to buffer you in dark months. Put the credit card in a sealed envelope labeled “emergency only” and give it to a trusted friend to hold onto. I am serious. You must remove temptation. Here’s how you manage your emergency credit card the Profit First way:

Every quarter, as you make progress paying down debt, reduce your credit limit by 50% of the amount you paid down. Say you have a maxed-out card with a $10,000 limit. By the end of the quarter, you’ve managed to pay down $3000 of that debt (nicely done, my friend). Now you have $7000 in debt and a $10,000 limit. What I want you to do is call the credit card company and ask them to reduce your limit by $1500, which is 50% of the amount you paid down in the first quarter. Now your debt is $7000 and your credit limit is $8500. In doing this, you put up a guard rail of sorts, a mechanism to protect yourself and keep your debt total down (should you convince yourself it’s okay to max out your credit card again), while keeping a credit line buffer in place should you need the card for emergency funds during slow months.

Keep following this method every quarter until your credit card balance is zero and your credit limit is $5000. Put that credit card in a sealed envelope and store it in a safe place (your wallet, it goes without saying, is not safe). Better yet, have a reliable friend hold onto it for you. This is your emergency line.

Now, for those of you who say, “But Mike, if I drop my credit line, my debt-to-credit-limit ratios will fall out of favor with lenders and my interest rates will go up!”

To that I say, “Who cares?”

The goal here is to remove financial stress from your life by eradicating debt, not to get better rates on more debt. We can worry about improving your credit score once you are debt free. Remember my buddy Phil Tirone? That’s what he does now. Once he figured out the formula for becoming debt free, he started, his business that repairs credit scores. Follow suit… first, destroy your debt. Then, fix your score.


The day my daughter handed over her piggy bank in an effort to help solve my self-made financial crisis, I still had all three of my luxury cars parked in the driveway. I was still a member of the country club I never went to and had a ton of recurring expenses that, quite frankly and even more embarrassingly, I could not name.

In the weeks and months leading up to that moment, I knew I was running out of time, but still held onto the trappings of the lifestyle I had earned (but not “learned”), the lifestyle I thought I deserved and did not want to give up. But my daughter’s amazing act of selflessness woke me up to the reality that none of that stuff mattered.

It’s common for us emotional humans to give up the stuff we can no longer afford (or couldn’t afford in the first place) by small degrees. We cling. We keep hoping that something will “turn up” and “save the day,” and so we dole out the pain in small increments, biding our time. We do this because we hate loss. More specifically, we have a far greater desire to avoid losing something than we have to acquiring something. This behavioral response is called Loss Aversion, and it is mighty powerful. Combine it with the Endowment Effect—the theory that states that we place a much higher significance on something we possess than on an identical thing that we don’t possess—and you are dealing with a stubbornness resembling that of a three-year-old in a tug-of-war for a beloved blankie. (“Mine!”)

For example, the beautiful red Porsche you’ve been eyeing—it would be nice to have, for sure. But once you have it, it’s way past “nice.” Now, it’s badass (and so are you). You polish the car. You take friends for rides in it. You take selfies with that red beauty in the background of each photo (just by chance, of course). You love it because now that you own it, your relationship to it has changed, even though it’s the same car you once idly admired from the showroom floor.

Then you get the notice: You missed yet another payment. If you miss one more they will repossess your baby. Your baby. So what do you do? Return the car? No, you cancel your daughter’s ballet class (she kinda sucked anyway), and your gym membership (you kinda sucked anyway), and that trip to the Cape (because everyone knows, anyone who goes to the Cape sucks… a lot). You eat ramen noodles every night. Shoot, you even cancel the insurance on the damn car and keep it parked safely in your garage until “better days” come along. So what if you can’t drive it? At least you didn’t lose it. At least it’s still yours.

I behaved the same way. I cut back everywhere I could, but nowhere that I should have. Then, when I couldn’t pay a bill and the credit cards were maxed, I cut just enough things to get by. The next month it happened all over again, only worse. Juggling bills and drumming up money were a source of constant stress.

The night after my “piggy bank moment,” I remembered what I used to do in the past, when money was tightest in the early days of starting up a new business: I wouldn’t cut expenses in ineffective dribs and drabs. I would cut them all.

It was time for me to return to what worked. It was time to rip off the Band-Aid.

I cut everything. The luxury cars? Gone. (I replaced the three cars with two used, basic models.) The swanky club membership? Gone. The little extravagances, like the Netflix account? Gone. And here is what made it easier—I realized that no one gives a crap. I mean truly, no one cares. I’m guessing you had no idea I was slashing and burning when I was in the throes, never thought for one second, “Hey, I wonder how good ol’ Mikey is making out with his financials?” And I’ll bet you aren’t crying about me right now, either. And that’s cool, because that’s reality.

When you realize that 99.99% of the people who know you or know of you won’t care what you own or where you hang out or what your circumstances are, and that the 0.01% who, for whatever reason, can’t stand you will simply point a finger at you, laugh evilly and then direct their self-loathing misery at someone else, it’s easier to ditch the pimped-out ride.

