In the beginning, an entrepreneur’s focus may be more on investing into the business instead of into their own bank account. Yet, as a fledgling startup grows into a successful business, things change. After a few years, the business may be more stable and even doing well. At that point, an entrepreneur needs to decide just how much to reinvest into the business versus themselves.
This allocation can be a tricky situation to navigate. To help you gain a better understanding of what needs to be considered when deciding how much you should pay yourself, we asked members of YEC Next to share their own experiences, as well as the reasons behind their decisions. Here’s what they said:
1. Take Care of Your Home Life
The one thing I learned about compensation is that you must pay yourself enough to take care of your home life. This is extremely important because if your home life is in disarray you cannot focus on business growth. Your pay should be based on what you would make in this same role working for someone else. If your company grows by a certain percent each year and you are the driver of that growth, your base salary should increase by that same percentage of net profit growth. The remaining profits should be reinvested. – Jilea Hemmings, Best Tyme
2. Figure Out Your Budget For The Year First
My salary is always dependent on the budget for the year and may increase or decrease with where profit (not revenue) is being reinvested into the organization. People always forget that there is tax to pay on that money you take. Overall, a modest salary of 30% of profit works for most, depending on industry. If the business does better than expected, then it’s easy to bonus yourself. More importantly, don’t live beyond your means. Flashy cars, watches and extravagant lifestyle moves mean you need more to survive. It puts a serious strain on your business if you need to pull all that money to keep up. – Frank Mengert, ebenefit Marketplace
3. Pay Yourself Well
Find out how others in your position earn and use that as a baseline (find an average). Look at how much you would have to pay someone else to do your roles. Those two data points will really guide you in how much you should pay yourself. Paying yourself is important, and paying yourself well is important for long-term success. If you do not pay yourself well, you may wake up one day and ask yourself “Why am I working so hard?” Or you may burn yourself out much quicker. At the end of the day if the founders aren’t making money, then it is probably not a good business model. – John Arroyo, Arroyo Labs, Inc.
4. Live Frugally
A start-up business is a precarious beast. While the road to financial stability is often a long one, the fall to unprofitability can, in contrast, be a quick one. I believe it is prudent, therefore, to put off lavish spending as long as possible. When your company is able to afford to pay you a good wage (this must be proven out over a significant period of consistent profitability), then it would be prudent to begin with a modest comparable industry salary (which can be easily found with a few searches). The ideal situation, however, is to be in a place where you have limited your monthly outlays so that you can re-invest the maximum amount into your business. Living frugally for the early years will pay huge dividends (quite literally) in the longer term. – Ryan Meghdies, Tastic Marketing Inc.
5. Reinvesting Is Important
I take out a fair compensation. I reinvest every amount I would not pay the CEO. I ask myself if my pay is related to the amount of time I spend on my business. My salary is equal to the number of duties and level of responsibility required. I review what recruiting agencies would offer to pay for someone in my position. I made sure the salary for my role is comparable to similar business wages. My pay is very reasonable compared to my employees’ wages. Reinvesting is important because you are giving your business the opportunity to grow. When you do not reinvest, you are starving growth. – Jessica Baker, Aligned Signs
6. Pay Yourself The Bare Minimum
Pay the bare minimum needed for all expenses and spending cash for a comfortable lifestyle. Every business owner’s situation will be different, but average out every monthly expense — mortgage to grocery costs to other personal expenses (going out, etc.) — and cover those. Then grow your salary as the company grows. During my agency’s first year I used extra time to complete some of my top-paying client’s content creation work to offset outsourcing costs, but didn’t allow this to take away from my BD time. I completed that work during my “down time” not fully associated with business development or onboarding new clients. This also allowed for quicker profitability. It’s also smart to re-evaluate your personal expenses every six months and curve your salary around what’s needed. – Ron Lieback, ContentMender