I have a confession to make.
I used to be scared of spending money, including paying myself.
My consulting practice was consistently bringing in a few thousand dollars a month and I was terrified of taking any money out for myself, for fear that I wouldn’t bring in another dime.
I was also scared of paying anyone to do anything for me. After I toiled away at a custom branded PowerPoint template for what felt like days, I finally paid someone $50 on Upwork to create it for me. Not only did they finish in about an hour, but that was officially the first outsourcing I ever did for my business. And I probably debated on whether or not to do it for a ridiculously long amount of time.
You may have similar fears as I once did, or ask yourself weekly:
How do I know when to pay myself? How much should I pay myself? What if my revenue is unpredictable? How much should my expenses be?
While I believe that the root of the issue is the scarcity mindset (we believe that there is NOT more where that came from), everyone wants to make sure they are allocating their incoming cash appropriately so they can build a sustainable business they love AND get paid to do so.
Remember, if we are not paying ourselves, we have a hobby, not a business.
And if you’re not cutting yourself a regular paycheck, or making a regular owner’s draw into your personal checking account (even if it’s just $100/month!), you will begin to feel resentment towards your business, and trust me, it all goes downhill from there.
So let’s dive into how to ensure you can pay yourself consistently, even if you don’t yet have consistent revenue.
Step 1 – Visualize your money. I don’t mean close your eyes and picture piles of cash a la Scrooge McDuck, I mean map out your revenue on paper.
Grab our template here. Jump to the Budget & Forecast tab.
Step 2 – Fill in your revenue for the last six months. Add a line for each different revenue source you might have (wedding photography, newborn photography, product sales, etc).
Step 3 – Input your estimated revenue for the next six months (or beyond). Here’s where people freeze. But I don’t know how much money I will make in the next six months! Of course, you don’t. But you are a smart person who can make an educated estimate. Here are a few ways to estimate the unknown:
- Look at your pipeline. What clients or work do you have committed? What clients or work are almost committed?
- Look at last year. If you’re struggling trying to figure out how much money you’ll make in October, check out how much you made in October last year. Is it typically a busy or a slow month?
- Look at your goals. If your goal is to make $120k this year and you’ve already made $80k, you need $40k for the rest of the year. Divide that by how many months are left and figure out the building blocks to get you there. For example, if your photography packages are $5k, you need 8 more. How many can you add each month?
Step 4 – Once your revenue is all laid out on paper, take a look at how it might ebb and flow from month to month. Are there big dips in revenue?
Step 5 – Here’s the fun part! Let’s do a tiny bit of easy math to figure out exactly how much you can afford to pay yourself, how much you should set aside for taxes, and how much you should spend on your business.
(Side note: If you’re super into this and want a great resource, Profit First is a good book to get started. I’m going to simplify it even more though, so if you’re not down for 300 pages of reading, stick with me here.)
Close your eyes for a second. Picture a bucket filled with money. This money is your total income for the month and this is how much we have to allocate every single month.
Let’s say there is $5,000 in that bucket. We want to divide up that $5,000 between a few other buckets:
- Taxes (for the IRS and, if applicable, state government taxes)
- Owner’s pay (that’s you!)
- Business expenses (everything you need to run your business)
- Profit (extra money to hold onto, invest in the business, save for a rainy day, etc)
Each month, we will take our revenue bucket and divvy it up like this:
- 15% for taxes
- 30% for business expenses
- 45% for owner’s pay
- 10% for profit
Step 6 – Set up different bank accounts. I recommend at least two business accounts plus your personal account. Your first business account is where all income will be deposited and where your business expenses will come from. Your second business account should be a savings account where you move your 15% for taxes and 10% for profit every single month. And of course, your personal account will hold your owner’s pay.
(Side note: Profit First recommends more accounts than this, but this is how I’ve set up my own business and it works well.)
Step 7 – See how you stack up. If you already track your expenses, owner’s pay, and profit, calculate the percentages (always calculate as a percentage of revenue) that you’re allocating from your bucket now. Make any adjustments necessary starting next month.
Step 8 – Deal with issues. But what if my expenses are higher than 30% now? What if my revenue is 0? What if I want to spend my profit on a big coaching program or new equipment? What if my expenses are lower than 30%; can I take more owner’s pay?
I know, I know. This formula isn’t entirely foolproof, no questions asked. Your business is a unique flower filled with nuances that you’ll need to work through. My quick answers?
- Lower expenses when you can
- Increase your revenue so you can pay yourself the 45%, even if that is only $20
- Go ahead and spend that profit but only after you have a 3 month reserve in the bank
- Absolutely adjust the percentages as fits your business, just use percentages and track it monthly!
Step 9 – Enjoy a business that fulfills your creative and professional goals, sustains your family and pays you consistently, and makes an impact in the world!
PS – Did you know that we offer VIP days? If everything above sounds wildly helpful, yet totally overwhelming, we can help. We’ll sit together for a whole day and look back at your numbers, then work to create achievable goals and a financial plan to get you there. We’ll set you up with the templates and tools you need to manage this on your own going forward and even check back in three months to see how you’re doing and tweak anything necessary. VIP days can be done virtually OR in-person. Let’s talk!