How Much Should Business Owners Pay Themselves ?

August 21, 2019
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In recent weeks on the Illumination Wealth Blog, we’ve been talking about how business owners need to approach both their personal and business finances with the same attention to detail. Last week, we talked about how much money to keep in your business and personal accounts to ensure there was always enough cash flow—but not too much extra cash lying around.

This week, we tackle one of the biggest questions that business owners will ask themselves: How much should I pay myself?

Determining the Ideal Salary

Determining your own salary and compensation from your own business can be a challenge for some. It’s tempting to take home as much as you can each month after all the expenses are covered and cash flow accounts are replenished. However, there are drawbacks to paying yourself too much. Your business may not have the resources it needs to fuel its own growth or maintain adequate capital reserves. The more you earn, the higher tax bracket you will find yourself in and that can actually hinder your ability to save for the future.

Many financial experts will argue that answering the question of how much to pay yourself should be determined by your own personal and family budget. In other words, the amount of money you need to live the life you want can translate directly into figuring out your own salary.

Building Your Personal Budget

It all starts with building a sound financial budget, which boils down to three key components:

1. Committed & Basic Expenses (50% of your budget)

A good rule of thumb is to budget 50% of your after-tax income to your needs. What are needs? Well, we’re talking about fixed expenses and necessities. This might include housing, food, transportation, clothing, medical, utility bills, education and any debt payments. So basically if you are doing things right, roughly half of what you earn is going toward your base living expenses.

2. Day-to-Day Wants (30% of your budget)

What we would consider “wants” would include non-essential expenses. It’s fair to want your life to be as enjoyable as possible, so devote 30% of your budget to these things. We’re talking entertainment, dining out, vacations and, of course, your “toys.” You don’t really need any of these things, but you want them and that’s perfectly fine. As long as you budget correctly, they can be yours.

3. Future Savings (20% of your budget)

As you are enjoying your life now, you will also want to be saving for your future. This will include retirement savings plans, health savings accounts (HSAs), investments and your personal savings account(s).

Some people may opt to shift the budget even more, to devote a higher percentage to savings as opposed to wants. However you want to slice this half of the pie is up to you as long as you have the right balance that covers your needs first.

Use Your Budget to Determine Your Personal Salary

With a personal budget laid out like this, you will easily be able to determine how much you pay yourself as the business owner.  All your needs, wants and savings goals will be met without taking more than you require. That additional profit can be reinvested in your business in many different ways, making for a truly win-win situation. And if you can’t sufficiently pay yourself at the amount that you want, then you should create your business goals and plan to support your ideal personal budget.

This is just one example of proper personal budgeting that any person can follow, and it is a good way for business owners to figure out how much to pay themselves.

For help with your personal budget, business planning, investment strategy, retirement savings and all your financial planning needs, count on the team at Illumination Wealth to provide the guidance and expertise that will help you achieve true financial independence. Contact us today to schedule a no-obligation introductory consultation.