September
12
2018

How To Pay Yourself

By Chris 0

Your business exists to serve you.

 

But your own pay usually comes LAST, right? And if you’re in the Founder Phase–sometimes even in the Farmer Phase–your pay might just be a combination of pocket lint and warm wishes.

 

Paying yourself is more than a math problem: it’s a habit problem. Your expenses will always expand to fill your budget. You’ll get pretty creative to pay the rent if you don’t have the money, but you won’t work as hard to pay yourself. You’ll opt for martyrdominstead. You need to develop the habit of paying yourself first, or you’ll never pay yourself enough.

 

Here’s how to start.

 

In the Founder Phase, your goal is “breakeven plus”. That means your business is cash-flow-positive, and you’re paying yourself something. Some of us have the benefit of a family who depends on our income, and we’re forced to cut that check on the first Friday. But others are willing to wait…and wait…and tell themselves they’re “reinvesting”, when they’re really just spending. If you’re in the Founder Phase, don’t wait to for your cash flow to match your expenses before you pay yourself. Pay yourself SOMETHING from day one. In other words, pay yourself a wage instead of waiting for profit.

Exercise: write yourself a check for $100 per week, payable every Friday. Date them in advance, sign them, and take them to the bank for deposit. Now the money is coming out without a conscious decision from you every week.

If you’re still tempted to cancel the payments on the checks, write them to your wife instead.

Every three months, give yourself a mandatory raise.

 

In the Farmer Phase, your goal is to reach a 33% profit margin in your business. This is different from paying yourself a wage; you’ll switch to taking profit PLUS a wage.

 

Start by finding your replacement value: what are others in your industry paid to do the work you’re doing? If you were to replace yourself in the primary deliverable of your business, what would it cost? We use PayScale.comfor these estimates, but you can use any anchor you like.

 

For example, if you own a pizza business and not paying yourself, take a look at what pizza makers are paid. Compare that to your own income. If you’re not paying yourself at least that much, start writing yourself checks in advance for that amount, and commit to giving yourself a raise in six months.

 

Finally, if you’re already paying yourself a LITTLE, but not enough (or worse, “covering your bills” with the business profits but not actually giving yourself a paycheck) take the next step:

 

Calculate your Effective Hourly Rate (EHR). Divide your total income, including all benefits from the business, into the total time you spend working at, in or on your business.

 

For example, if you’re paying yourself $500 per week and working 40 hours at the pizza shop, 12 hours on bookkeeping and 3 hours cleaning on the weekends, your EHR is $9.09 ($500 / 55 hours.)

 

Then tell your boss what a jerk he is, and that he can take his lousy job and…wait, that’s you.

 

If you’re in the Founder Phase, commit to paying yourself the industry minimum. Then commit to bringing your EHR up by working slightly less or paying yourself slightly more. 15% raises are usually the starting point, because they’re hard to notice.

 

If you’re in the Farmer Phase, work up to the industry average over time. Give yourself pre-written “raises” until you reach that point. Write checks for the next year if you have to, moving each amount up by a few dollars at a time.

For example, week 1: $500 check

Week 3: $540 check

Week 5: $580 check

…until you hit the average pay for the average worker doing your job. Of course, we won’t stop there; we’ll continue to take profits above and beyond that pay (which is the reason we opened the business!) But we’ll no longer starve ourself to build up a bank of profit and then blow it on unnecessary necessities.

 

Your goal, in the Farmer Phase, is a minimum EHR of $50 per hour. Boost your EHR by cutting your hours down to 45 or less per week, and increase your pay incrementally at the same time.

 

In Tinker…well, we’ll get there. For now, start paying yourself!

 

 

 

 

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