How Much Do You Pay Yourself as a Small Business Owner?
Numerous studies show that the only real way to build wealth in this day and age is to run a business. In fact, those same studies show that it’s almost impossible to become wealthy while working for someone else. And that’s no surprise.
When you punch a clock or work on a salary, your earning potential is limited. You will earn a set amount of money for each hour you work, and that’s the limit. Sure, you can miss out on family activities or work when you’re exhausted and get paid overtime, but in the end, your earning potential is still governed by the clock.
On the other hand, when you work for yourself, you get to control how much money you earn.
A lot of people ask me how to pay yourself when starting a business, but I always respond by telling them that’s not the right question. When starting a new business, the majority of what you earn will be funneled back into the business in order to grow it.
I know (sigh), but that’s what it takes to build a successful business.
Just think about all of the dot com entrepreneurs that had to close up shop soon after getting millions in startup capital. You know why they failed? Because of instead of using the cash flow to grow their new business, they used it to buy fancy cars and expensive houses.
And that just not what successful entrepreneurs do.
So, let’s get back to the question: how do you pay yourself as a small business owner?
1. Ignore Most of the Advice Out There
I’ve read a lot of expert opinions that tell entrepreneurs how to pay themselves when starting a business—and honestly, I usually just shake my head in frustration. It seems that much of the advice concentrates on making sure the new business owner is comfortable.
For example, I’ve read that new business owners should pay themselves what they’re worth. That’s nice in a theoretical setting, but when you’re opening a new business, things aren’t usually that cut and dried. In most cases, if you pay yourself what you’re worth in a fledgling business, you won’t be paying suppliers, rent, or employees. Remember, the business is new and that means it hasn’t even come close to its earning potential.
I’m here to tell you—there is nothing comfortable about starting a new business. In fact, if you’re about to take the leap, you better get ready for some pretty serious discomfort.
Starting a small business takes a lot of sacrifice and patience, and one of the things you’ll sacrifice is your financial comfort. That’s because once you open the door (or URL), your money is no longer about you—it’s about your business. In other words, you need to think about the business’ needs before your own.
2. Decide What You Can Live On
Once you understand that you’re not going to earn a six-figure income the minute you open your doors, it’s time to get back to basics and determine what you will pay yourself as an entrepreneur. I recommend looking at the numbers on this important question.
Start by adding up all of your personal expenses. Include fixed expenses like rent and insurance, and then budget for variable expenses like food and clothes. Create the most bare bones budget you can, because like I said before, most of your earnings will go back into the business.
Now, take that number and divide it by 52. For example, if your bare bone personal expenses are $2,000 a month, that’s $24,000 a year. That means your weekly salary should be $461.54. ($24,000 / 52 = $461.54)
And that’s your magic number, at least for the first 2 years.
Why I Use This Calculation for New Business Owner Salaries
It seems harsh, doesn’t it? Living for two years on such as bare bones budget? But let me tell you why I believe this is a recipe for success.
Take a look at some startling new figures I ran across when researching my new book, The 30 Day Work from Home Challenge: Do You Have What it Takes to Be Your Own Boss? (Yes, that was a shameless plug)
· According to the Labor of Statistics, only about 50 percent of new businesses are still open after 4 years.
· According to Small Business Trends, only 40 percent of small businesses earn a profit, 30 percent of them just break even, and a sad 30 percent of them are losing money.
Did you get that? Only 40 percent of small businesses earn a profit. So if a new business owner pays himself what he thinks he’s worth out of the incoming cash flow, what do you think will happen to the business?
Do you think that could be a big reason for the first statistic, that only half of new businesses make it to the 4 year mark? I do.
Well there you have it. The first couple of years in a new business are the most important to its long-term success, and one of the best ways to care for it is to put it ahead of yourself financially.
What about you? If you run a business, how do you pay yourself? Have you experienced the negative effects of paying yourself too much in a new business? I’d love to hear from you below in the comments!