If you are a solo entrepreneur, you’re responsible for paying yourself. A lot of my clients pay themselves all of the money they make. They pay their bills, and their paycheck is whatever is left. There’s a lot they don’t consider. And it’s not a sustainable system.
I want you to know exactly what you need to pay yourself and where your money needs to go so you can feel more in control of your paycheck and create the financial security you deserve.
Today, I’m talking about how to determine what you need to pay yourself, really knowing your numbers as a business owner, and identifying what’s possible for your money in the future. The earlier in your business that you can build these systems and habits the better off your business—and you personally—will be financially. Regularly paying attention to how money flows in your business will help you fulfill your vision, whatever it may be.
In this episode, you’ll learn…
- Why you need a consistent system in place for how you pay yourself [01:19]
- How to determine what you need to pay yourself and why you need three different tiers of budgets [02:34]
- Why you need to prioritize savings and retirement funds [04:15]
- To remember to account for taxes before paying yourself from your net profits [05:42]
- The importance of understanding your current and past year’s numbers [07:20]
- How looking at your numbers quarterly helps you project revenue goals [08:56]
- How to identify what’s possible for your money [09:26]
- To consider all the different jobs of your business’s money [10:19]
- To average your past 12 months of expenses to understand where your money is going [12:37]
- How paying attention to your money and its purpose creates possibility for the future [16:46]
Tune in to this episode to learn how knowing your numbers can help you determine your paycheck and grow your business sustainably.
In the episode…
Do you know how much money you need to pay yourself as a business owner? Do you regularly look at your business numbers and know where the money needs to go? Or do you have no clue where to begin and feel inconsistent and erratic with your money?
Your money has purpose, both in your personal and your business life. Having a system in place for knowing how much money your business makes, how much you can pay yourself, and where the rest of the money needs to go will allow you to create long-term financial security for yourself and your business.
Follow these simple steps to really get to know your money so that you can feel more financially in control and plan for a consistent paycheck from your business.
Step 1: Determine What You Need to Pay Yourself
Start by mapping out your financial responsibilities and obligations. I recommend creating a gold, silver, and bronze budget to reflect where you will be financially during different stages of your business. This allows you to see what you might need to scale back on and where you want to grow. Consider your taxes, savings, and business expenses in this step as well. Considering all the jobs your money has to fulfill helps you understand what money can do for you in your business.
Step 2: Know Your Business Numbers Inside and Out
Start by taking a look at how much you made in the last 12 months, and how much you made in the last six months. Take your overall gross and divide it by either 12 or six. This is a great benchmark for understanding how much money you are making on average. Look at these numbers quarterly so that you can project your future money goals for your business.
Step 3: Identify What’s Possible and What’s Realistic
Once you have determined your budgets and you know your business numbers, you are ready to identify what is possible moving forward. After allocating for taxes, savings, and expenses, you can start to look for gaps in your paycheck amount as it relates to your gold, silver, and bronze budgets. For example, if you’re living at your bronze budget, looking at your money lets you see how you can move yourself up to your silver budget. Making sure the numbers make sense and that you are paying yourself regularly will put you in a space of financial control and safety.
Here are the takeaways that I want you to remember from this episode…
- It’s important to know how much you can pay yourself and that you’re working towards your financial goals.
- Having a gold, silver, and bronze budget allows you to be flexible and plan for different stages of life.
- Knowing how much money your business makes on average each month allows you to project future revenue goals.
- Paying attention to your past and current expenses helps you to prioritize what are important investments for your business in the future.
- Identifying what’s possible in your business numbers helps you to live out your budgets in real life with less stress and more control.
Ready to dive deeper into planning for your business and your paycheck? Apply to work with me, and let’s start working towards your financial goals.
Want to go deeper into planning for financial security, including how you use your paycheck? Check out this episode!
Transcript for “How to Determine Your Paycheck as an Entrepreneur”:
Hi and welcome to Money Files. I’m Keina Newell from Wealth Over Now. I work every day with professional women and solopreneur is to help them get out of financial overwhelm and shame so they can experience more flexibility and ease with their finances. Are you ready to gain confidence and learn to manage your finances intentionally? Tune in and grab financial tips that will help you master the way you think about and manage your finances.
Hello and welcome back to another episode of Money Files.
Today I want to talk to my solopreneurs and people that are responsible for paying themselves. And I want to talk to you about determining your paycheck. Whenever I’m talking to people that apply to work with me for business finances or even some people that do contract work, I ask them, how much do you pay yourself? And they look at me with a blank stare because generally speaking, they pay themselves all of the money that they make. So they have a system that looks like I make money, I pay whatever bills need to be paid, and then if my personal bank account is running low, then I fill that up with whatever money I have on my business side.
