Delayed Gratification and business

Todays blog is about delayed gratification and how important that is to running a successful law practice or any other successful business.

In the 1960s, a Stanford professor by the name of Walter Michel did a study which has become known as the Marshmallow Experiment. The Marshmallow Experiment was very interesting. He took a bunch of four- and five-year-old kids. They’d bring them into a room, and he’d stick a marshmallow on a table and he’d say, “I’m going to leave the room for a few minutes. If you want to eat the marshmallow, that’s fine, but if you don’t eat the marshmallow when I come back, I’ll give you two of them.”

As you can imagine, a bunch of these four- and five-year-old kids ran over and grabbed the marshmallow and ate it right away. But a number of them did not. Now, what was interesting about that experiment is not so much what occurred then, but the follow-up. Over the next 40 years Michel tracked these kids to see if there was any difference between the kids that engaged in delayed gratification and the kids who ate the marshmallows right away.

What they found was really, really interesting. The report said the children who were willing to delay gratification and waited to receive the second marshmallow ended up having higher SAT scores, lower levels of substance abuse, lower likelihood of obesity, better responses to stress, better social skills as reported by their parents, and generally better scores on virtually every range of other life measures.

Now, this was repeated later on in another study from the University of Rochester, but they did a little twist to it. That was basically the unreliable experiences. They broke the kids into two different groups, one in which the person who made the promise wouldn’t necessarily keep the promise, and the other that was a reliable experience. Not terribly surprisinrg, what they found was the children in the unreliable group had no reason to trust the researchers to bring the second marshmallow, so they didn’t wait very long to eat the first one. I mean, if you don’t think that you’re going to actually get anything at the end, there is no reason to wait.

The kids in the second group were training their brains to learn delayed gratification as a positive, that they were going to get something positive if they waited, and they could rely on what they were promised.  The experiment found that this group not only developed a better capacity to wait, but they waited an average of four times longer than the first group. The study also found the children’s ability to delay gratification and display self-control was not a pre-determined trait, but rather was impacted by the experiences and environment that surrounded them. In fact, the effects of the environment were almost instantaneous. Just a few minutes of reliable or unreliable experiences were enough to push the actions of each child in one direction or another.

So, here’s the bottom line on this. There’s a lot of reasons why people don’t engage in delayed gratification, and a lot of it has nothing to do with willpower or character or strength. It has to do with experiences and your belief in the reliability of the end game. Putting money in the bank doesn’t make a lot of sense if you don’t think you’re going to live past 25. Putting money in the bank doesn’t make much sense if you don’t trust the system. Investing in the stock market doesn’t make much sense if you think that everything’s going to crash. Delayed gratification has a lot to do with your experiences and expectations.

But let’s take that out of the equation for a moment and let’s just talk about delayed gratification from the perspective of, what does it do for you? If you can learn to engage delayed gratification as a positive, what the studies all show pretty demonstratively is that you are much more likely to be successful. Let’s apply that in a business setting.

For many young lawyers or people who are just starting out in a law practice, one of the biggest challenges is cash flow. You have a good month and you pay all of your bills and then you have a bad month and you can’t pay all your bills. Then the question is, what do you do? Traditionally the only thing that a person could do was either take money out of their pocket , if they have it—a lot of times they don’t—or they go and get a bank loan or they put it on a credit card, which is effectively taking out a bank loan.

I’ve known a lot of lawyers who run their practice basically with credit cards.  When they don’t have enough money to cover the bills, they put it on a credit card and they just hope and hope and really hope that the next month is better and they can pay it off. it’s a cycle of feast and famine. The challenge with that is that it’s really, really hard to get ahead. If you’re basically spending every penny you make, it’s really tough to get ahead. If you have a lot of debt, all of that excess money is going to service that debt. That, obviously, is a real challenge.

I think that it’s really important to talk about the fact that a lot of firms…a lot of people who are running firms, only think about one number. They think about their gross revenue. How much money is coming in? They focus on this number because, it gives them is access to money.  As my mentor Richard James says, the top line, which is your gross revenue, is for vanity. The bottom line, which is your profit, your net, that’s for sanity. The challenge for a lot of firms is that while they might be doing well on gross revenue, if they’re spending every penny they make, they’re really having a tough time getting ahead. They’re not seeing a substantial profit.

When I talk about profit, I’m not talking about your salary. If you are running a firm, you should be getting a salary. I’m talking about the money over and above that. At some other time in another blog, I’ll talk about why it’s so critical that you give yourself a salary. It is for a whole host of reasons, but let’s just assume that you are doing that, that your salary is part of your overhead. I’m talking about the profit margin above and beyond your overhead and expenses.   Your firm needs to have profit above and beyond your salary for the very reasons that I’m going to be talking about.

If you don’t have profit which you are putting away… I don’t mean profit that you’re going out and just buying a new IMac or going on vacation or getting a new car or might just go buy a new guitar. I’m talking about profit that you are actually saving. Stick it in the bank. If you don’t do that, when you run into those thin times, those times where for whatever reason the phone’s not ringing, or the phone’s ringing, but people are not hiring, or like we have just experienced, this pandemic, you can have some real problems. 

Let me tell you a true story. I use the “profit first” methodology, and what that means basically means that when money comes in, a small percentage goes into a profit fund, a percentage goes into a tax fund, a percentage goes into my payroll, and then money goes into the operating account to run the business. Then what is above and beyond that, I cut off a slice and I put it in a rainy-day fund, or what I call a holding fund.

