How Much to Pay Myself as a Business Owner

hi everyone Jamie troll here your favorite CPA and financial literacy coach and today we have a really important topic and that topic is how much to pay yourself as a business owner okay this is a question I get all the time how much should I pay myself and of course I have to give the most annoying accounting answer ever which is it depends right so it always depends on your situation and your goals and your goals for your business and your goals in your life right and your financial situation and tax brackets and all kinds of things but don't worry I'm going to give you some actual real advice here as to figuring out how much to pay yourself and how much you should pay yourself as a small business owner now I am a pretty big advocate of paying yourself I know that there are some people out there that will encourage you to always be reinvesting back into your business especially in the early stages of business but I actually believe that it is important to be taking something out of your business from you know pretty much very very early on okay so maybe not day one but maybe by day 100 that you are actually taking some money even if it's not a lot out of your business to be able to pay yourself why do I say that well because if you don't if you're not taking money out in either owner draws or salary you are essentially working for free if you are reinvesting everything back into your business you are working for free now that may work if you maybe are independently wealthy or have some other income that you're relying on maybe you've got a trust fund I don't know I don't judge but I think that for the majority of people who are starting businesses it is important that they are also making an income from that business and I also think that even just from the standpoint of setting a precedent for yourself you don't want to set the precedent of always always reinvesting back into your business a hundred percent okay because I know people that have been in business for years and years and still haven't ever really paid themselves from their business maybe they've pulled money out a couple of times here and there but they have no real process for paying themselves regularly and that means that they are working for free and I do not believe my friends that any business owner should be working for free your work has value and you should pay yourself now I know the idea sounds great of course but how do we know how much we can pay ourselves and what if we don't make enough profit to really be able to pay ourselves in a way that we think is reliable well I have some thoughts there right so if we are in a place where you don't feel like you have the profit to be able to pay yourself you're not really sure uh if you're going to need that money later on in your business then the very first thing to do is to sit down with your numbers and get really comfortable with them right really understand the ins and outs see where your money is going so you want to understand how much money is coming in and where it's coming from how much money is going out and really kind of map that out you can actually put that on a cash flow spreadsheet or something like that that just shows you okay here's how much money I expect to come in this month and how much money I expect to spend this month and kind of model that out for a few months in advance and when you do that you'll be able to see whether or not you've got any potential shortfalls because those are going to be really important to keep an eye on because you don't want to take money out of your business and then subsequently have to find a way to put it back in later to be able to pay your bills so you never want to take too much out of your business however you do want to make sure that you're not paying for expenses that really are not providing a return on investment right so you want to make sure that the vast majority of the expenses that you have in your business are actually things that are going to generate you more money down the line okay now there are certain things that of course we have to pay maybe Insurance things like that that are required that maybe aren't really a return on investment or we may never have a return on that investment but we need to have them anyway but there are also a lot of different expenses that really do contribute to the growth of our business right when we hire when we purchase assets that can help us work fast faster when we do software that helps us with productivity there are lots of different Investments that we make up front where we see the return on that later down the line so you don't want to be over cutting those types of expenses but you do want to cut the types of expenses that really aren't generating you much at all right that we're just spending money because you know we spent the money and maybe we even forgot that we had a subscription to something that's been renewing every single month even though we haven't used it in a year I've done it no judgment I promise so once you have that base profit in mind this is where you can start figuring out how much you can and should pay yourself each and every month in order to be able to both meet your business goals save for a rainy day and also to be able to meet your personal goals and support your lifestyle okay so we're going to take that base profit number and then we're going to apply a profit planning percentage okay my profit plan is a trademarked profit plan it has two F's in it because of course you need to have two F's my husband says that I should use the tagline for people who give two apps about their business I don't know hopefully YouTube does not um censor me from saying that but anyway there is a reason for the two apps that we will get to and each one of these letters stands for something specific so we're going to quickly run through that and ultimately what what I want you to do is take that base profit number and add a percentage right to add up to 100 for each of the different letters in profit plan okay we're gonna go through it real quick I'm going to tell you what each letter stands for and then you can think about the percentage that you would want to put towards that and what you'll probably end up doing is playing around with this a little bit if you want to work with me on this I have a freebie it's totally free