This week's topic – the importance of paying yourself - can be more complicated than it seems on first glance. Paying ourselves sounds logical, particularly when you're working for a set income paid to you at regular intervals. But the real question comes down to what you actually do with that regular income, and how it's getting utilised.
As we've said in previous weekly episodes, we strongly recommend doing a cashflow budget in order to get really clear on how your money is tracking and what your cost of living is, particularly when it comes to those non-negotiable fixed costs such as bills that we can't get away from. After the budget is completed, it's then time to look at how you're using your surplus cashflow, or the amount that may be left over after your bills are paid. This is also related to how you've arranged your personal bank accounts.
An easy way to organize your accounts is to have the following arrangement, or something similar:
1. A bills and everyday account
2. A personal spending account
3. Online savings accounts for different purposes (such as travel, school fees etc)
4. Investments and superannuation
The amount that gets directed into each of these accounts really depends on your cashflow surplus, but the most important aspect is that some money is diverted out of circulation from the everyday account, and into other areas. It's also best if this arrangement is done automatically so you get used to only using what's in the everyday account for your regular expenses.
In the case of a couple, it's best if each person has their own personal spending account and they have full discretion over what they spend that money on. This way, there are no arguments over who spent what – if you want that pair of shoes, you can buy them with no guilt, provided there's money in your personal spending account to cover them.
And of course, you should certainly make an effort to pay some money into an investment account as well as your superannuation. Salary sacrificing into super is a great and simple way to do this, and it has the added benefit of saving you some tax in the process.
Paying money into super is particularly important if you're self-employed – don't overlook this! You pay your employees superannuation and it's just as important to pay yourself on a regular basis. Fast forward 10 years and you'll certainly be pleased you put some money aside.
For business owners, it's an easy trap to fall into to not pay yourself a correct wage or to simply not pay yourself at all. The downside of this approach is that you're really running your business as though you've "bought yourself a job." By not paying yourself a regular wage, you avoid having to make a higher profit amount, but you also reduce the end value of your business in the eyes of a potential buyer.
Consider if someone came along and wanted to buy your business – one of their questions may be whether the business could, in fact, be run by a manager. If there's not enough room for the owner to draw an income, there won't be enough room for the expense of a manager to be covered either. This has the effect of then reducing the overall value of your business asset. Therefore, challenge yourself to draw a regular wage from the business and aim to have the capacity to increase this over time.
If you'd like to know more about this concept please don't hesitate to contact us. We're only a phone call or email away.