And that seemingly works until it doesn’t, because the thing that I want for business owners is for you to be able to know exactly what you need to pay yourself, but have a consistency with it, because ultimately it’s going to give you better control and help you be able to see the money that’s coming in and help you clearly identify where money needs to go. So just because you are in charge of paying yourself doesn’t mean that you should drain all of the money in your accounts. Because we want you to be able to create this financial safety. We want you to be able to have financial security so money doesn’t feel really erratic or out of control for you.
And I don’t want you also to get caught with a big tax bill, because that’s something else that can happen when you’re taking all of the money that you make and you are just spending all of it. I would also say that with this message, if you are in the beginning stages of your business, it is so helpful to start building these systems now, even if the dollars and the cents don’t all line up because the earlier that you can build this habit, the better off your business is going to be financially, the better off you will be financially, because this will just be how you think about money in your business.
So the first thing I want you to do is I want you to actually determine what do you need to pay yourself? Like what are your financial responsibilities and obligations? I like to talk to my clients about creating like a gold, silver and bronze budget. Right? You could also think about like your caviar versus like PB and J budget, like because you have the ability to make money on demand. There’s different places in which you are going to desire to be financially at different times. And we do want to make sure that you’re getting raises and things of that nature, but really actually sitting down and thinking about what does my budget look like in these like three different areas? So gold, silver, bronze, of course, gold is lavish. Silver might even be a reflection of generally speaking, when I did this, that is kind of like a reflection of where I was financially when I left my job. And then the bronze was like, okay, let me really think about my essentials.
And the reason I want you to have those three different budgets is because if you ever need to like maybe you need to start paying yourself at a bronze level before you can get to gold. You’re able to see what things you would want to scale back on. You’re able to see what things you want to add into your life. And ultimately, it’s going to make sure that things aren’t just happening to you financially and you’re not losing sight of your money. It’s also going to allow you to play with your numbers. If you’ve listened to my podcast about financial visioning, it’s also going to allow you to have that bigger scope of where you desire to be financially and as you’re planning out your paycheck, I really also want to encourage you to think about on the personal finance side, like, how much money do you want to be saving? Like, when I’m talking about saving, I’m thinking about emergency funds. I’m thinking about smaller sinking funds that you may have for travel or gifts, any of those things.
I want you also to be thinking about what do you want to contribute to retirement? I think that this is a conversation as entrepreneurs, we’re not talking enough about because you are responsible, you are your employer. So you are responsible for paying the employees retirement. You are also the employee. So I want to make sure you’re considering these two things and also think about right, like how am I paying for my health care, things of that nature. And so in your business, health care might be a business expense, but I’m bringing this up because these are the gaps that I see that people don’t think about when they’re thinking about their overall business expenses. And it’s the way that money just all of a sudden happens to them. And then they don’t figure out like, oh my goodness, I don’t know how I wasn’t accounting for that.
So first, sit down, determine your paycheck. Like, what’s your gold, silver, bronze? Think about three different buckets if you want to add in another one in there. I don’t know. Copper could be in there as well. But think about once again, what are your different budget levels and actually write down, you know, whatever your realistic numbers are, whatever your needs are, because this is going to help you figure out this is how much money I need to pay myself. Also realize that this number that you’re calculating is going to be the number after taxes. So if your bronze budget, you need to pay yourself $2,000 a month. That’s really after taxes. That’s not the gross amount. Remember, the gross amount is the bigger amount. It has more letters and the net amount, which is after taxes, it has less letters like your paycheck has less money when you are paying yourself in terms of net. And I know some of you are probably in different places. I recently filed an s corp, so I pay myself through a payroll system that does take out my taxes.
But even in thinking about how much I want to pay myself, they take out my taxes. And so I still have to think about what do I want to net in paying myself? If you’re paying yourself with an owner’s draw, like, yes, you could pay yourself $2,000 and you would actually get $2,000 in your bank account. But I still want you to be considering taxes because your business should be saving for your taxes so it can pay its taxes. So regardless of how that money comes to you, the conversation about taxes still has to be there. So you’re not just looking at the dollars and thinking like every single dollar that comes into my business is mine, because every single dollar that comes into your business is not yours. Your dollars have different jobs. Your dollars go towards taxes, your dollars go towards expenses. They go towards maybe paying contractors that work for you. They go towards paying yourself and they also go towards saving money in your business. So it’s important to consider all of those things when we’re thinking about what money can do for you in your business.
