by Jenna Kutcher
I talk about money probably more than the average person. I wholeheartedly love digging into numbers and evaluating the best places to utilize money because after all, money is simply a tool, a means of exchange, to help you get what you need in life and business.
Money shouldn’t be this scary thing that we avoid talking about, but we all know there are all kinds of limiting patterns and negative mindsets when it comes to money. I used to be a money hoarder, meaning I just wanted to save, save, save out of the fear that I’d run out someday or that one day my career would end just like an NFL players and I wanted to be sure that I was being responsible with my funds…
Let’s be honest, I’m still working through my relationship with money and something tells me that it’s a lifelong, complicated relationship we’re all in.
But today I want to continue this conversation about how to best pay yourself as a business owner because there’s so much room to learn how-to be more strategic with our money and something tells me that no one has ever walked you through how to navigate a life where you’re the CEO.
In episode 165 of the podcast, I gave some more background into my own journey with how I pay myself as an entrepreneur and how I got past some of my old beliefs about money. If you haven’t listened to it, that episode is an incredible starting point if you’re still trying to sort out what your income should look like when you own your own business.
Let’s talk about how your values should guide your salary, how much you should reinvest into your business, the perks of building passive income or revenue streams, and why a consistent pay structure is imperative for your personal and professional financial state.
I know money can be tough to talk about, but it’s something we should lean into and not shy away from, and we’ll never get better with our finances unless we face them head on and learn to work with them rather than ignoring them.
Hire an accountant
The first thing you’ve got to do to set yourself up is to hire an accountant. I hired mine right when I got started for a simple reason: I didn’t know what I didn’t know. And I knew an accountant would be able to lend expert advice about where my money should be and how I should be handling it well. And before you tell me that there isn’t one who specializes in what you do — if I could find one in our village of 1,200, then you can find one. I still work with the accountant that I started with over 8 years ago when I wasn’t even profitable.
An accountant can give you vital advice about how to approach pay after taking a look at your specific business and the current state of your finances. The first thing an accountant will probably advise you to do is separate your business and personal finances.
In the early days especially, it can be easy to just lump everything together and keep your profits and business expenditures in the same account that you use to shop for groceries. The biggest reason this is a no-no is because it makes it insanely difficult to view your numbers.
It’s super easy to open up a business banking account. Once you have everything separated out, you’ll be able to better see how much money your business is bringing in every week, month, and year, which will make it so much easier to handle business finance responsibilities and pay yourself routinely.
What Kind of Entrepreneur Are You?
There are a few different stages and types of entrepreneurship that affect how you’ll be paying yourself.
Side hustlers who are building a business while working full-time, odds are, you’re likely or hopefully making enough at your main job to cover your personal expenses. While you might be putting in overtime to build this additional revenue stream, you don’t actually need that money to be hitting your bank account every other week. This is tremendously powerful because you have the opportunity to reinvest everything you make on the side back into your business.
This means you can use your business profits to invest in a new website, create more offerings for your customers, or get help with something you don’t have time for or don’t like doing, like social media or graphic design. Whatever it might be, use this unique time in your business when another job is totally funding your personal life to ramp up your business, get your savings in order, and prepare for the time when you’ll be able to turn the side hustle into a full-time gig, if that’s the big goal.
What Type of Business Do You Run?
There are a lot of options, the two most common for entrepreneurs are Limited Liability Company or a Sole Proprietor — but it doesn’t stop there, there are also partnerships, corporations… s-corps, c-corps… if I just lost you, that’s okay because this stuff can get confusing.
Corporations, sole proprietorships, partnerships, and LLCs all have different tax requirements for owner compensations. Again, this is why it’s so important to START with an expert.
Don’t fool yourself into believing that an accountant will cost yourself a ton of money and you need to make that before you hire one, chances are, an accountant will save you a lot of time and money which was why I hired one before I had ever made a profit. An accountant will be super helpful in making sure you’re doing everything right when it comes to what type of business you own and how you pay yourself.
Depending on which category your biz falls under, you’ll want to understand what your legal rights and obligations are. Regardless of the type of business you have, typically entrepreneurs pay themselves one of two ways: via payroll through a salary or through an owner’s draw.
I’m sure you’re familiar with what salary looks like — you’re paid on a set schedule based on either a flat rate or hours worked. If you run a c-corporation or s-corporation, you are actually legally required to have a salary to track withholdings for social security, medicare, and state and federal income taxes.
The other method called owner’s draw is a withdrawal from the company’s profits payable to you since you’re the owner. Owner’s draws aren’t subject to withholding for governmental taxes, but you’ll still need to report that income when tax day comes around, and you’ll generally have to pay the same amount of taxes at the end of the year that you would’ve been paying with a salary’s tax withholding.
How Much Do You Need?
Determine how much money you truly need to cover your personal expenses. Now, your personal expenses cover everything from rent or mortgage and bills, groceries, and gas to childcare, personal maintenance like haircuts, and loan payments, like car or student loans.