cost you nothing that you can grab that is my profit planning template which walks you through even more in detail than I will today on how to use it but you can just go to jamietroll.com forward slash profit plan again profit with two F's and that is where you're gonna be able to grab that so you'll be able to get this spreadsheet you don't have to do this yourself I already have it mocked up I have some examples in there for you and you can use this to then go and come up with your own profit plan and your own plan for saving money money and paying yourself so first of all before we get started these letters are not in any particular order it's not an order of importance necessarily it's just how they show up in the word profit so let's start with letter number one which is the p and that is for pay yourself which arguably is one of the most important things that you want to make sure that you are doing with the profit in your business so you're going to put a percentage to that pay yourself now you may not know what that is but right now I just want you to come up with an idea right look at your base profit amount and think what would be a great percentage to be able to pay myself in a given month of that profit right is it 50 is it 60 is it 30 right think about how much you want to be able to pay yourself and ultimately that's going to be something that hopefully can sustain your lifestyle now real quick for my S Corp owners or my C Corp owners that are paying yourself a salary you can grab the profit plan and it's going to give you some specific directions on how to handle that salary in this calculation so that it makes sense for you okay okay now once you've put an amount in to the P for pay yourself the next thing that you're going to want to make sure that you're putting a percentage towards is are for rainy day you want to be saving for a rainy day I typically recommend that you have at least one to three months of your base operating expenses right those recurring operating expenses that you have each and every month you want those to be saved for in your rainy day fund now that may not be possible Straight Out The Gate right that might be something that you put a little bit of a percentage towards each and every month and as you get closer you can kind of reduce that percentage but if you have nothing saved to a rainy day now I would put a pretty high percentage on that because you want to be really maxing that out before you pay yourself to terribly much because you just want to be prepared for emergencies you still want to be able to pay your payroll you still want to be able to pay your expenses that you can't just cut down overnight if sales dry up for some reason so make sure that you are putting money into that rainy day fund and again you can adjust those percentages later when you get closer to that one to three months of operating expenses now the O is for opportunity okay opportunity opportunity is one of my favorite ones I will say that probably about all of these but the reason that I like the opportunity fund because this is where all those additional expenses that aren't really the ongoing expenses they're the occasional expenses maybe you're doing a big new marketing campaign for a short period of time maybe you're going to a conference maybe you want to take part in a course or a class or a certification right maybe you want to hire someone to help you so those types of one-off things right that at least at the beginning are not typically ongoing those things you would be saving for in your opportunity fund and this is really going to depend on how fast your business grows so the things that you put in your opportunity fund that is saving for big Investments that you want to make so if you've ever wanted to do something maybe there was a program you really wanted to take but you weren't sure if you could afford it the quick way is to be able to look at your opportunity fund see how much money is sitting aside in that opportunity fund and then you can actually know very quickly whether you can afford it or not right so my rule is I don't do it if I can't afford it for my opportunity fund I wait until next time okay so that for me is a really important thing because I want my business to grow I do put a fairly high percentage into my opportunity fund you may decide to take more out to pay yourself but know that when you put more in the pay yourself and less in the opportunity fund that means that your business will probably grow slower than it would the other way around right especially if you are making sure to invest in things that truly will grow your business so make sure to check that out make sure to put a percentage into your opportunity fund because that is key for growing your business okay now we got the two apps the two F's the first app is for future the second F is for fun so now you know why we have two apps because we've got to save for some fun but for future we are talking about paying off debt if you have debt whether that's personal or business debt you can save for that and saving for retirement government or maybe it's kids college fund or something like that right so that is what future is for so depending on how close maybe you are to retirement that's going to depend on how high that percentage is or if you want to retire early maybe you have a pretty high percentage going into that and then you are using that to fund perhaps asep Ira or something similar now onto the fund f which is fun right that's for saving for something fun and I know a lot of business owners hesitate to put much in the fun fund but I will tell you that 10 times out of 10 when you have something neat and I don't just want you to put money into just a fund that you don't know what you're going to do with name what it's for is it for a vacation is it for a home renovation project that you want to do my very first fun fun went to buying a hot tub I kid you not okay it's going to accrue over time and if you're putting let's say two three four maybe even five percent or more of the profit that you're making in your business towards something fun and something that you're looking for forward to I promise you you will actually make more money it will be more motivating right than any of these other things on here will be way more motivating even than paying yourself it will be more motivating than saving