Today is about to get a little nitty gritty and we are HERE for it!!! Raise your hand if you’re an entrepreneur who has ever had the question “Wait.. How do I pay myself? How much do I pay myself? How much should I set aside for taxes? HELP?!”
Our hands are raised too. We’ve been there, friend, TRUST US.
In this episode , we cover our top tips and lessons learned the hard way around finances as a business owner, especially when it comes to paying yourself and just overall understanding your finances.
This is a basic formula to start with:
- Have a business bank account that’s SEPARATE from your personal bank account.
- Have ALL of your business expenses & income go through this account.
Aka have your payments deposited into this account and make all your expenses (subscriptions, travel, equipment, literally everything you pay to use in your biz) go out of this account.
- Set aside 20%-30% for taxes each month or out of each paycheck you get.
If you forget to set aside taxes, you will consider that money “yours” if it’s just in your bank account.
EXAMPLE (Lindsey): I can’t remember what year this was cause I honestly blacked it out of my memory one year in business when I did really well financially (made over 6 figs), I DID NOT set aside tax money as I got paid. And so the next year during tax time when my accountant gave me my tax bill of how much I owed it LITERALLY was $60k. I fainted. I died. That’s an entire person’s yearly salary and I was expected to just pay it all at once cause my dumbo butt didn’t save it aside like a smart cookie. Don’t be a dumbo butt.
- Pay attention to your monthly expenses/upcoming expenses.
If you’re a photographer and have an editor you work with for all your galleries, note the average monthly expense and make sure you have that set aside for operating expenses. Plus any other expenses: Honeybook or other subscriptions, web host, business coach, etc.
- Anything remaining can technically be fair game to pay yourself and transfer to your personal bank account.
- We’d recommend after doing the math to set aside upcoming monthly expenses, to pick a reasonable number that is the same every month to transfer from your business bank account to your personal.
Consider that your salary. If you sporadically pay yourself different amounts for different months, it’s going to be hard to budget your personal life money because it won’t be consistent. PLUS if you pick a conservative, reasonable number to transfer to your personal account every month to “pay yourself” then even when you have a huge profitable month in your business, you can remain consistent in your pay. Then at the end of the year if you have extra profit in your business bank account you can do an end-of-year distribution of that profit. Because if you fluctuate the amount you pay yourself every month, you’re naturally going to be riding high and spending more when you make more in your business, but then be screwed if you have a low-income month in your business.
Let’s put this into an analogy:
Let’s say you get paid $1,000/mo from sales or client projects.
You’ll want to set aside upwards of 30% for taxes, which is $300. Put that in a separate “tax savings” account that you don’t ever touch!
Then you look at your average monthly expenses and notice they’re at $200/mo so you make sure you leave $250 in your operating expenses folder for a little extra buffer.
That leaves you with $450 that you can either reinvest in your business OR payout to yourself!
This is the “normal” formula that most businesses use. It’s very easy to understand and easy to start with. So if you’re first starting out, that’s a general overview for you.
However, we highly recommend the Profit First method by Mike Michalowicz. It’s explained in depth in his book Profit First. You can also get an overview of this method by listening to Episode 61 of this podcast where Mike himself came on and explained this method. Essentially, in the shortest explanation possible, Profit First Method does kind of the opposite of the “societal norm” of business bookkeeping in that it’s not Revenue – Expenses = Profit. Instead, it’s Revenue – Profit = Expenses. It’s a FANTASTIC method and strategy that we use and we highly recommend it for anyone ready to get their business finances in shape.
However, with that being said, the first above steps are a decent “first step” if you’re feeling totally overwhelmed and confused!
No matter which method you choose to start with, the BIGGEST takeaways we want you to have from this episode are:
- Set up a business bank account ASAP.
- Set aside tax savings from day one.
- Invest time and/or money into financial education (aka read Profit First and other financial literacy or strategy books)
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Profit First by Mike Michalowicz: https://amzn.to/3Hs4uLX
Episode 61: https://podcasts.apple.com/us/podcast/061-profit-first-with-mike-michalowicz/id1487265198?i=1000486588502
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