And when you realize that 99.99% of the people who do know you and truly love you will rally around your courage, as my family did for me, that, that is when you will stand up, brush yourself off and say, “Let’s do it.”


Now, your business will be sending you a quarterly profit disbursement check. Yippee! Celebration time! And do you know the best way to celebrate when you have mongo personal debt? Have a death-to- debt party. It’s super fun and goes something like this: As soon as you get your disbursement check, turn on some tunage that gets you fired up—my choice would be Metallica’s “Seek And

Destroy,” but if you don’t have a mullet, do your thing. For God’s sake, though, don’t crank up the Barry Manilow or “Escape (The Piña Colada Song)” by Rupert Holmes… we want to destroy debt, here, not make love to it.

Then, make sure you have a glass of libation, or whatever floats your boat. Finally, take 90% of your profit disbursement and use it to pay down debt (smallest first). Call it in using your debit card, or go online and get it done immediately. Then, and only then, raise your glass and say, “Cheers to me!” Then, we dance (or swing our sweaty, stringy mullet hair around while listening to Metallica). The party is over in about ten minutes, but that debt? It’s gone forever. Hey, wasn’t that a total blast?

You may think I’m being sarcastic here, but I’m not. To me, paying down debt is winning, and winning is fun. Get yourself some of those crackers the Brits give out at Christmas—you know, the little cardboard tubes covered in wrapping paper that two people pull apart like a wishbone to reveal little trinkets and revelry inside?—for your party. Invite your spouse. Whatever it takes to commemorate the occasion. (And if you videotape your tiny death-to-debt party, send me a link, okay? I want to post the best of the best on my blog.

Use the remaining 10% of your profit disbursement however you please. Go out to dinner. If you don’t have enough for dinner, go out for ice cream. No matter what your disbursement is, cherish it. Celebrate with it. Your business is still serving you and killing debt at the same time.

After you’ve eradicated your core debt—credit cards, bank loans and student loans—start using 45% of your quarterly profit disbursement to kill remaining long-term debt and keep 55% for your splurge item or experience. This is another psychological move. It’s more gratifying to get the bigger chunk of the fruits of your labor and spend it on whatever the hell you want than to take the smaller chunk. So use 45% to expedite the payoff of long-term debt beyond your normal monthly payments (mortgage, car payments) and keep the rest for whatever crazy antics you get up to. (What? I don’t judge. And I totally didn’t see anything.)

After you own your cars and home outright and have wiped out debt from every nook and cranny of your life, one hundred percent of the profit disbursement goes to you. And this time the party had better be legit. I’m talking a band and some good booze, maybe stuffed pizza instead of plain. And my wife and I had better get an invite.


Remember the graphic in Chapter 2 that showed how our expenses increase at a parallel to our income? That is the concept of Parkinson’s Law (nothing to do with Parkinson’s disease), in which C. Northcote Parkinson explained how our available resources (time, money) expand to fill the space made available for them. This is why, if you give yourself two weeks to complete a project, you will get it done in two weeks; but if you give yourself eight weeks to finish the same project, it will take eight weeks. This is also why, if you have ten dollars in your pocket, you will spend ten dollars. As our income increases, Parkinson’s Law takes over and we spend every extra penny we earn.

Now that you know your salary and actually take it, you need to live within your means. Then, you’re going to lock in your lifestyle. What that means is, no matter how good things get (and this is going to be a challenge for you, because now that you follow Profit First things will get amazing), you will not expand your lifestyle in response. You need to accumulate cash—lots of it—and that means no new cars, no brand-new furniture or crazy vacations. For the next five years, you will lock it in and live the lifestyle you are designing now so that all of your extra profit goes toward giving you that ultimate reward: financial freedom.

Don’t freak out on me, now. I’m not telling you that you shouldn’t go out to dinner with your sweetie or go away for the weekend. (Were you thinking a B&B? I like B&Bs.) You need to enjoy life. I get it. What I am telling you is, in order for Profit First to have a permanent impact on your life, you need to build as big a gap as possible between what you earn and what you spend. The more cash you can collect the better, because at a certain point money starts earning you substantial money, all by itself. Money yields interest and returns from investments. And remember, once the money you have collected yields more new money every year than you spend in a year, you have achieved financial freedom.

Here are five rules to help you stay locked in to your lifestyle for the next five years:

1. Always start by looking for a free option.

2. Never buy new when you can get the same benefit you would if you bought used. (It’s used as soon as you buy it, anyway.)

3. Never pay full price if you can avoid it.

4. Negotiate and seek alternatives first.

5. Delay major purchases until you have written down ten alternatives to making the purchase and have thought each one through. Save your splurging for Profit First quarterly disbursements! Yay!

The Profit First Lifestyle is a frugal lifestyle, for sure. But the frugal lifestyle is not the same as a cheap lifestyle. You can and will live very well (actually better) when you are frugal than you would when you are posing as a big spender. Why? Because frugality removes financial stress, enabling you to better appreciate and enjoy the things and experiences you purchase. Big spenders buy the same things, but their purchases are served with a big ol’ heaping serving of massive stress. Who’s got time for that? Remember, well-dressed poverty is still poverty.

