Pay Yourself First
You might have heard of “pay yourself first,” a way to rigorously save money by sending a chunk of your paycheck to your emergency fund, HSA, and 401K before you get to your everyday bills and expenses. The idea is to prioritize saving over rent, utilities, groceries, and living costs because you’ll always find a way pay those–even if it means cutting right back or taking up a side hustle. Well, finance experts suggest that small business owners should use this approach too, and find a way to take a regular salary and build personal savings before putting resources back in their companies.
Committing to personal savings
As women, we aren’t always encouraged to put on our own oxygen mask first, and it can be tempting to put everything we have back into the businesses we’ve worked so hard to build. However, it’s 2019 and we have to show up for ourselves. Committing your personal wealth:
- Shows investors that you are serious about your business as a viable, long-term way of making money
- Rewards you for the time and effort you put in every day and incentivizes you to keep going
- Allows you to invest and diversify your income to protect yourself from unforeseen circumstances.
Many times, small business owners want to reinvest all their money back into the business. You may be thinking you’ll make more money than in the stock market; however, that is a short-term investment strategy. Do not invest all of your money into your business. I believe you need to be saving 10–20% of your gross income for your long-term goals. – Justin Goodbread, Heritage Investors
If 10-20% sounds too far outside of the realms of possibility for a personal savings plan right now, you should still take steps to protect yourself. A good place to start is making sure you are investing in the right insurance for your business.
Keeping track of your salary
Your first salary might be just enough to cover the amount you need to live, pay your bills and save a little each month. If you’re bootstrapping, it could be way below market rate for your level of skill and experience. Remember to keep evaluating how your business is doing. Entrepreneur and business writer, Sam Harrop recommends that you keep track of the amount of money you take out of the company and how much you should be taking as a market-related wage. “This difference is what we call “sweat equity.” It is your investment in your business. You are an investor in your business, and all good investors expect a return on their investment.”
Getting started with a personal wealth plan
You could start by:
- Getting a good hold on your business’s average income and making a plan for slower months
- Creating a personal wealth budget and treating it with the same seriousness you’d treat your business budget
- Booking in some time with a financial advisor.
“In my experience, most entrepreneurs have great instincts, exceptional resolve, and business vision, but they rarely have a well-thought-out personal wealth management plan,” says Nicholas Murphy, a first vice president and financial advisor with RBC Wealth Management. “It’s almost like an attorney not having a will: They’re so focused on their business plan that they forget to develop a personal wealth plan.”
Keep in mind that the way you pay yourself will be different depending on your legal structure. A tax attorney will be able to walk you through the ways to pay yourself if you’re a sole proprietor, in a partnership, S corporation or C corporation.
However your banking is set up, avoid the common pitfall of taking a little bit of personal money here and there from your business. Finance writer, Gabby Revel, advises “If your business is a registered corporation, it may be illegal for you to use corporate money for personal expenses. Even if you’re a sole proprietor, where the IRS doesn’t differentiate your business income from personal income, it’s a bad idea.”
We understand that you have a deep personal responsibility toward your business, but you also have one toward yourself and your future. You are your company’s biggest asset, and you need to protect it.
ALWAYS CONSULT A FINANCIAL ADVISOR BEFORE MAKING CHANGES TO THE PERSONAL INCOME YOU TAKE FROM YOUR BUSINESS.
You have a deep personal responsibility toward your business, but you also have one toward yourself and your future.
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