One of the biggest mistakes entrepreneurs make is either not paying themselves at all or mixing business and personal finances. Let’s explore the right way to compensate yourself while building a sustainable business.
🚫 Critical Mistake to Avoid
Using your business bank account like a personal checking account is a recipe for financial disaster. Always maintain separate business and personal accounts.
The Foundation: Separate Your Finances
I always recommend that clients establish two distinct accounts:
🏦 Essential Banking Setup
- Business Bank Account: For all business income and expenses
- Personal Bank Account: For personal living expenses
At the end of each month, transfer a predetermined amount from your business account to your personal account for the following month’s expenses.
How Much Should You Pay Yourself?
This is one of the most common questions entrepreneurs face, and the answer isn’t one-size-fits-all.
💰 Determining Your Salary
- No set percentage: Each business and personal situation is unique
- Consider overheads: Account for your company’s monthly expenses
- Realistic lifestyle: Balance business needs with personal necessities
The Reality Check Example
📊 Monthly Income vs. Lifestyle Needs
Situation: You need $5,000 monthly for your lifestyle, but your business only generated $2,000 this month.
Solutions:
- Temporarily adjust your lifestyle to live on $2,000
- Increase business efforts to reach the $5,000 monthly target
Managing Income Fluctuations
Business income naturally varies from month to month. Here’s how to handle the inconsistency:
🎯 Smart Income Strategy
Establish a baseline amount you need to cover essential living expenses. Aim to consistently meet this target each month, with additional earnings creating a buffer for slower periods.
Two Schools of Thought on Entrepreneur Compensation
School of Thought 1: The Minimalist Approach
Some experts suggest reinvesting all profits back into your business for the first decade without taking a salary.
⚖️ Balanced Perspective
While reinvestment is crucial, I recommend taking a modest salary to cover basic necessities. Remember:
- Cover essential living costs, not discretionary spending
- Reinvest the majority of profits for growth
- Balance survival with business development
School of Thought 2: The Delayed Gratification Model
This approach involves taking no salary initially, reinvesting all earnings, and paying yourself a substantial dividend after your first profitable year.
📅 Realistic Timeline
Most startups don’t generate significant profits in their first two years. If you’re operating as a sole trader, plan for minimal or no withdrawals during the initial year.
The Entrepreneurial Reality
Building a successful business requires significant sacrifice and dedication. The entrepreneurial journey is challenging but immensely rewarding with the right mindset and strategies.
🌟 Keys to Entrepreneurial Success
- Set clear priorities and maintain discipline
- Embrace the sacrifice required for long-term success
- Develop resilience to overcome challenges
- Differentiate yourself from competitors
- Think big to achieve substantial growth
“A wealthy person is simply someone who has learned how to make money when they’re not working.” – Robert Kiyosaki
Struggling with business finances? Schedule a financial strategy session to develop a sustainable compensation plan.
