Pay yourself first

I used to pay myself last. I would see clients, receive payments, deposit them into my account, and immediately allocate those payments to my expenses. And then I would set aside whatever was left over, for myself. Sometimes that meant taking less than I needed for basic survival, but I thought I was doing the right thing. That if the business was to survive, it had to come first.

But that order is backward, it's why I felt like my business was happening to me, rather than for me. 

You may know the feeling. You pay the rent, supplies, booking software, website, marketing, laundry service, and more. You cover everything the business needs, and at the end of the month you look at what's left and think: I guess that's mine.

Sometimes it's $400. Sometimes it's nothing. Sometimes you don't even look.

When you budget expenses first, you never actually learn whether your business is working. You just know things are getting paid, and you're hoping there's something left for you at the end.

Most microbusiness owners budget the way they were taught to think about bills: pay the loudest ones first. Rent is due on the first. Software renews automatically. Supplies run out and need to be replaced. These expenses feel urgent, so they get paid first.

Owner’s pay does not feel urgent. It feels optional. Something you can skip this month and catch up next month. Something you feel a little guilty about wanting. That, however, is the problem. What begins to happen is that you start to resent your business.

I used to run a small post-rehabilitation (personal training) business. I was booking on average 20, one-hour appointments per week, plus several more half-hour appointments throughout the day. My calendar was pretty full. I paid rent in the form of a per-client fee at the clinic I worked at, as well as insurance, transportation (gas), purchased and maintained my own exercise equipment for in-home clients, software to run the business, and more. I set some money aside for taxes, but was not disciplined about it, and didn’t always save enough. I never thought to pay myself first. As a result, I felt out-of-control and exhausted. I kept hoping that my bank account would grow, which should have happened, considering the success I was having booking and retaining clients.

I had let my expenses decide the direction of my business.

I now pay myself first. I realized that the only way any business of mine would thrive would be if I put myself in the driver’s seat. I decided to set my owner's pay and profit targets first – to an amount that would make the business worth it to me. I then built everything else around it. It allows me to see, in real numbers, if I need to raise prices or cut an expense. It forces me to conduct my business within its means.

I would argue that your pay is the whole point of having a business. When you treat it that way, you are in control. Every other financial decision becomes sharper. 

The percentages you use in your budget should be based on your own research. If you are a muralist, you will have different margins than a massage therapist. You will have a different tax situation, and different overhead. It is important to look into both the IRS and local/state taxes to see what your rates are. The costs of doing business matter, and it is important to calculate what you might be paying for rent, utilities, software, and other regular expenses. The goal is to build a budget that reflects your actual business.

Owner-first budgeting creates clarity. You get to decide what matters most to you, and this basic framework gives you a place to start.

Spend some time researching the percentages that make sense for your business and your location before you fill these in. The steps below give you a structure. The numbers and percentages are your own.

Ask yourself one question: what amount would make this business worth it to me?

When you first build a business, you might not immediately have as much cash influx as you want right away, so instead of deciding upon a dollar amount, pick a percentage amount to set aside whenever you are paid. (This can happen at any interval you choose - it could be once per week, twice per month, or once per month). For example, you might decide you want to keep 40% of your revenue as owner’s pay, which is a reasonable amount. You could take less or more, though I would suggest you take a percentage that allows for a reasonable amount to be set aside for other expenses and still be able to operate your business. 

Profit can give you a buffer for slow months. It can cover repairs or purchases. It can fund your expansion plans. It represents stability. 

A massage therapist might set aside 5 to 10 percent as profit. Some months it covers a broken table. Other months it accumulates, and suddenly she has the money to move into a better studio without taking on debt. That is what profit does. It gives you options.

Spend time researching what you actually owe. Look at your state tax requirements. Look at the IRS tax tables for your income bracket and your business structure. If you are self-employed, you need to account for federal, state, self-employment, and quarterly estimated payments. The percentage will differ based on your income, your location, and your deductions.

For many self-employed microbusiness owners, 25 to 30 percent is a reasonable starting range. But that is a starting point. Your number might be different. Do the research.

Taking time to set aside an adequate amount of money for this will allow you to pay peacefully at tax time.

After owner’s pay, profit, and tax, the remaining percentage is your operating budget. Your operating budget covers these expenses and more: rent, supplies, software, marketing, and insurance.

Allocating money to expenses last allows you to see what you are spending on and whether it is necessary to continue paying for that higher tier of software subscription, the extra 300 square feet of space in your studio, or [insert your extra spending here]. The idea is to live within the means that you have, which may just force you to get creative.

The percentages you choose may not always stay the same, and that’s okay. They may go up and down depending on changes in your income, or profit goals. Reviewing your numbers every month will help you determine whether to keep your percentages the same or make small adjustments. Ask yourself if the numbers still make sense.

For example, a massage therapist might increase her profit percentage to allow for a more expensive purchase in the future. A muralist might raise her prices after demand for her services rises considerably. The goal is to have a clear picture of where your money is going so that you can operate your business from a sense of calm - not chaos.

Spend the time you need to figure out the percentages that make sense for your business. Research your industry, build your budget with percentages that make sense for you, monitor your accounts, and adjust if you need to.

This is a simple and effective way to create more peace of mind in your business. You can start now.

For another breakdown discussion of business budgeting, with percentages included, visit this article: