When you business finally starts producing income (and the initial joy wears off), business owners now have a new financial issue — how should this money be spent? Should you invest profits back into the business, spend the money own your own personal expenses? Or if your business is producing profits, is that the time to pay yourself a salary or save for retirement, or should you wait? Allocating that next dollar of income is challenging, because you and your business have conflicting priorities. On one hand, you want to grow your business as fast as possible. But you also want to enjoy your profits (finally!) and start to up-level your lifestyle.
You also know you “should” be saving for retirement — and you don’t want to miss out on years of saving (especially when you would be building your 401(k) if you still had your corporate job).
I recommend you triage the allocation of your income. As you are able to pay for the first category discussed below, you can move on to considering expenditures in the next category. For example, once you have your minimum expenses covered, you can start investing in business growth and saving for retirement.
“Must” have expenses
Minimum Personal Expenses: shelter, utilities, food, gas, loan payments, insurance.
Minimum Business Overhead: rent, payroll, licensing, operational costs, insurance, taxes, inventory.
Maintenance & early growth
Personal Expenses: clothing, household goods, toys, personal care, discount travel, insurance, gifts, charitable donations.
Business Growth: promotion & advertising, networking, staff, outsourcing, new products and services.
Lifestyle & Growth
Lifestyle Expenses: luxury vacations, 2nd home, luxury automobile, designer clothes, country club membership, extensive charitable causes.
Rapid Business Growth: research and development, new technologies, staff, branding, business real estate, additional business ventures.
Wealth Building: real estate, equities, alternative investments, college savings funds, additional retirement savings.
But be aware — these choices depend upon you personal priorities and goals. You may not be willing to “give up your coffee” today for a million dollars in 40 years. That’s not right or wrong. It’s a matter of personal values. The important decision is to always be making a conscious choice of what you are taking and what you are giving up in response. The Wealth Spa(TM) Minute Do you know the average monthly overhead of your business? Is that figure a real number or just a guess? Use your bookkeeping software to find your average monthly expenses — to determine how much it costs each month just for your business to stay afloat.