If staring down the next five years is too much for you, that’s cool. I have a Plan B for you. (And if you do rock the five years, this is your next step after your locked-in lifestyle term is up). It’s called the Wedge Theory, a term that has been floating around entrepreneurial circles for a while, which as far as I can tell was originally coined by Brian Tracey. The idea of the Wedge Theory is to only gradually (and mindfully) upgrade your lifestyle as your income increases. Every time your income increases, you set aside half of the increase in savings so that you don’t expand your lifestyle to, as Parkinson’s Law suggests, “use all available resources.”

So for example, if you’re taking home $100,000 (post-tax, paid by your business) and your Profit First Lifestyle means you’re setting aside $20,000 every year and living on $80,000; this is where you will start your wedge. Half of every income bump over and above $100,000 will go directly into The Vault. The Vault starts piling up cash, and changes from a “Holy crap, I have no money” fund to a “Holy cow, that’s a lot of money” fund.

Let’s say your take-home income goes up to $135,000, an increase of $35,000 over the previous year. You would take 50% of the $35,000 ($17,500) and drop it into The Vault. This leaves just over $117,000. Because you live the Profit First Lifestyle, you now take 20% and set it aside for savings. With the increase in income, that number is now $23,400. That brings your annual savings up to right around $50,000. And, you are now living on more as well—$93,600, to be exact, an increase of more than $13,000. Your life moves forward, but the Wedge Theory, combined with Profit First, allows your savings to climb super fast, getting you that much closer to financial freedom.


When was the last time you got a chunk of free money? The answer is never. And even if you were granted money (thanks to old great-gramma Sally), there is always a tradeoff. Regardless of how you get your money, the universe seems to find a way to make us earn it. This is why I don’t gift my kids an allowance. Instead, I set up a chore list with corresponding pay rates and post it on the refrigerator. (You can download one from the Resources section at The kids decide how much they earn, by working for it.

Give your kids some mailing envelopes (you know, the snail mail type) and have them label each one:

1. One for the big dream, like my daughter’s horse. Have them stash up to 25% of their chore money in this envelope.

2. One to help support the family. This number should be a recurring number, such as $5 a week to contribute to groceries or entertainment. The key is to have a recurring fee so they get used to having to pay out something on a regular basis. Make sure the number is age-appropriate.

3. One for impact. Have them put 5 to 10% into this envelope to give to a charity of their choice, or to use in a meaningful way… like starting their own business, one that both serves the community and makes money!

4. One for The Vault. This is where they will sock away 10% of their funds for a critical emergency (hopefully your kids will never have one, but you want them prepared from day one), which will also become an investing source as the money accumulates.

5. One envelope for mad money, to buy whatever they need or want—toys, music, books, etc. Let them earn money and have fun!

I mentioned my barber Lou in the Introduction. He is the master of the envelope system. He divides every day’s take among envelopes appropriate for his business. His shop has been profitable every single month for decades and he has no debt (except he owes me a haircut for mentioning him in this book).

It goes without saying that the kids must follow the Profit First golden rule: Always allocate the money to the different accounts (envelopes) before doing anything else.

This system will teach your kids so much about the value of money—how to manage it, how to earn it, how to finance their dreams. It may feel strange at first (I’m talking to you, helicopter parents), and you’ll surely get some pushback; but this is a massive gift to them. Imagine how your financial life might have turned out differently, had someone taught you these important lessons and strategies? Or, if you are lucky enough that your parents did, just think about how well it served you and do the same for your kids.

Giving your kid a car may feel nice to you, but it’s selfish as hell. You are only avoiding “disappointing” your children when you indulge them and make their lives easier, and this only hurts them when they enter the “real world” completely unprepared for reality. Let your children get burned a little within the safety of your parenting, rather than scorched in the unsafe and often cruel world.

One of my favorite Profit First Lifestyle nights was when my wife and I and two of our friends went into New York City to see Jimmy Fallon at his former show, Late Night with Jimmy Fallon. The tickets were in a lottery and we happened to get them. We saw the show live, and laughed and laughed. Meatloaf opened the show and Twisted Sister ended it with a rocking three-song mini-concert. Seeing Jimmy Fallon cost a whopping zero dollars. Watching Dee Schneider bang out “I Wanna Rock” cost zero dollars. In the words of the famous commercial: “An amazing night out with my wife and friends? Priceless.”

Here’s the deal—living the Profit First life does not have to be excruciatingly painful. I’m not suggesting that you sell everything and live in a hut, work by candlelight and eat whatever you can find on the forest floor. I’m not even suggesting that you give up the things you love. I’m simply suggesting that if you want true financial freedom, you will have to let go of your preconceived notions about what you “need” and start placing a higher value on financial independence than you do on your stuff. It’s not rocket science. And it won’t kill you. Promise.


Step One: Set up corresponding Profit First allocation accounts for your personal expenses.

Step Two: Based on your most recent pay and the “lifestyle lock” explained in this chapter, figure out how much you should truly be living on.

Step Three: Have a sit-down with your entire family and talk numbers. Tell them what you’re doing with Profit First and the positive impact it will have on your family’s long-term financial health. And if it helps, you can tell the kids that this method was something suggested by “Uncle Mikey.”

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