for opportunities it'll definitely be more motivating than saving for retirement or for rainy days right so if you're putting money into something that you're looking forward to that is going to propel you forward to be able to make more money get more excited about what you're doing in your business and oh the fun side effect is your family might get more interested too and more excited about what you do in your business that was the key behind my hot tub is that my husband was on board and checking every single day how my business was doing when I did my first launch because he really wanted to know when we were going to be able to get that hot tub which I will say is sitting on our back deck right now and is totally worth it now the eye is impact the i in profit plan is impact and impact is really what it sounds like right how can you make a greater impact outside of just your business right on the world around you on the causes that you care about and I believe that every business can be benefited by making sure that a portion of their profits are going towards um something positive right whether that is donating to a charity or a cause that you feel really strongly about or perhaps having some money set aside so that if you wanted to support right somebody for free or do some pro bono work you can do that because you've set some additional money aside for that reason right so whatever you want to do with it maybe it's scholarship funds right anything that you want to do with that I think it's really really important even if you start at one percent to make that commitment that you are going to put that money towards something bigger than just yourself and your business and then my least favorite one we just talked about the best ones and now we're going to talk about my least favorite one which is taxes but I can't leave it out right we have to be saving four taxes from our profit you pay taxes from The Profit that you make in your business now how much goes towards that is really going to range so you're going to want to look at maybe prior tax returns right you're going to want to understand what tax bracket you're in and remember that even if you're in let's say the 25 tax bracket that doesn't mean that all your income will be taxed at 25 it's just the amount over that tax bracket okay so we're not going to get into detail about that today but you just want to understand what your effective tax rate generally is and you want to think about state taxes here too if your state has an income tax so I live in Tennessee we have no income tax yay but there are a lot of states that have pretty high Hefty income taxes especially California and New York you probably want to add a decent amount on to your tax savings for that so you can work at the CPA on what the appropriate percentage is for you to save you can look at prior year or you can just guesstimate right maybe somewhere in the 25 to 35 percent range maybe it's less than that if you're an S corp and you're already paying some estimated taxes through your payroll right so again that will vary largely but you want to make sure that you're putting a number in there as well that is going to have you protected I like to oversave rather than under save for taxes because then I'm not making bad decisions towards the end of the year where I'm trying to find any and every tax deduction that I can get just to save money on my taxes and reduce my income because I've already saved money for those taxes and therefore uh even if I have a big tax bill at the end of the year if it's less than what I have saved for right it feels like I'm getting a refund so that's the the great amazingness of being able to save for your taxes and make sure that you don't accidentally spend that money that you actually are going to need so there you have it again make sure to grab my profit planning worksheet jmintrell.com forward slash profit with two F's plan and also if you're wondering how I actually do this right do I have all of these different bank accounts I actually do not there's a few different ways that you can effectively track these reserves so you could do it the old-fashioned way and just use a spreadsheet to track how much of your available balance in your bank account right you can use for these various things that's kind of the low-tech way to do it they're also you know tools budgeting tools out there that you could use like perhaps YNAB is a really popular one um or you can get what I use which is the bank that I use right the banking platform that I use for my money with my business account is Novo so if you go to Jamie troll.com forward slash Novo that is a referral link yes and I appreciate any support but that is the the banking platform that I use and they have a special uh feature that allows you to basically take your income and put it in a different bucket so you can take that cash balance and put it into these various different buckets so that you know what your available balance is and then you can look and see what is in each one of these separate buckets as well so I highly recommend Novo I've been using it for a while I love love love the reserve accounts it's really hard to find anything like that in business banking and I am not a person that wants to over complicate Life by having a ton of different bank accounts and so this was the perfect fit for me and it's also totally free which I love as well I love a good deal so again Jamie trolley.com forward slash Novo and I have a whole video going into some of these newer features that Novo has released as well if you want to find out more about Novo check out that video also make sure to grab that free profit planning worksheet from me and that also comes with a tutorial on how to use it and happy paying yourself

Channel: Jamie Trull

Views: 895

Keywords: how much to pay myself as a business owner, how to pay yourself, how much to pay myself, how do i pay myself, how much should i pay myself, pay yourself, pay yourself first, profit plan, proffit plan, salary for small business owners, owner compensation, llc compensation, small business owner compensation, business owner pay, pay yourself a salary, how do business owners get paid, how to pay yourself first, small business owner, sole proprietorship, jamie trull, llc, s corp

Id: cyYNOfG339w

Length: 16min 50sec (1010 seconds)

Published: Tue Nov 01 2022