How I Paid Myself More While Working Less

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fall leaves in pretty light I wanted to talk this week about sustainability and income - about budgets and paychecks and all financial things we don't easily talk about. And fair warning - this post is a bit vulnerable and long. And many of you likely don't need the thoughts I'm sharing this week, but for those of you who do, it may feel just as vulnerable for you to read them as it was for me to write them.

 

Last year my goal was to focus more on sustainability over pure growth. I was at a point where I knew that I was about as busy as I could be, and the next big step towards increasing my income was going to be through scalability, but I wasn't quite ready to make that move yet. I wanted a year to get a few things in place, add one more income stream to my business, build a stronger foundation, and really analyze where I was spending my time and where my efforts paid off the most.

 

Part of doing that was figuring out how I could meet or exceed my previous year's net income while still making room in my schedule to start a few new projects, including a new stream of income. In 2017 I ended making about $12,000 less in gross income than I did in 2016. That's the rough equivalent of about 6 weeks worth of work. It's hard to truly break it down because I have some months that make a lot more than that, and some months that make a lot less, but I think that's a good, rough average. But, once I accounted for all my expenses and tax obligations, I ended up earning almost $6000 more in net income than I did in 2016. That means that hour for hour, I actually paid myself more while working less, beyond just raising my prices. And it freed up time to start new projects and portfolio build for a new income stream.

 

(For those of you who need a refresher: your GROSS income is your total earned income, before taxes or expenses. Your NET income is what you have left after paying expenses and taxes. In other words, your GROSS income is every dollar that comes into your business account. Your NET income is the portion of those dollars that you actually pay yourself after expenses and taxes. And your gross income is how much your business earned. Basically, your net income is how much YOU actually earned.)

 

How did I do it? It's so simple it almost feels ridiculous mentioning it, but it was kind of life changing for me: I kept to a budget, gave every dollar a job, and spent way less on my business, while still investing in myself, than I have in years prior. That's it.

 

That means I thought about purchases before making them. I kept track of where my money was really going - thinking beyond my bookkeeping software and categories, and really thinking about every purchase in terms of how many hours of work I have to exchange to buy the thing I wanted. With a few exceptions, I instituted a 24 hour "wait on it" rule. And with most of the money I did have in my budget, I invested in myself through workshops and education - including a very expensive, but very worthwhile, week long mentoring workshop I took this fall.

 

Admittedly, I've been at it long enough that I no longer have very many large equipment expenses. I've also learned which tools work and which ones I don't really need. I really believe that you have to spend money to earn money, but I tried really hard to reframe my business spending in a more controlled way. Whether you are just starting out, or have been in business for a while, too, I know that you can still benefit from going through a bit of a expenses audit, and really thinking about not just the money and numbers coming and going, but what that money means - where you are investing, and how you can measure your return on investment, even for intangible things like education and peace of mind.

Reframing How You See Your Business Dollars

One of the most misunderstood pieces of financial advice I hear sole proprietors and LLC throwing around is that "everything is a tax write off, so buy as much for your business as you can." I mean, yeah, much of what you purchase for your business likely is a tax write off (and here's the big disclaimer - if you don't already have a CPA you can count on, you need to get one ASAP. I am not a CPA but I have one I trust, and I rely on him heavily for advice on my taxes and accounts. His modest yearly fee is worth every single penny.) But back to the write-off thing... yes, any expenses that you can write off you should. But please don't buy things for your business if it means sacrificing your own paycheck.

 

If you are newly in business you are probably saying to yourself, "well that's great but I DO need to buy things for my business." And you are right - but I don't want your habits now (i.e. investing every penny back into your business) to become the way you think of your budget and earnings a few years from now when you're at a stage where you are ready to invest that money back into yourself and your family in the form of a paycheck. As soon as you are able, start putting your income to work by investing it in yourself - be that through quality education, a paycheck, or even in paying for childcare and a housekeeper so that you have the time to actually work.

 

Your business dollars are YOURS. And if you truly need something, then yes, having the business buy it and counting it as a write off is the smart thing to do. But if it isn't a need, remember that your trading an income - a paycheck - for a thing. That thing may have value - but so does a paycheck. There is no shame in admitting that you are in business to make money, and to pay yourself. I am. Without question. I adore what I do, I am immensely grateful for every opportunity and every single client - but at the end of the day, I am working to help feed my family. They come first, so once I've paid my minimum obligations and set aside money for taxes, my paycheck comes first. It helped me to reframe that paycheck as a necessity for my family - because it is - and not as a luxury my business was providing me.

Time vs Money

Every single thing on this earth comes down to time, or money. Most people prioritize one or the other in any given situation. I happily - almost joyfully - pay my housekeeper every month because what she does for us is a task I am very happy to pay money for in exchange for my time of not having to do it myself. There are other times when I don't want to exchange my money for my time, and I will happily put the hours in to do the thing myself. Your business is no different.

 

Yes, there are times when it absolutely makes sense to make business purchases. There is stuff you definitely have to have. But just like in personal finance, there are an awful lot of things that are more of a want than a need. And the really important thing when you are running your own business, is to remind yourself that it isn't just a tax write-off. It's also an exchange of "your paycheck for a thing."

