How much should I pay myself?

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Welcome to Money Confessions, where You’re in Good Company community members submit the money dilemmas that oh so many of us are experiencing, yet struggling to talk about.

This week, we’re exploring how much you should pay yourself as a founder or freelancer.

If you’ve got a money dilemma, we’d love to hear from you! Just hit reply to this email or DM us at @yigcpodcast on IG or TikTok and you may just find your dilemma featuring in a future newsletters (anonymously of course).

Mads and Soph!

I just listened to your Splitwise podcast! So good, loved!

I’ve recently started freelancing full time and I am currently in a situation where I am putting all my money into a savings account and kind of just living out of it… I really need to work out how to pay myself as I’m now done being paid by employers for good.

Essentially, how much I should pay myself? Appreciate this is probably different for everyone lol… And also, my accountant said I should connect my ABN to a bank account for tax purposes (???) which I have NO IDEA how to do, and also try to use one card for all business transactions…

I could just speak to my accountant, but after the episode it prompted me to come to you guys!

Sincerely,
Fresh to Freelancing xx

Well, we are so glad you came to us! The question of ‘what should I pay myself?’ was one of the most discussed topics at our Money Talks dinner last month in Sydney! It’s also something that as side hustlers, we have had to consider ourselves. We love to hear that the girl bosses have all been girl bossing, but when you first start making money for yourself, it can be a bit of trial and error to work out what your business needs and what you can take for yourself…

So, how much do you pay yourself?

We started by asking ourselves how much do you actually need to live off? What is the total cost of your “must have” expenses such as rent, bills, groceries, health insurance, socialising etc. We know, this can feel like a bit of a chore (and sometimes a confronting one at that) but it is vital to understand what you need to get by so that you don’t fall short. Pull up a quick excel and note everything down, or go through your common expenses in your banking app (little plug: Up helps do this for you!!) and come up with an amount that you “need” every month. Let’s call this Amount A, your foundation salary.

Amount B is the payment we consider the most important, and it is the amount that goes into your superannuation account every month. When you are “traditionally” employed, superannuation is taken care of for you. However, when you are working for yourself, you have to be accountable for contributions yourself. Currently, the superannuation guarantee sits at 11% of your base salary, and we cannot stress enough the importance of putting away money for your retirement and the benefit of starting early (if you need a refresher of compound interest and the magic of it, go back to last week’s newsletter). So for us, the formula starts to look like:

Total income * 11% = Amount B (your superannuation contribution)

Amount A + Amount B = your MVE (“minimum viable expenses”)

Note: A and B are so important, particularly if your freelance income can be sporadic. By knowing your absolute must haves, then you can very easily assess that anything more (less tax) is a bonus for you... Enter Amount C, the leftovers which can either be allocated to either yourself (savings or investing) or reinvested back into your business.

Once you have worked out how much it genuinely costs you to get by, and have allocated an amount to your future self (who will thank you!!), then the next step is to understand how much is left over in terms of business income. With this excess amount, the question to ask yourself is how much the business needs for growth? This is going to look different for every business depending on your goals. Do you need to invest in a new website? Do you need to hire an employee? Or can the business sustain growth with no investment at all?

One founder we asked who has experience building businesses themselves said…

If you’re wanting to keep the business as a job (just you) and no other employees, then definitely pay yourself as much as you can. But if you’re wanting to grow the business and employ people, then it may be better to keep the money in the business, so there isn’t a grey line of what is your personal money, and business money.

We tend to agree with this. Sort out what is needed for growth and put the rest into savings, investments, or anything that will set your future self up.

A + B = money required for current you + C = for future you (either personal or business growth).

Then there is obviously the logistical side to running a business (tax, ABN’s, etc etc) and making sure that you have dotted your i’s and crossed your t’s so that when it comes to tax time, you have everything sorted.

Some advice from another founder below…

Treat yourself like a business. You should have one bank account that is business related where all business incoming (payments) and outgoings (computer, travel, other business related expenses) should come from this account. Payment of your salary should also come from this account, paid into another personal account. The main reason for this is for tax purposes. When it comes to tax time, you need to show all of your business incomings and outgoings that you can claim. 

When we started the podcast, we very quickly realised, that it is a loooot easier to track all of this if it is set up in a separate bank account, so we’d say your accountant’s advice is very valid!

And a final piece of advice from a community member who has been freelancing for years…

The most important thing I’ve done over the years is dedicate 30-60 minutes every week to sorting out my finances. I’d recommend putting this time in your calendar as a recurring event to stay on top of it. When you’re self-employed, managing your finances is like being the CFO of a small business (aka you!) so be sure to give it the regular attention, care, and focus it deserves. I found committing to this routine significantly reduced my stress, and helped me to build my financial confidence.

Of course, the above is all sharing our own experiences, and some tips and tricks from our community. It’s always a good idea to chat to your accountant, or get in touch with a financial advisor to discuss what’s relevant to your own personal situation.

A big thank you to our YIGC community member for sharing this dilemma… this community is filled with side hustlers and self-employed bosses, so we suspect this one might be helpful to a few of you!

Tune into tomorrow’s episode on the cost of moving overseas and sharing salary with your bestie with Caitlin Emiko! This one is a must listen.

Until next week,
Maddy and Soph x