So you’ve determined your paycheck. The next thing I want you to do is I want you to actually sit with your numbers like this, a part of knowing your numbers as a business owner. One of the things I love for people to do is look at what? How much money have I made in the last 12 months? How much have I made in the last six months? I think these are two really good benchmarks to always know. So you’re going to have your overall gross that you’ve made. But I like to tell people, if you have a 12 month gross of $240,000, I want you to divide that by 12. And I want you to know how much you’re averaging in that 12 month time span. And so the average would be $20,000, right. If you were looking at the last six months, if you were adding up the last six months and you made $120,000, if you divided that by six, like, clearly the average is still $20,000 there.
But that would be a good thing to know as a business owner, because I could say on average, I am making $20,000 a month. That doesn’t necessarily mean that every single month I’m making $20,000 because, as you know, one month you may make $30,000, another you may make $50,000. But by looking at the average, I’m able to account for the fluctuations and I’m going to be able to make decisions off of the average amount of money that I make. If I were looking at that six month increment and my average went down from a 12 month space, I might also be able to question my sales or set some goals, whatever that may be. But that would be a whole different podcast, a whole different conversation.
But for you and the purpose of this conversation, like know your numbers, know what the average amount of income is that you’ve made in the last 12 months and the average amount of income you’ve made in the last six months. This is a number that I like to look at every single quarter to really keep a pulse on where like how I’m performing as a business owner and being able to look at my numbers in a way that helps me also be able to project revenue goals going forward for the year, going forward for the next quarter. And then the next thing I want you to do is I want you to identify what’s possible. I’m going to try not to lose you in this last space here.
So when I talk about identifying what’s possible and thinking about what I just asked you to do was know your numbers. Although you may have an average of $20,000 in your business or $10,000 in your business, you can’t go and say, I’m paying myself $10,000 a month. Like That’s going to be my paycheck, ya know I’m going to pay myself $20,000 a month, right? Like that’s the average amount of money that you bring in and you haven’t accounted for the other things that you need to do in your business. You need to save for taxes. You need to make sure you’re saving for expenses. You need to make sure that you’re saving money in your business just to save, right, like that your business has an emergency fund. So say you, for instance, average $10,000 a month and you decide that about 20% of that would be for taxes. About 10% would be saving in my business and 30% of that would be for expenses and then compensation or your pay would be 40%. Right. So say that’s what your outlook look like. What that means is that $2,000 of that money is for taxes. $1,000 is for savings. $3,000 is going to be for monthly expenses and $4,000 is going to be to pay yourself monthly.
So when you are able to identify what’s possible in that situation, if I have made my gold, silver and bronze budget, I can now go back to my gold, silver and bronze budget and look and say, like, can I afford to pay mine? Well, I figured out I can afford to pay myself $4,000 a month because I have my money set for taxes, savings and expenses. But it also, let me actually look at what my budget says. And so here’s where we’re going to start to identify the gaps of, okay, well, right now, although I want to really be living at a gold budget, I’m probably more at a silver or a bronze. So now I can start to shift my numbers to reflect that I can pay myself $4,000 a month. We’re seeing where we’re going here. So we’re thinking about our numbers. And when I talk about giving every single dollar a name, the same is true as a business owner and you understand the purpose of money. And if you know that consistently, I’m going to be able to pay myself $4,000 a month, that’s going to create a whole different level of ease on your personal finance side.
But also, once again, I could go into a whole different conversation about expenses and all the little things from here. That’s not where I want you to get lost because there’s more work that you could be doing there. I just really want you to be able to focus on like, Oh yeah, I want to be able to break down the average amount of money that I bring into my business and be able to have some clear goals for how much would go to taxes, savings and expenses. Right. And I think, like, if you’re stuck right now and you’re thinking, oh, my goodness, Keina, I don’t know how much I spend, like in terms of expenses for your business. If you do QuickBooks, go back and look at your P&L. You can look at the last 12 months and find the average amount of money that you spend. You can look at the last six months and find the average amount of money that you spent. I think for expenses, I really like to look at a 12 month range or an average, and I would say for like a calendar year, if you’re starting out in business, you can change that. But that will help you see like what percentage of your average amount of income are you spending on expenses?
Once again, could go into a whole different conversation there. But if you’re stuck about how much you spend on average in your business, that’s a great number to look at. And it also will scoop up all of those annual subscriptions and annual expenses that a lot of business owners have versus monthly expenses. Also, it will make sure that it identifies and scoops up maybe those one time investments that you’ve made, like I pay and invest in a coach twice a year. And so I wouldn’t see that necessarily as a monthly expense, but it is something that I can plan for monthly or think about in the average amount of money that I make or excuse me that I spend.
