While reinvestment in business has its own perks, investment in oneself is vital too. For ages, every entrepreneur has posed this question once or too often: how much should I pay myself from my business? Everybody adopts a different approach to answering this question, but we save you the trouble of running endless google searches and present you the best ways to deal with the issue.
It is important that you pay yourself
Before we proceed to sort out the matter of how much, you need to be sturdily convinced that you must allocate a fixed sum from your income as your pay even when you are a sole proprietor in your business. It is highly emphasized that you treat your business and personal finances as different units. The emphasis follows the fact that the practice of paying oneself carries a bunch of advantages, few of them are listed below:
- Deducting your monthly pay decreases the amount of tax levied on the total profit which in terms increase your final profit.
- It is highly convenient to keep track of expenditures and investments with two different financial accounts for personal and entrepreneurial life.
- Paying yourself reveals stability of your business and illustrates your long-term planning which reflects positively to current and future potential investors in your business.
- Earning a monthly salary allows you to save, apart from business investments. These savings can be utilized in future plans like pension policies, life insurance policies, college tuition fee plans for children, etc. They also come handy during a crisis, for example, when your business is not doing too well.
In coherence with above advice of paying yourself a fixed amount, it is important to mention that you must not take out more than assigned money in any case. If your personal expenses exceed your pay because of emergency situations, go for short term loans like installment loans to meet your expenses. This will assure you, your investors and the government that you are indeed an employee in your own business and let you enjoy the advantages.
How much should you pay yourself?
The answer to this question is highly subjective. However, there are two primary paths you can walk on to determine a reasonable pay for yourself: either pay yourself enough to get by or pay yourself what you are worth.
Pay yourself enough to get by
As the name suggests, this method of payment allows you to extract enough from your business to meet your necessities. No more, no less. This technique works the best for amateur entrepreneurs who have recently initiated their business and require massive capital to stabilize their business and reach the break-even point. The argument here is to minimize your personal finances and suffer immediate discomfort for long-term gain. This requires you to either rely on prior savings or settle for a substantial living until you are well into the black. Your future self will thank you.
Pay yourself what you are worth
If your business has reached the breakeven point and you comprehend that your basic pay should rise, determine what your value in the market is and decide your salary accordingly. In order to know your market worth, you best bet is to factor in three basic pointers that are:
- What was your pay when you left your previous job? That amount tells you the opportunity cost, the money you would be making if you were doing something else, of running a business on your own. Your pay should definitely compensate you for that.
- How much do the other employees in the same industry with the same positions get paid? Comparing the prices online help you in evaluating the gain in your value since your last job. Also, running an online search will give you an insight of what other business owners are paying themselves.
- How much will your salary increase in future? Allowing yourself raises as your business grows is the best strategy to pay what you are worth as it provides you an incentive to put extra efforts and measures yours as well as business’s growth in the long run.
Additionally, you should consider the base salary, your duties and responsibilities, and the time you spend in business management while calculating your worth. Forget for once that you measure self-worth; treat yourself as an employee and allocate the funds neither too generously, nor too harshly. Just the fair amount that you deserve. While being your own boss sounds exciting, many entrepreneurs find it tough to decide their own salary. If you end up paying yourself too little, you may struggle to survive. If you pay yourself too much, your business might be at risk. Hence, deciding how to strike the right balance is crucial.
Lastly, don’t forget to keep a regular check and balance of your own pay. Reassess your compensation periodically and adjust your cash-flow statement accordingly. Involve your accountant if need be. Decide wisely and help your business reach new heights.
See related: Invoice Intelligently: 5 Ways to Get Paid Faster
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