At the end of 2019, I had $100,000 sitting in that fund. I remember going to my financial advisor and complaining, “You know, it’s really driving me nuts. I got all this money sitting in this fund and it’s not really doing anything. It’s getting some miniscule interest rate, hardly worth anything, and I feel like I should be doing something with it.” And he said to me very wisely, “What’s that money for?” I said, “That money’s for in case we have a bad month and I need it.” He said, “So you need it to be liquid, right?” I said, “Yeah.” He said, “Then don’t touch it. It is doing exactly what it’s supposed to do. It is sitting there being available for when you need it.”

To be honest, it did not sit well with me. I felt like that money should be doing something, actually earning some interest or something. It wasn’t but a couple months later the pandemic hit and man, that $100,000 turned into less than $1,000 by summer. Now, the good news is,  as we adjusted and  acclimated to the pandemic, I was able to build that fund back up to $100K by the end of the year,.  But the point is, I needed that money. I needed $100,000 to cover the various costs and expenses  and payroll and other things that come up. By having that money readily available I was able to do that, and I didn’t have to take out a loan. If I’d had to take out a loan, I’d still be paying that loan off.  I mean, the interest on $100,000 from a bank is fairly significant. I’d have to be paying that off, and I’d be continuing to pay that off for probably a couple years.

Rather, I basically was my own bank. I loaned myself that money. It was my money, but I effectively loaned it to myself so that I covered the bills. Now, this might be really challenging if you’re saying, “Hey, I am brand new. I’m right out of law school and I’m opening a new firm. I was working for the public defender or the DA or whatever and I decided to go out on my own, and yeah, I might have a little bit of money set aside, but I don’t have a nest egg. I don’t have a big account.”

Well, I hear you, brother. Neither did I. When I started on this venture and really started to build this business into a profitable and viable firm, I didn’t have any money sitting in the bank. As a matter of fact, I was at a place where I didn’t know where the money was going to come from to pay the rent. But, I started the process, and slowly I would just cut a piece off of the money that came in and I would start to sock it away.

This is where we come back to delayed gratification. Instead of going out and buying something new or upgrading things or getting new furniture for the office or whatever, I just delayed that. It was more important for me to put that money away, to save it and put it in the bank and watch it grow. It was nice to have it available for those days that I needed it.

Now, the beauty of this plan was once that was built, once I had the money in the bank, I slept better, because I didn’t have to worry about covering payroll, covering rent, and covering my taxes, because the money was in the bank. Once I had that, then it gave me a bunch of options. Jocko Wilco says that discipline gives you freedom, and it does. If you discipline yourself early in the process, then you have freedom later. Whether you’re putting money in a 401k or investing it in property or gold, whatever it is that you’re investing in, as long as you are doing it on a consistent and regular basis, it will grow. The stock market goes up and then it goes down, and it goes up and it goes down, but over the long trajectory, it goes up. Historically that’s the way it’s always been. And, knock on wood, that’s the way it will continue, because I have money in those kinds of investments.

But the bottom line is this. If you consistently invest and you consistently put money aside, you will have the ability to increase your nest egg, and then if there is a month or a period of time where money is tight, for whatever reason,…and even now, even though we have a very thriving and viable business, there are still months where things are slow. The people still want their rent, and the employees still want to get paid, and all of that. We have the money to cover those expenses because it is in the bank.

So, it really comes back to delayed gratification. It’s the ability to discipline yourself to say, look, I’m not going to spend every penny I make. Rather, what I’m going to do is I’m going to jealously hold on to money that I can. Now, one of the ways that I did this, that was really, really helpful to me was I look at my bank account every single day. I’ve gotten into that habit where I looked at the bank account every single day. Why? Because what I think about is what I bring about, and if I’m looking at that bank account, I’m noticing that it’s growing.

Now, there’s another thing to just be aware of. Our body runs on chemicals all day long. We do things that make us feel good because we get hits of dopamine, serotonin, endorphins and oxytocin. That’s why social media works. When you get a “like” on your Facebook page you get a little dopamine hit. It makes you feel better. When you accomplish something, you get these little chemical hits of joy that make you feel better. That’s what sales are all about. Getting you to buy something because it is causing your body to give you a little dopamine hit, a little feel-good juice.

What you want to do is to train yourself to feel the same way about saving money. Because I have worked really hard at it, when I go into the bank account and I see the numbers go up, and that money is being put away, I get a little, “Ooh,” a little dopamine hit, a little joy juice, a chemical reaction in my body that says, “Hey, you are really doing something good.” If you train yourself to do that, if you train yourself to actually enjoy saving, then what you’re going to see is that you will continue to do it. The only way you’re going to train yourself to do that is if you monitor and track your money every day.

Let me kind of cut right to the chase. If you’re starting a new firm or if you’re starting any kind of business whatsoever, you have to deploy discipline. You have to have delayed gratification. You’ve got to give yourself the opportunity to grow your business, invest in your business, to put the time in your business so that later, you can actually enjoy the fruits of it. If you’re always living on a shoestring and if you’re living paycheck to paycheck, and you don’t know where the next dollar’s going to come from and you don’t have any money set aside, that’s just a really stressful life. It doesn’t have to be that way. There are ways to do it. I’m no financial genius. I learned a lot of this stuff the hard way. But, I have trained myself so that when I save money, it makes me feel good. If it makes me feel good, it makes me feel every bit as good as if I went out and bought a brand-new guitar. It may not be as fun, but what I know is that later I can get even a better guitar. I can get a better thing. Later, I can spend more money because I have worked so hard to save that money and let it work for me and let it grow.

I teach people how to actually enjoy building their businesses and actually how to be profitable, even if  you’re a lawyer.