MBA1259 How Much to Pay Yourself When Starting a Business

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Hey O. Welcome to the Hundred Dollar MBA Show. Because a better you means a better business. That's why we deliver daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of the Hundred Dollar mba, a complete business training and community online and and in today's episode you will learn how much to pay yourself when you're starting a business. One of the last things people think about when they start a business is how much they're going to pay themselves. What salary will they set for themselves. This is critically important, especially if you are doing this business full time. If this is your side hustle and you're getting your full time income somewhere else at a job. Totally cool to put this on the back burner for the time being. But if you're doing this business full time, you need to make sure that you obviously pay yourself. You need to make sure that you could pay your personal expenses and bills. But the question here is how much, how much should your salary be? Well in today's episode we'll talk about how to come up with that number. How to make sure that you're paying yourself the right amount but also not overpaying yourself. Yes, that's possible. We get into all the details and more in today's episode. So let's get into it. Let's get down to business. I remember when I became a full time entrepreneur, this was one of the biggest questions I had in my mind. How much money do I keep? How much money do I pay myself when I'm doing my business? The funny thing is that most entrepreneurs, what they want to do is give as much money back into the business so they can grow. But if you don't pay yourself enough, you're not going to be able to pay your bills. It's going to cause you a lot of stress on the personal side of things and therefore affect you as a leader in business. So once you're making enough money that you can pay yourself and still run the business, you need to establish what you can actually afford to pay yourself. What's your range here? Well, first of all, you got to know how much are your personal expenses? We talk about this at length in many of our lessons in the past 1200 episodes. But to recap real quick, you need to make sure that the first thing you do is lower your personal expenses as much as you can. Even if that means downgrading your car or even where you live, paying less rent or less mortgage in a neighboring town or state. Some people I know have even moved country to save some money when they're starting a business. Totally doable, of course, if you're running an online business. But the point here is that the lower the expenses, the easier it is for you to give yourself a reasonable salary and have a content life to be able to pay your bills and still have money to spare to pump right back into the business. So say, for example, you've lowered your expenses and you established you need at least $40,000 a year to pay for your expenses. So let's say, for example, you've lowered your expenses and you realize, okay, I need at least $70,000 to pay for all my personal exp. So how much is $70,000? Divide that by 12. If you don't have that money in profit to pay yourself every month, then it's not time to go full time. As an entrepreneur, you need to stick with your salary. But if you do have, then you're in good standing. Okay, you're doing all right. And I think you should start there where you pay yourself the minimum, where you can pay all your expenses. So why do I say minimum? Why don't you just pay yourself $100,000 a year? Well, a couple reasons. Number one, you want to have some money so you can Reinvest in your business so you can continue to grow and then you can continue to hire new people. You know, you're your first employee, you want to hire other people so you can actually outsource. You could start delegating tasks that you're doing right now. You have to start doing this because you can't do everything yourself forever and you can't grow your business or scale your business by yourself. There's a certain cap depending on your business model and what you're selling and your niche and all that stuff. But there is going to be a cap. Two, the more money you have left over, the less you're going to need to borrow or get investors to invest in. You can stay independent, you could stay bootstrapped, you could stay self funded. This gives you a lot more autonomy and you make all the decisions, no pressure from outside. And the third reason is depending on where you live, what country, what state, all that stuff, many times your personal income tax rate will be higher than a business tax rate or a corporate tax rate. So if you pay yourself, let's say, $100,000, in some places, you might be taxed 40%. But if you had $100,000 in profit in your business, after all your deductions, your corporate tax could be lower than that. Could be 30, 20, 15%. So in other words, the more money that goes into the business, the less money that gets, you know, taken out with taxes. But of course, check with your accountant, your lawyer on the specifics on that, because I obviously don't know your specific situation or where you live. But these are the three main reasons why you want to pay yourself enough, but not overboard. A lot of people, especially young entrepreneurs, as soon as they have a business, they have a budget, maybe they even have funding. They're like, okay, I'm give myself $150,000. 200,000 a quarter million is going to be my salary. Hey, I'm the CEO. And they do this for several reasons. One, they want to live the dream and not actually live the dream forever because they want to burn the money. They basically feel like, hey, I'm entitled to this, or I, I deserve this. And maybe that's true, but you really need to think conservatively when you're starting your business. They also want a big salary so they can borrow against it personally, whether it's a mortgage or car loan. But I really believe paying yourself minimally in the beginning, and I know all the best entrepreneurs out there personally, the people I know personally have run great businesses, have done this in the past, and this is where I learned it from. People that run eight and nine figure businesses, they pay themselves as low as $40,000 a year for many years, three, four years at the start. And once their business was really doing well, doing, you know, eight and nine figures, they gave themselves a raise. You know, they gave themselves a break. But at the start, be conservative. I do want to stress, make sure you're conservative, but you're covering your expenses. And remember, you want to be conservative of your expenses. Lower those expenses, see where you can save money, see where you can downgrade things in your life. Be comfortable so you have, you know, less stress in that area where you pay your bills. But don't be extravagant. Now, once you have your salary set, make sure you actually pay yourself. You actually run payroll for yourself, even if you're running your business by yourself. You have no other staff. But when it's time for the end of the month, you need to actually make a payment from the business to you as a paycheck, as a payment, and even make a contract with yourself saying, hey, I am getting paid this amount of salary. You're going to need these details, come deductions, come tax time, all that stuff. And again, speak to your lawyer and your accountant. But the point here is that you need to make this kind of official. You need to kind of make sure that it's actually happening. Money is moving from the business to your personal bank account. And you're gonna need the money, of course, to pay your bills anyway. So you got to do that and always, of course, pay yourself. You got to make sure this happens month over month. So you make sure that you take care of your personal expenses and your business takes care of itself with its profits. Now, I know I've talked about making your salary as conservative as possible, but I would really feel a lot more comfortable if you set your salary about 15% less than what you think you can afford. So say, for example, you say, hey, I can afford to give myself, you know, a $50,000 salary. Drop that by 15%, which would be around, you know, $72,000. Why? Because your business may be doing well in this month or right now, but it could fluctuate. You could have a great month and then a slow month. For most businesses, you know, income, revenue, profits are not as consistent as they'd like. Some models are better for that, like SaaS, businesses, membership businesses. But even those businesses may see some churn, may see some down months. December is known to be one of the worst months for SaaS businesses, because even if they're a B2B or a B2C, you know, not a lot of activity happens during the holidays. When I say activities, people just don't make decisions like that in the holiday season. So to kind of buffer for the ups and downs and so it's not so tight. So you can pay both your personal expenses and your business expenses. You give yourself 15% leeway. Of course, if your business is thriving and six months pass and you're growing month over month, you can, you know, give yourself a raise and recoup that 15% in your salary.

