Money Strategy #5: Pay YourselfNovember 22, 2008
This article is part of a series of eleven short articles on managing money. It is aimed at freelancers and independent contractors. Before you read this article, make sure you have read the disclaimers etc. in the introductory article about my money management rules.
Strategy #5: Pay yourself
Critical to your financial survival at a personal level is to pay yourself. However, don’t ever assume that your business income is your personal income to spend on whatever you want.
Karen had her own technical writing business bringing in some $80,000 annually. She assumed that all that $80,000 was hers, not the company’s. When she hit some lean times, she had nothing put aside to pay the bills and eventually had to fold her business and go back to a permanent position.
To deal with the ups and downs of business income, I pay myself a fixed salary, which doesn’t vary no matter how much my business is bringing in or whether I’ve worked billable hours that month or not. My salary is nowhere near the gross income for my business. In the good times, the business bank account is nice and healthy and it stays that way. This provides me with a buffer to continue paying myself the same salary even in lean times. My mortgage payments and other household bills don’t get smaller just because my business is bringing in less income.
There will be lean times; you need to have a financial buffer to cover those times. I try to have a buffer of at least three months salary in the business bank account. Some advisers recommend six to twelve months.
Each year I try to attend and speak at at least one conference in either the US or Australia (sometimes both). I not only have the expenses of getting to the conference, plus the usual costs of registration, accommodation, meals, transport, etc., I also have the double whammy of no income for the time I’m away. I have had situations of four to five weeks of exceptionally high expenses combined with no income for that time. I could not do this if I didn’t have a buffer of funds to cover my salary for the time I am away. Anyone who is an independent contractor or freelancer is in the same situation: If we don’t work, we don’t get paid.
- The Rules
- Strategy #1: Get professional advice
- Strategy #2: Keep your money separate
- Strategy #3: Invoice regularly
- Strategy #4: Pay your bills on time
- Strategy #5: Pay yourself (this article)
- Strategy #6: Set aside your tax obligations
- Strategy #7: Use accounting software of some sort
- Strategy #8: Regularly keep track of your position
- Strategy #9: Decide on a billing method
- Strategy #10: Manage any surplus funds