Add up all of your personal expenses from the last 90 days, divide it by 3 so you can get the monthly break down, and to have a look at the average amount you’re spending or likely to need on a month to month basis. To figure out what that number looks like to cover a full year, just multiply it by 12 and if you’re feeling really awesome, add in a cushion amount to help with unexpected expenses that life throws your way.
Now that you know how much money you absolutely need to be able to cover your expenses for the year, let’s talk real quick about value-based saving and spending. Value-based management allows you to base financial decisions, like saving and investing, on what means the most to you long-term rather than quick pay-off short-term.
Basically, it lets you manage your finances from a big picture perspective which is so important. One of the biggest things I want to instill in entrepreneurs is that while it’s important to plan for the here and now, it’s even more critical to create a plan for the future since no one is likely helping you set aside things like money for retirement or a 401k.
When you picture your life in 10 years, what do you see? Do you want to live in a downtown condo close to work and be able to travel to new places every other week? If so, your money values might be travel and convenience. Or do you envision a house on sprawling land with 3 kids running around in the yard? Your values might be family, home, and legacy.
So, when you’re evaluating your personal expenses, I want you to look at those things that might not be supporting the values and vision you have for your life. It could be a bunch of subscription services that you don’t really use or need, or maybe you enjoy eating out a few too many times a week. Those things are all good and fine, but if they are hindering your finances instead of helping to build the future you dream of, it might be time to reevaluate how your money is supporting, or not supporting, your values. Life is more than just working around the clock and collecting a paycheck and in order to make our lives more than that, we have to take a deeper look at all of the small decisions we make on a daily basis that impact that bigger picture.
The money that you might be able to save from unnecessary expenditures can then either go back into your business, go into savings, or go into personal investments. If you want to save a certain amount of money by a certain time to support your value-based goals, work that figure into your salary and then stay consistent with saving and building up your finances. By recognizing our values and mixing that with the amount of money we know we need for personal expenses, you’ll be able to really drive down on how much you need to be paid to cover what you need now, and what you want later in life.
More Isn’t Always Better
Sure, more money is great, but at what expense? I would say that my relationship with money has transformed dramatically recently as I’ve taken more time off to be with my family and to truly reap the rewards of all of the years and years of hard work — and while I know I’m capable of more, right now I’m pursuing enough so that time, not money, is my priority.
I swear to you, that every single time in my career that I’ve prioritized time over money and set off in pursuit of freeing up more time and letting go of the desire to make more, those are the times that my business shifted or grew the most.
More money doesn’t always mean life’s getting better and better and easier and easier. But it’s important to realize that the more money you’re making both personally and within your business, usually there are more responsibilities to manage and keep track of.
If your business is making a lot more money, whether it’s suddenly or over time, it could be because you’ve finally hit your stride and sales are doing exceptionally well… but it could also mean you’re working 60-hour weeks regularly and hardly have time to breathe, let alone take a break. What good is more money if you have zero time to enjoy it?
Once you know how much money is enough for you to feel really good about your finances and future, you can keep your salary pretty stable at that number and take any extra money to use for your business. Maybe you can outsource more or build your team to include one or a few more full-time employees to spread out the array of responsibilities. Maybe you can start investing in real estate or other opportunities to build long-term wealth and stamina for your business in case a recession hits or an unexpected slow season strikes.
A Note on Passive Income
Creating passive income, including investments and evergreen products and services that your customers will continually want to purchase in the coming months and years, is one of the best ways to really stabilize your profits and make sure to have constant income without always exchanging your hours or employee hours for income.
There are so many awesome opportunities to build passive income, be it owning rental properties, selling courses, opening an online shop, selling artwork or photography or through some other continual income generator that requires little to no legwork on your part after its initial inception.
Passive income allows your business to grow steadily and incrementally with little maintenance on your end, which is kind of dreamy, isn’t it? We’re so used to digging in and committing our hearts and souls to our businesses as entrepreneurs that the thought of passively bringing in additional money can almost be guilt inducing. But it’s honestly one of the smartest moves you can make for the longevity of your business and to really grow a solid padding of savings to preserve your biz through long and slow seasons.
I did a full episode on passive income, so if that’s something you want to dig into, listen to “How to make money while you rest” an entire episode dedicated to exploring what passive income is and how you can create revenue streams that are running while you rest!
The Big Picture
Paying yourself as an entrepreneur can be a tricky thing to navigate, but it doesn’t have to feel impossible or scary. I can’t recommend enough getting an accountant, really observing your numbers, digging into the data so you have certainty and incorporating your values into your financial decisions to determine the best number for YOU.
It’ll change over time, it always does, but with the right advisors and the data to back up what you’re working towards, you can find security as an entrepreneur. You might not get it right the first time around, but that’s the blessing of being an entrepreneur! You get to ride out this journey and find what works best for you and your business.