What Does it Mean to Pay Yourself First as a Small Business Owner?
If you are an entrepreneur considering starting your own business, or if you’ve already opened your business but you aren’t sure how to facilitate its growth, one of the best pieces of advice out there is to pay yourself first. Learning what this means and putting it into practice is the cornerstone of your small business’s success.
What Does it Mean to Pay Yourself First?
The term “pay yourself first” describes a money-saving technique designed to help you save money to cover your own long-term needs and wellbeing. To put it as simply as possible, it means giving yourself a paycheck. Often, business owners tend to put all of the revenue they generate back into the business, whether they are upgrading their equipment, purchasing new inventory, hiring more employees, or any other expense. Unfortunately, many small business owners suffer when they fail to give themselves paychecks before reinvesting or spending the money their business generates.
Ways to Pay Yourself First
The simplest way to pay yourself involves issuing yourself a paycheck (transferring funds into your personal bank account) on a set schedule that you determine. This money should not be used for the business; instead, it should be used for your own personal needs, including your mortgage payments, groceries, personal transportation, vacations, and more. Of course, there are other ways to make sure you are paying yourself, too. These include:
- Making regular deposits into your 401k or Roth IRA accounts. When you put money toward your retirement, you are investing in your own future.
- Paying off debt. You might also choose to pay yourself first by paying off your personal debts, including things like credit cards, student loans, mortgages, auto loans, etc. Again, this ensures that you are focusing on your future wellbeing and financial security.
- Depositing into your health savings account. If you don’t already have a health savings account, consider setting one up with the funds you pay yourself from your small business. Of all of the benefits associated with a healthcare savings account, the potential for money savings is the most enticing – and one of the most important.
- Creating an emergency fund. The funds you pay yourself from your small business revenue can be used to create a “nest egg” for emergencies. Ultimately, you should save enough money to cover between three and six months’ worth of expenses in the event of an emergency.
- Saving for a major purchase. Many small business owners pay themselves in order to save money for a down payment on a home, and some even save money to purchase their personal automobiles in cash, which comes with a significant discount.
- Buying insurance. Finally, you could even purchase insurance with the funds you pay yourself each period. Health, life, and long-term disability care are all fantastic investments.
If the idea of paying yourself first seems tantalizing but you aren’t sure where to start, hiring a professional bookkeeper who is focused on helping small businesses save cash is your first step. Over time, you’ll find that you can not only pay yourself enough to accomplish your personal goals, but you can build significant savings in your business account, too.