The Secret to Paying Yourself First
Pay. Yourself. First.
It’s a popular phrase in entrepreneurial circles, and you’ve likely heard it before.
It sounds great in theory, doesn’t it? The idea that our top financial priority is to put cash in our personal pocket seems like a good one.
The truth, though, is we can miss the mark if we don’t put a plan in place for our businesses to pay us. Your money loves to have a job, and if you don’t direct some of it toward your personal account regularly, your business will inevitably eat up any and all available cash. Your cash will go somewhere but it might not be into your pocket.
Sounds counterintuitive, I know.
But it’s true! Too often, our cash goes to things in our business that don’t actually move us forward and leaves us without much left over to pay our electric bill.
Putting a plan in place to pay yourself consistently can ensure that you’re feeling taken care of as a business owner and will allow you to be able to handle your personal expenses with ease and flow.
Which makes it all feel way more fun!
While you’re probably really excited about helping your clients, and are passionate about the work you do, you’re also likely working really hard to pay the mortgage, put food on the table, maybe send your kids off to college, and perhaps even squeeze in a vacation here and there.
And the way to ensure all of these things can happen is to craft a plan to pay yourself from your business.
A healthy biz boils down to bringing in more than what we are spending – it’s that simple financial equation that I love to talk about here at the Zen Money Initiative: Income – Expenses = Profit. And part of that profit number should include your take-home dollars.
So, how much should you pay yourself?
The better question is: how much can you pay yourself? The easiest way to determine a reasonable take-home amount is to work backwards from your ultimate financial goal. If we build what you pay yourself into your business and pricing calculations, how much money does your business need to earn in to make it all work?
First, let’s calculate your yearly personal expenses, including your mortgage, electric bill, car payment, regular monthly expenses and an allocation for your once-in-a-while spending like your annual car registration. For the purposes of this exercise, let’s say you need $10,000 a month to take care of your family and have a little fun in your life, too.
Next, let’s focus on your business. Say you’re bringing in $20,000 a month (for the sake of simple numbers). We need to set aside at least 30% for taxes, so subtract $6,000 of that right off the top. That leaves us with $14,000 to put towards paying ourselves and our business expenses.
If your business expenses are $4,000 a month or less, you can take that $10,000 home, every month! But if your business expenses are more than $4,000, you need to adjust your take-home expectations or change your business spending.
Make sense? And sometimes you might find that you don’t have the cash on hand in your business to cover your personal needs, even if your earnings show that you should have enough to do so!
It can take time for our cash to catch up, especially if you offer your client payment terms. It’s important to keep this in mind and remain flexible as you work up your money buffer within your business before ramping up to taking a full “salary” home.
However, mapping out your vision for how much you want to be paying yourself allows you to see where you can make adjustments in your business spending, your pricing, or both so you can hit your money goals.
Are you currently taking money out of your business on time or haphazardly?
Look at your numbers for the past several months and decide when you’ll pay yourself, without robbing from your future business needs. Is that once a month? Twice a month? Getting out of the habit of taking a little here and a little there is a good first step. After all, those dollars add up quickly, and you might find you’ve been spending more on personal things from your biz bucket that you think. It’s far easier to transfer a set amount of money to a personal account, just like a regular paycheck, and keep your non-biz spending there, so you’re not left wondering where all your cash has gone.
And even if you are in the position where you don’t need to pay yourself each month to cover your personal expenses, I still recommend paying yourself a small amount each month to help get in the habit. That way, when you are ready to start paying yourself consistently for your efforts, it’ll be a simple matter of increasing your take home transfers!
Need a little more guidance in this area? I love to work through this equation with business owners so they can see what’s possible. There may be more money on the table for you to take home, and I want you to put it in your pocket! Sign up for a Zen Money audit with me, and we’ll figure out how to get you where you want to go! Grab your time here.
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