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Guys, to wrap up today's lesson, it's super important for you to set yourself a set salary for the year and to actually make it happen. You know, to have this documented and actually pay yourself from the business to your personal bank account. It's always best to err on the side of being conservative, you know, making sure that you are lowering your personal expenses so you don't have to pay yourself so much. And of course, if you can drop that number by 15%, that's going to give you a little bit more of a safety net just in case you have a few slow months in a row. That way you can pay your business bills and your personal bills. You know what's going to happen is if you don't do that, you may be paying yourself month over month, just like a payroll, like a salary. And then you'll say, hey, I don't have enough money left over to pay for the expenses of the business. And if you have a small business, if it was just you at the moment, then the first thing you're going to do is tap into your own personal, you know, account to pay for it. You're not going to let your business go under because of a past due bill. But then what about your personal expenses so that 15% gives you a little breathing room so that you're not stressed out. And of course, like we said, as your business grows month over month, you'll be doing well. You can give yourself a raise. You can have even more breathing room. Thank you so much for listening to the Hunter Ombie Show. Hope today's episode was helpful. If it was, let me know in an itunes rating and review. We read every single review. We love reading them and it allows us to know what to double down on and really focus on. And we love to hear what you love about the show. Your favorite episode was your favorite takeaway. Share please we read them and we appreciate you for them. All right, before I go, I want to leave you with this Paying yourself is a funny one, because if you've been an employee for most of your life, you never have to actually think about that. You just get paid, right? Paying yourself is like saying, yeah, I'm giving myself an allowance. I have to actually set an allowance for myself, see what's reasonable, see what's not. Too much, too little, and then actually fulfill on that allowance month over month. It's easy to ignore, it's easy to forget because you're just not in the habit of doing it. But make sure you make it a point and you make it a habit at the start. Good habits are good to form in the beginning of your business. All right, thank you so much for listening and I'll check you in tomorrow's episode. I'll see you then. Take care.

Of At Capella University, learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course room to the workplace. A different future is closer than you think with Capella University. Learn more at Capella Eduardo.