A version of this article originally appeared on the Wall Street Journal.
When it comes to how much you should be paying yourself as an entrepreneur, there’s no straightforward answer. But all entrepreneurs should consider paying themselves before spending money on other expenses.
In order to better grasp how much you should be paying yourself, I believe it is important to come up with a formula that takes into account your personal and professional life. One of the biggest benefits of this approach is that it allows you to rely on a flexible framework that accounts for the highs and lows of your business.
The formula I recommend takes the following factors into consideration in the following order: foundational personal expenses, company costs, a fun fund and company growth.
Personal expenses and company costs are both straightforward — they account for the necessary costs of living, such as your housing, utility bills, food and other foundational expenditures, as well as what it costs to regularly run your business. These expenses will remain relatively constant each month if your business is consistently profitable, which allows you to more easily account for them.
At the end of each month, subtract your personal expenses from your overall sales, and then subtract your company costs. It may sound strange to essentially pay your personal expenses before covering company costs, but it is counterproductive to run a business while struggling to keep yourself afloat.
Many entrepreneurs take the needs of their company into consideration first, but what they really need to do is restructure their thinking and tend to their own needs in order to see their business thrive.
This definitely requires a strong amount of self-control — there’s a difference between living it up and covering your necessities. Depending on your business and revenue for that month, there might not be any profit left after paying your necessary personal expenses and company costs. Other months, there will hopefully be extra profit to work with after accounting for those two important factors.
When there is profit at the end of the month, allocate 20% of it to your fun fund. This is an account dedicated to personal spending money — it should account for things outside of what you need to get by. This fund can be spent on a vacation, a new car, improvements to your home or on whatever you see fit.
The point is to reward yourself as an entrepreneur for your work and dedication, and to ensure you don’t end up being an employee of your company as opposed to the owner. Think of your fun fund as an additional incentive to continue to put your life and business on a path towards success.
Finally, you should reinvest the other 80% of your profits back into the company with a focus on landing more customers, expanding distribution and other actions to help increase long-term sales.
This formula isn’t perfect — running a business will never be perfect. Some months there will be no profit to pay for extra personal expenses or company growth, while other months you’ll increase the percentage of profits going into your fun fund because company growth may not be a priority at that time.
This formula is designed to be a flexible framework for your success as a business owner. Cater it to your needs and preferences, but always remember that your needs as entrepreneur should come first. Taking yourself into consideration before anything else is the key to succeeding as an entrepreneur, and is necessary for a rewarding existence.
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