Episode 3: Paying Yourself First

Paying yourself first is not something that most entrepreneurs do well. We tend to invest everything that we make back into the business and survive on the scraps that are left over. I’m here to say “no more!” to that lifestyle. Today we’re going to talk about what it means to pay yourself first, why you should pay yourself first, and how the heck you even do it.

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What Does it Mean to Pay Yourself First?

Paying yourself first means that you prioritize your owner’s compensation or salary first. To keep it simple, this just means paying yourself enough to live, eat and sleep, before you pay other expenses for the business. Let’s take a look at a basic example. Say your business makes $5,000 a month. Your personal expenses are around $3,000 a month. To implement this pay yourself first concept, you would pay yourself $3,000 a month from your company. That’s the first line item in your budget. AFTER that, you have $2,000—that’s what you have left for the business to run on.

You may be wondering how you can even run and grow your business that way! There are bills to pay! And listen, I get that you need money to run the business day to day, but the business also needs its most important ingredient, YOU! You are the motor that keeps revenue flowing and customers happy. And you can’t keep yourself going without paying yourself.

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 Why Should You Pay Yourself First?

You are the most important ingredient for your business’s success. Whether it’s a side hustle or a full time hustle, treat yourself with some respect and pay yourself a salary that you can justify, both for your business and your lifestyle. By no means does your salary have to be massive. It can start out small and grow over time as the business grows. But to continue to ignore your needs by not paying yourself enough will only wear you down. You can’t be at your best for your clients. You can’t play into your strengths because you will constantly be held back by finances being a pain point. Planning to pay yourself first will also help make your forecast more predictable, as you’ll be able to better plan for future revenue and expenses. As a quick side note, here are our definitions of Revenue, Expenses and Forecast:

• Revenue is all sources of income for your company. This can be from all different types of products or services.
• Expenses are what it costs to make your business run: rent, employees, costs of supplies AND your salary
• Forecast is your yearly plan of how much you need to bring in and how much you will spend, broken down by month.

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How Do You Do This?

Let’s start with tallying up next month’s revenue. This is simply reviewing or forecasting how much you will make next month. If you want, you can even forecast your revenue out to six months to a year from now. Grab a pen and paper, open an excel spreadsheet, or even your phone calculator. Say you’re in a product-based business. You may have orders that you will fulfill next month (meaning payment will come then) and you know that more orders will come in. Tally all of that up. That’s your revenue forecast!

 Or maybe you’re in a service-based business, and you might have payments that come in at different times before or after you perform the work. Make sure your payments for the next month are included, but also write down when other payments will be due, specifically which month they belong to. This helps you make sure every month is as accurate as possible if you chose to forecast beyond the next month. For future revenue, if you choose to go out beyond just the next month, look at historical data. If you have been in business for over a year, how much did you make in this month last year? Add that to your forecast.

The goal here is to see how much the business will bring in during whatever period of time you chose. 

But wait! Maybe your business is brand new and you don’t have any previous data to use. Start forecasting revenue with what you anticipate to make starting next month. As time goes on, this forecasting will get easier as you have historical data to look back on.

Get all your payments (both planned and actually guaranteed) summed together and broken out by month. You can go as far out as a year, or just look at the next month.

Next, tally your monthly expenses together. Include a monthly salary that you want to pay yourself that is both fair and you believe is possible for your business to support month over month. A place to start is to try to figure out what a person doing similar work to you in your geographic area makes.Then you can scale up or down based on what your business can consistently support. I don’t want our listeners to miss this point. Being fair to yourself is huge, and one of the main reasons for paying yourself first. Taking care of yourself can impact so many areas of your personal life and the success of your business. 

Finally, let’s look at these two numbers (monthly revenue and monthly expenses) side by side. Subtract the monthly expenses from the monthly revenue, and that’s your business’s monthly profit. Ideally that’s a positive number! And that’s it—you’re paying yourself first because your salary is included in those expenses AND your business makes money (if all goes to plan). 

If you implement this into your business, I promise you won’t be disappointed. You can feel the buy-in of your business paying you!

Join our facebook group, here, to talk with other entrepreneurs implementing these same principles!

Download our Monthly Money Management Guide Money Management Guide for a deeper dive into the small business budgeting process!