3 Ways The Self Employed Can Pay Themselves
One big decision every self-employed person needs to make is how are they going to pay themselves. You’re the boss and get to make the decision, but there are several things that could cloud your judgment.
On one hand, maybe you take in all the income you make from your business, leaving little to reinvest or save for taxes. On the other hand, maybe you are so interested in investing everything you make back into your business you don’t pay yourself! This can be equally damaging by making you resentful towards your work and ending up with burnout.
This is why we have developed the 3 ways the self employed can pay themselves with the Truly Profit Plan.
The Truly Profit Plan is a simplified budget that focuses on the health of you and your business. With this plan it ensures you get paid, so you can reap the benefits of your hard work. While also making sure your business gets paid, so you can reinvest and continue to grow.
What is The Truly Profit Plan?
The Truly Profit Plan is a budget that establishes how every dollar you earned will be spent. For every dollar you earn, it will be broken up into 4 categories.
- Owners Pay – 40%
- Taxes – 10%
- Profit – 10%
- Operating Expenses – 40%
Each category should be a separate bank account where you deposit the appropriate percentage weekly, bi-month or monthly depending on the needs of your business.
For example, if you make $1,000 from January 1 – 15th, then you would deposit the following into the four bank accounts:
- Owners Pay – $400
- Taxes – $100
- Profit – $100
- Operating Expenses – $400
You now have your established budget for the next 2 weeks. The more you make, the more profit you will have and the more you can spend in operating expenses.
The 3 Ways You Can Strategically Pay Yourself
With the Truly Profit Plan, we will illustrate 3 ways you get paid.
You may have noticed one of the four sections outlined above is Owners Pay. This is your business and you should pay yourself regularly.
Determine your salary by adding up the average of your 6 mid-range months of revenue. Take this amount monthly and let the balance accumulate in the bucket.
This will ensure you can regularly pay yourself each month.
Your profit is the reward for all your hard work and the risk involved with being an entrepreneur. Set this aside with each pay period and every quarter divide it into thirds:
- ⅓ goes into an emergency savings fund (build until you have 3 months of expenses saved!)
- ⅓ goes into your retirement fund
- ⅓ is profit for you to have fun!
If you are profitable each month, it will be a big deal for your business. This is difficult for businesses to achieve and is something you should have pride in.
This account is reserved for all of the business expenses that go into running your business. Typically this will include things like rent, office expenses, professional services, and applications. This account also includes payroll for employees or contractors.
However, if you are a team of one and all of your expenses are covered, you may be able to pay yourself from this account as well.
Before paying yourself from the OPEX account, it is also important to understand your upcoming goals. For example, if you are hoping to expand it may be better to set extra income aside for the new hire. If you do not want to expand and enjoy working solo, then paying yourself a portion of OPEX may make sense.
Be sure to talk with your accountant or bookkeeper about this possibility before moving forward.
Setting Your Prices
One common area we help our clients in is setting prices. This is a difficult thing to solve because there are so many factors to consider.
One important point in the calculation should be the Truly Profit Plan. The Truly Profit Plan establishes a budget for you. Meaning for every dollar earned you are only allowed to spend 40% of that on operating expenses.
If you are going over that 40% you have two options. You can increase your prices or decrease your operating expenses. This can be especially challenging if you have been in business for a while, but you must get to the budgeted percentages.
We believe the Truly Profit Plan is essential to taking control of your finances. It is a simplified guide that can help any business owner get paid and take care of their business at the same time.
If you are ready to begin implementing the Truly Profit Plan, download it here.