Remember your first job and the day you received your first paycheck? It was a crisp check, all neat around the edges, and just begging to get cashed and have some fun. Then, two weeks later, you got another one. And two weeks later another one. It was all so simple!
Enter self-employment. Unless you’re an S-corp, there is no majestic bi-monthly paycheck. There’s the money you make and then there are the bills you have to pay and somehow those two need to connect by paying yourself.
One thing we didn’t learn in our first job (or really any other job after that) is how to make that connection between self-employment income and our pocketbooks.
And so we try to figure it out on our own, with the best intentions, but usually we’re screwing something up.
Here are 3 mistakes you might be making when you pay yourself:
Having All Your Money Go Into One Account
If you don’t have separate business and personal checking accounts, stop reading this and go open one right now. Seriously, stop and go. Go now.
In this scenario, you aren’t really paying yourself. Rather you have floods of money coming in with no structure.
When your finances are mixed, you don’t have a clear sense of the state of your business or personal finances. It’s difficult to develop and stick to a budget for either account which means it’s easier to overspend and harder to set and reach goals.
You’re at risk of missing deductions because there is just SO MUCH information to sort through and it will take you a million years longer to do your accounting. Which means you probably won’t.
You know those bags of Chex mix that have, like, 3 of those super delicious rye chips?
Well, a mixed-use account is like that. You spend so much time digging through the bag looking for that one thing you really want, that you ignore all the other delicious bits.
When your finances are mixed you don’t have a clear sense of your business or personal finances.Click To Tweet
Paying Yourself Whenever Money Comes In
Don’t do this! I know it’s tempting, especially if you’re running a service based business where you get paid daily. All that cash pouring in is just begging to get spent on a new pair of Doc Martens.
Drawing money out every time it comes in is dangerous for your business. Sure, personally you get some extra bucks, but you’re also leaving your business in a lurch when it needs to pay bills.
Plus, you will likely look at your business bank account when you need to purchase something and say, “Well I can’t afford it,” which means you are missing out on valuable deductions.
Here’s the thing- purchases for your business are tax-deductible and help you save money on your tax bill. Rainbow glitter Doc Martens are not.
Drawing money out whenever it comes in is also dangerous to your personal finances because you wind up feeling like you have limitless funds. $500 today, $300 tomorrow, $600 the next day- I can buy whatever I want!
But you don’t have limitless funds. You have bills to pay, credit cards to pay off, and goals to save for. Often, when people draw money out whenever it comes in, their personal spending goes up and their savings go down.
Drawing money out of your business whenever it comes in is dangerous to your personal finances.Click To Tweet
Paying Yourself Whenever You Need It
Don’t do this either! So, maybe instead of drawing money out whenever it comes in, you’re super careful and only take a draw when you need to pay the electric bill.
The danger here is that you are not tending to your personal needs as a business owner. I get the argument of wanting to keep most of your funds in your business but you also need to be sure that you’re benefitting from your business as the owner.
If you aren’t- your business is going to suffer.
Even if you don’t want to draw out huge sums of money every month, you should still draw out something reasonable that will cover your personal expenses and savings goals.
Your business isn’t just paying for your life right now, it’s paying for your life 3 years from now.
Don’t get caught up in, “Well when my business is more successful I will get paid,”. What will happen is that your business will become successful without learning how to pay you. Then, when the time comes to get paid, your business is going to really struggle to sustain this new expense.
Teach your business how to pay you early on.
Your business isn’t just paying for your life right now, it’s paying for your life 3 years from nowClick To Tweet
What to Do Instead
I could write a bunch of fluff about this, but I’m going to keep it brief. Develop an owner pay schedule.
An owner pay schedule is a set amount that you pay yourself regularly. It accounts for your business expenses, tax savings, vacation savings AND for your personal expenses and financial goals.
An owner pay is made with intention. It isn’t just a number that you decide sounds good, it’s a number that you carefully calculate based on your financial needs. This is a number that sustains you on ALL the levels.
An owner pay schedule is regular. Set up an automatic transfer to pay yourself or schedule a time to do it every month. This regularity keeps you on track with your spending because, when that money is gone, you don’t get to dip in again. You get to wait, like the good ‘ol days of getting a paycheck, and figure out where you overspent and why.
If you’re like, cool Andi, thanks for telling me all about this thing I have to that I have no idea how to do– fear not! I have a 60-minute mini-training that teaches you step by step how to create an owner pay schedule for yourself. Check it out here!