Council Post: Pay Yourself First: Why It's Important For Small-Business Owners (2024)

FAQs

Council Post: Pay Yourself First: Why It's Important For Small-Business Owners? ›

When you pay yourself first, you're making savings a priority. By setting aside money before you spend it on anything else, you're more likely to stick to your budget and save more over time. This can help you build an emergency fund, save for a rainy day or invest in your future.

If you make a habit of depositing or moving money into your savings account every time you are paid, you may be less likely to spend it on your everyday expenses. This practice can help you foster a habit of saving that will add up over time and help you be prepared for large or unexpected expenses.

If you can manage it, paying yourself first will likely reduce your stress, as you'll have something saved for retirement and a way to pay for emergencies in cash, from your car breaking down to unexpected medical expenses.

It's important to “pay yourself first” to ensure money is set aside for unexpected expenses, such as medical bills, a significant car repair, day-to-day expenses if you get laid off, and more. The ideal safety net is three to 12 months of living expenses.

You can pay yourself as a business owner by setting a regular salary or taking owner's draws. Maintain clear financial separation between personal and business accounts, and choose an amount that aligns with your business's financial health.

By paying yourself before others, you are building the habits and discipline it takes to gain peace of mind with an emergency fund, save for large purchases and trips, and invest for long-term wealth building.

Cons. Potential downsides to paying yourself first include: Transferring too much to savings: Not keeping enough money in your checking account can be harmful for your finances. Always keep a cushion in your checking account to avoid paying overdraft fees and possibly monthly service fees.

Paying yourself first can be effective because it ensures you save something every pay period, and it reduces the chance that you'll spend money you intended to save.

Key Takeaways. The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.

Then I discovered a timeless principle in the classic book "The Richest Man in Babylon" by George S. Clason. The concept is simple yet powerful: "Pay yourself first." This approach transformed my saving habits by prioritizing setting aside a portion of my income before addressing any other expenses.

Why should business owners pay themselves first? ›

Paying yourself a salary can also be an important part of your financial plan, as it provides a steady income stream and helps keep personal and business finances separate. By putting your financial well-being first, you'll be better equipped to handle the ups and downs of running a small business.

If you pay yourself this way, you can elect to be treated as an S-corporation for tax purposes. The advantage is that you only pay FICA, Medicare and Social Security taxes (colloquially called “self-employment tax”) on the salary or wages you pay yourself, not on all business profits.

If you choose to pay yourself a salary from your LLC as an employee, you will pay income tax on your wages earned, and the LLC must file a W-2 form to show the IRS your payments and withheld taxes. You'll need to file IRS Form W-4 to determine the amount of income tax that the LLC should withhold from your paychecks.

If you don't first attend to your own needs, you're not going to be able to assist those who rely on you for help and guidance. Taking care of others should not require you to sacrifice your own well-being. When you take on too much, you're also risking your own mental and physical wellness.

Paying yourself first means saving money before using it for bills and other spending. This approach to budgeting protects you in financial emergencies and provides for future opportunities.

In addition, taking a salary makes it easy to anticipate the company's cash needs and it helps you pay your personal taxes in a timely way. The IRS even requires owners of S-corps and C-corps who are involved with running the business to take salaries, which must include “reasonable” levels of compensation.

What is a major benefit of the Pay Yourself First strategy? It encourages you to prioritize saving money.