Why I think you should NOT pay yourself first (or last).

Pay yourself first?A lot of books tell new business owners that a sound financial practice is to always pay themselves first. In theory this sounds pretty good, right? It implies that you are taking good care of yourself financially.

Truth be told, this never quite made sense to me.

When I first started out, I didn’t make enough to pay myself first and still be current with payments on the office rent, phone, Internet and marketing expenses.

I worked another job to make sure that my personal bills (home, leisure, family) were paid. Every cent that came in to my new practice was saved either for the current monthly business expenses or for future business expenses.

Both ways – paying yourself first or paying yourself last – means that potentially some bills will not be paid in a given month.

Here’s what I mean. Say you bring in $6000 in March and you know you need $1200 to pay your home expenses. If you pay yourself first this leaves $4800 to pay the rest of your bills. But what if your malpractice insurance is due in April and your taxes are due in April to the tune of $6000. This means your business is $1200 short.

I think the real answer is to earmark each dollar as it comes in to your practice.

You see it all starts with the budget. Let’s start with the main budget categories:

• Profit (yes, you NEED to have profit in your business)
• Personal expenses (what you need to pay for your life and home)
• Personal savings (for emergencies, upcoming bills, vacations, retirement)
• Business expenses (everything from your office to your marketing and Internet)
• Business savings (for when you have lulls in your practice, need a new computer or when you want to want to expand)
• Taxes

The first step is to figure out what you spent in each category over the last year and then figure out what percentage each category is of the total amount. Every business owner’s numbers are different.

But let’s take an example here: Let’s say after you counted up your expenses, your categories looked like this (and this is only an example and not a recommended percentage structure)

Profit: 5%
Taxes: 20%
Personal expenses: 20%
Personal savings: 5%
Business expenses: 45%
Business savings: 5%

Then as each dollar comes into the practice, you could give the appropriate percentage to the appropriate budget category account. So if $6000 came in one month, in this case, $300 would be in the profit bucket, $1200 would be saved for taxes, $1200 would go into a personal account to pay for personal expenses, $300 would go into a personal savings account and $300 would be saved as “business savings. 45% or  $2700 would go to pay for your monthly business expenses.

While in month one, you may need to get some additional income; over the long run is where this strategy really is powerful. Over time you would save up and have enough money in each category to take care of all that you want your business to pay for AND always have profit!! Imagine the freedom and relief!

This way you are not having to choose whether to pay your business or yourself first but making sure there is enough money for all that you want and all your upcoming needs.

Why not take a look at your numbers now? Even if you can’t start this immediately, you can begin to work toward this as a goal.

Manage your money. Manage your destiny.

Love and blessings,
Casey

 

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