 

I read some great money advice about this time last year. It suggested turning every payment into an hourly amount, so that you really understood what money costs you. So if I'm on the fence on a purchase, after waiting my 24 hours, I do that math quickly in my head and think "is it really worth 3 hours of my time?" Sometimes the answer is "hell yes." Other times, it's absolutely a giant no. A hundred dollars means different things for different people, and equating it to time brought a lot more meaning to it for me.

Pay Yourself First

Let's say you purchase something for your business for $1000. It becomes a write off, which means that you basically pay for it tax free - or really, you pay for it with pre-income tax dollars. Which sounds amazing, of course. But if it isn't something you truly need, you also just lost out on a potential paycheck. Yes, you would have to pay income taxes on that paycheck, but if you need a paycheck, it's kind of a no-brainer. Being able to pay yourself $750 verses buying something you don't really need for $1000 is NOT the same thing as "losing" $250 to taxes. And that's the thing I want to make sure you are thinking about this year.

 

That's all super rough math, since everyone's tax bracket and obligations are different, but you get the idea. One of the hardest lessons I've had to learn as I've transitioned from being a business owner who earns enough money to pay for her hobby, to being a business owner who contributes to half of my family's budget, is that every dollar needs a job. And often, that job needs to be going to my paycheck. It's painful paying income tax on a larger amount of money for sure. But it's way more painful to feel like I'm not paying myself enough, and struggling to make our personal ends meet.

 

And that's what I did this past year. I worked less, and paid myself more, simply by spending less on my business. I didn't skimp - I just stuck to a budget of about $1000 a month, and for everything outside of that budget I visualized the thing verses a paycheck - I put the thing into an hourly rate, and weighed if the thing was truly worth the time it cost me to earn it. And more often than not, the paycheck won this year.

Give Every Dollar A Job

So what are the things I do spend money on each month? I have three categories of expenses. Monthly items, such as Adobe CC, PPA dues, advertising, etc. I have yearly obligations, such as hosting fees and insurance. And then I have an As Needed savings category, for things like new or replacement equipment. I used to use paper and pen to keep track of it all, but I found that it didn't do a good job of showing me an active picture of my business, and it didn't do a great job of absorbing new or unexpected things. This past year I started using You Need A Budget for my business accounts, and once I got the hang of it, it completely changed how I see my accounts.

 

I also use bookkeeping software and an accountant. But the difference between YNAB and my bookkeeping software is simple, but SO KEY: my bookkeeping software tells me where the money came from, and where it went. It just shows me income and expenses, after I've spent it. But YNAB allows me to tell my money where I want it to go, before I spend it. It helps me give every dollar a job (which is the entire point of the YNAB program), and it gives me so much power and control over each and every dollar.

 

Because you can't get a good snapshot of the financial health of your business if you just look at your account balance, or past P&L sheets. I can't really just look at my business account and say "oh sweet, I have $, I can totally afford that new lens I want" - because chances are those dollars are either already spoken for in terms up upcoming expenses, or already spoken for in terms of paying myself. Especially those of us who can't count on a set amount of income every month, having padding for the lean months is so important. And that's what YNAB was able to show me. And it's completely why I was able to pay myself more over the course of the year while making less overall.

Educate Yourself & Take Control

No one likes to talk about money, but we all seem to be curious about it at the same time. I think it's something we need to talk more about, both as women and as small business owners. I plan on talking about it a lot more this year, and I hope it helps you think about your own finances and business more carefully as a result.

 

And I also have to say this: I have pretty much sucked at money my whole life. I am terrible when it comes to managing our personal finances. Historically, I am a super impulsive purchaser, I hate having to budget, and I am not someone who is naturally frugal. I want all the things - and I hate that about myself and I’m working on changing it, but - that’s part of who I am, and I want to be open and honest with that so that you understand that truly - if I was able to make big changes, you can, too.

 

I don't want you to think that I have it all figured out, or that I'm naturally good at this. I am NOT. Really, truly - not good. But this past year I decided enough was enough. And I was too afraid to tackle our personal finances this way - so that should tell you something about where I'm at. But my business seemed more achievable, so I started there. And I am so glad that I did. This year I'm working on our personal finances this way, and although we are barely a week into 2018, I already see such a big change. My only regret is that I didn't start our personal finances this time last year when I started my business finances this way. But it's never too late. You'll never regret what you start today, and you can't change what you did or didn't do yesterday.

 

Educate yourself. Give every dollar a job. And re-frame your business purchases so that they are truly working for you, rather than you working so hard to be able to afford them. And I don't have a free download for you with this post because I have a recommendation instead, and it's not my thing to give away. But if there is ONE thing you do for the financial health of your business this year, please, please consider doing this - check out You Need A Budget, and set up a budget for your business. I now have two budgets in my YNAB app - one for our household budget, and one for my business' budget. I know it was a huge reason why I was able to pay myself extra without having to make more this year. And it feels really good to know exactly where every penny my business earns, goes. And it feels even more amazing when more of those pennies find their way to me directly through a paycheck.

I so, so want you to not just find success as a creative, but success in business, too. And keeping your finances healthy - being involved in them, aware of them, and in control of them, is such a huge part of how you get there. I didn't write this post because I think I'm an expert at managing money - quite the opposite, in fact. But because I know I'm not good with money, I've worked hard over the past few years to educate myself, and take the steps necessary to get a better handle on my finances.

If you have any questions on how I budget for my business and keep track of it all, feel free to post them in the comments!

Kate Densmore2 Comments