Why you should pay yourself a salary as an entrepreneur
Should you pay yourself a salary? It’s a question you’ve doubtless asked. Entrepreneurs think about money constantly. How much is coming in, how much needs to be paid out, how much needs to be set aside for Uncle Sam, how much can be put toward marketing, how much can be socked away for emergencies … sound familiar? If you run your own business, I’m sure it does.
When your income varies from month to month and you’re the one running the show, you spend lots of sleepless nights fretting over finances.
And when money gets tight or a single fiscal priority rises to the surface, many entrepreneurs — myself included — do one thing first: Cut our own salaries. You always pay your employees, the bills, and the rent, but when cash is scarce you put off paying yourself a salary. Often for months at a stretch.
Sometimes it’s unavoidable. My uncle has owned his own architecture firm for 30 years, and I know for a fact that when clients withhold payment for long enough, he takes a hit himself so everyone else can get their paychecks and benefits.
Hell, when I’ve had truly scary months myself, I’ve sold my Frye boots and leather jackets on eBay to make ends meet rather than float myself a few hundred dollars from my tax fund.
Some business coaches even encourage startup CEOs to go without a salary during the first few months of launch. But to keep business healthy in the long run, you must pay yourself a salary on a regular basis. Skipping our own salaries as a financial fix isn’t selfless or smart, it’s unsustainable and should be considered a last-ditch effort. Here’s why:
Failing to pay yourself a salary clouds your fiscal understanding
Skipping your own salary payment a couple times a year might momentarily skew your view, but it’s unlikely to cause lasting damage. Skipping your own salary payment six months in a row, on the other hand, will begin to distort your understanding of how solvent your enterprise truly is.
Everything might keep functioning when you’re paying everyone except yourself, but that doesn’t mean you’re actually meeting goals or achieving success.
Your own salary needs to be a regular part of the business budget. Omitting it on an ongoing basis may fool you into thinking that everything’s fine when it really isn’t.
Failing to pay yourself a salary adds to your worry load
If you’re over a barrel and unable to pay yourself, you’re probably not skipping through life humming “Zip-A-Dee-Doo-Dah.” When all profits are funneled back into the business, you’re stretched thin and worried. And while some worry is normal and unavoidable, too much of it will distract you from running and growing your business.
You need all your energy and creativity to help your business thrive.
Sapping it by making your own finances unstable is a risky move.
Failing to pay yourself a salary isn’t sustainable
Unless you have a side gig selling your plasma or robbing banks, you will eventually burn through your savings and be unable to pay your bills. At first you might just have to eat fewer restaurant meals and switch to a cheaper gym. But eventually you’ll be grappling with massive, disruptive life changes. What happens if the repo man comes for your car? What if your ongoing sacrifice means you have to move your family to a smaller home? Might sound a bit dire, but these scenarios and more are scarily possible for entrepreneurs who attempt to live unpaid for long stretches.
Building your business on the illusion that operating costs are all you need is unwise and unsustainable. Paying yourself a salary has to be part of the fiscal big picture.
If your business is making a profit, a portion of that profit absolutely should flow back into your own bank accounts — your personal, mortgage-paying, vacation-funding bank accounts. If you’re still in startup mode, you might be forced to route all profits back into the business. You might even be praised by peers and potential investors for doing so. But don’t let it become a habit.
Know how much money you need to pay for your personal expenses, add another 20 percent or so for personal savings, and do your best to pay yourself that amount every single month.
It’s not selfish to pay yourself a salary. It’s not a luxury. You are in business to make money, and a portion of that money should be yours to keep.
Originally published at Garage.