So going back to identifying what’s possible, make sure that you consider, okay, how much am I setting aside for taxes, expenses and what am I saving? Because by doing that you’re then going to be able to say once again, I make this amount of money on average, but of that, here’s how much I can afford to pay myself. I’ll give you another example. Say that you average $20,000 a month. Maybe you’re someone who has less expenses. I know a lot of people work for themselves, but maybe they’re a contractor, they don’t have a lot of overhead. So by not having a lot of overhead, you don’t have a lot of things to write off in terms of expenses. So maybe you decide that you want to save 30% of what you make. So you’re saving 30% and you’re going for taxes. You’re going to save 10% for savings, you are going to save 20% for expenses, and then you’re still going to pay yourself 40% of that. Right? So numbers wise, of that average $20,000, it would look like you are saving $6,000 for taxes, $2,000 for savings a month, and then $4,000 a month for expenses. And you’d be able to pay yourself $10,000. Once again, you get to come back to this conversation with yourself, like, how does that fit with my gold, silver and bronze budget? Can I live off of $10,000 a month? You can also have that conversation about, you know, are my expenses within this $4,000 range.
But it’s going back and it’s making sure that the numbers make sense, because after you have questioned your numbers, you’ve been able to check in on your averages and you’ve determined your paycheck, now what you can do is you can you know, adjust your payroll system if you have that or just think about, okay, I’m going to actually set up transfers on the 15th and the 30th, and here’s exactly how much money I’m going to pay myself. So a lot of my clients are still very much in an owner draw phase. And if they were paying themselves $4,000 a month, then they would do an owner’s draw on the 15th and owners draw on the 30th, and then they get that dopamine hit of having a paycheck. And it comes to them consistently because we’ve been making decisions about what they desire to pay themselves on a consistent basis based off of the paycheck that they’re going to pay themselves. Generally speaking, they’re not spending all of their money on just paying themselves. And so they’re also going to build up a reserve, which on a later podcast I can talk to you about creating consistency with your cash flow.
But I think that this is a very important conversation for business owners to be having, is to determine what is my paycheck going to be, how much am I going to pay myself? And even like some of you listening may be thinking, Keina, I can’t afford to pay myself $4,000 a month because right now everything I’m reinvesting in my business. I still, regardless of where you are in your business, want you to start like thinking about this because it’s about creating possibility. It’s about visioning for yourself and knowing where you desire to be, which is going to help shape what you invest in in your business. It’s going to help with your decision making about how you want to spend money. I tell my clients that are business owners as well to create like a hell yes and a hell no investment list. And I think that you could do this probably every six months in your business and look at it and evaluate, okay, what are the things that I would absolutely spend money on again and what are the things that I would never spend money on again? And by way of doing that, you are going to make sure that how you’re spending your money, it really has a return on investment in your business.
I think that as business owners in especially in the beginning, I’m so guilty of this, I was buying things, hoping that they were going to be like the silver bullet to help me make more money. And I discovered that that wasn’t true. I needed like some mindset work definitely in the beginning of my business, I will actually link a podcast where I talk more about how I discovered the impact of mindset work in my own business. But it just once again, it helps you filter investment lists, will help you filter your decision making so you’re not making investments in your business from a graspy place. And you can make sure that how you’re spending money in your business feels like it’s in alignment with who you desire to be as a business owner.
So if you’re in the beginning stages and you’re thinking, I’m having to reinvest, reinvest, still do this exercise because eventually you’re going to have money that you want to manage in a different way, and you’ll already know how you want to manage that. And you can also maybe you can’t afford to pay yourself $4,000 a month, but you could start somewhere where you’re paying yourself $100 a month. Like I know even in the beginning of my business, I paid myself something because I wanted to reward myself for the work that I was doing while I was also reinvesting in my business. So there’s many different ways that you can take this as a business owner and use this for yourself. But what I want you ultimately to understand that you are financially in control of your numbers. And by going through the simple steps of determining your paycheck and knowing your numbers and then making sure they make sense, like, is this actually possible that that I could pay myself X amount? Because you’ve sat and you’ve looked at your taxes, you’ve looked at your expenses, you’ve thought about what you want to save, and then you can start to create that freedom for yourself by setting up transfers so you know that you’re paid on the 15th and 30th, or maybe you’re paid biweekly, whatever that looks like for yourself. But I hope so much that this podcast was helpful. If you have found this conversation meaningful, I would ask you to leave a review on Apple Podcasts or any of my conversations if they have impacted the way that you’re thinking about your numbers. And if you are ready to work with me, I would invite you to go to www.wealthovernow.com/appointment And I will be looking forward to connecting with you to help you change your relationship with money. So till next time I will chat with you later. Thank you so much for listening to Money Files. If you’re ready to take the next step to reach your financial goals, head to w dot wealth over now dot com backslash appointment and let’s get started.
