The process below is what I like to call, “Planning Enough to Get By!”
The method below is the bare minimum to creating a salary. You simply compile your list of living expenses and ensure yourself a salary that will cover everything. Then, you can grow your salary from there.
To begin planning your salary, you need to put together your own personal financial statement that lists all your living expenses, any credit cards with outstanding balances and all short-term and long-term loans. This may be one of the most difficult things you’ve ever had to do, as you don’t want to leave anything out. You want to make sure that your income from the business will be enough to cover your personal living expenses. I strongly recommend using Mint. Mint has helped Amanda and I lay the foundation for all of our financial goals. Literally every account, mortgage, car payment, student loan, stocks, IRA, etc. that we’ve ever had in the last few years is all in Mint. Whenever we login in, we know exactly, in real time, how much we are worth. It is invaluable resource as an entrepreneur.
Whether you use an incredible free resource like Mint or not, you should create a personal balance sheet based off of all operating expenses and goals you and yours have. If you have any outstanding debts, now is the time to focus heavily on them, as you might be viewing them all in full for the first time in one snapshot. Generally, if you can pay down any debts before going into business, you’ll not only decrease the amount of income you’ll require each month, but also improve your personal net worth, which is important when it comes to borrowing capital to fund your business if you need.
Once you establish each of your expenses per month, add them all together. This is the amount you will need to pay yourself in order to meet your basic living requirements at a bare minimum.
This is pretty simple stuff, as long as you stay organized. Remember to include all your expenses. You must provide yourself with complete information. After all, you will be living on this income for the foreseeable future, so you don’t want to get it wrong!
Let’s look at an example. Regina, who decides that she is to be a successful soap and skin care business owner, is figuring out how much to pay herself in salary, based on her personal finances. Here is the list of her personal expenses that come out each month:
- Mortgage: $750.00
- Car Payment: $300.00
- Credit Card: $100.00 (minimum payment)
- Student Loan: $200.00
- Health Insurance: $330.00
- Netflix: $9.00
- Gym: $20.00
- Investment: $200.00
- Utilities: $120.00
- General Living: $1,200.00
This list is everything she owes per month. Her soap and skin care salary must eventually cover all of these personal living expenses in order for her to work full-time and wholeheartedly on her business. The monthly total comes to $3,229.00. Due to unforeseen circumstances and/or emergencies, it would be smart of her to bump up her personal living expense number to, let’s say, $3,400.00 per month. Regina now knows that eventually she will need to take a salary of $3,400 per month to continue her current lifestyle, and perhaps increase this as her business can afford it. This comes to an annual salary of $40,800.
Now, will Regina be able to rake in that much in her first year? Probably not. And this, more than anything else, is why starting a business is so damned hard. Most entrepreneurs who start businesses make serious financial sacrifices while also taking on serious financial risk. If it was easy, everyone would have their own business. It’s not easy. Regina has to make a solid plan that gets her business to the point of affording her steady payments that add up to at least $40,800 in one calendar year. If Regina can work into this salary over the course of a few years, she will be on the right track. If her business isn’t doing well over the first few years, she might be in real financial trouble.
Your business will not be fruitful unless you establish clear financial goals, with your own personal livelihood in mind. If you are creating a soap and skin care company as a side thing, without needing a salary to draw from, no worries. But, if you eventually intend to pivot away from whatever your main financial earnings are right now into being a successful business owner, you’ll need to establish a salary. This method is how I wiggled my way into a financial living. I simply did the numbers, as numbers don’t lie (as long as they are all in front of you!), and came up with an owner draw that would cover my personal financial livelihood that I could eventually take out of my company’s checking account on a systematic basis.
If you need more help in this area, or to find another method of personal salary, check out our latest book, Creating a Soap & Skin Care Brand.