Maximizing Your Earnings: The Importance of Paying Yourself First
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Chapter 1: The Essential Principle of Solopreneurship
When it comes to solopreneurship, the foremost principle is to prioritize your own earnings. Just as an employer is responsible for compensating their employees fairly and promptly, solopreneurs must adopt a similar approach.
The mechanic examined my aging 1995 Toyota Corolla, tapping on its worn tires.
“Have you ever considered selling it?” he asked, rubbing his hands together.
“I can’t afford a new car right now,” I replied. “Can you help me get this one running?”
“Oh, this car will last,” he reassured me. “Japanese cars are built to endure.”
“That’s great to hear.”
“But…”
“But?”
“It needs four new tires. They’re completely worn out.”
“You must be joking. What will that cost?”
He jotted down a number on a piece of stained paper and handed it over. Normally, such an unexpected expense would have forced me to dip into my dwindling savings.
But this time was different!
Thanks to a newfound side income from affiliate marketing, I had the means to cover the expense without stress. This unexpected income felt like a windfall (though my accountant had a different take come tax time).
I used those funds to keep my old car running for several more months. Many solopreneurs and content creators tend to work for an exceptionally frugal boss, reinvesting all their profits back into the business without compensating themselves first.
If you're generating income from your content, ensure you pay yourself before reinvesting into your business.
As the years passed, my affiliate income allowed me to enhance the quality of the content on Become a Writer Today. I invested in faster web hosting, hired a designer and editor, and even commissioned freelance writers to cover topics outside my expertise. I also financed the self-publishing of books, which can cost upwards of $2000.
However, I soon found my monthly expenses surpassing my affiliate earnings. Today, my regular costs include web hosting, email marketing subscriptions, stock images, online course budgets, virtual assistant services, bookkeeping, various WordPress plugins, proofreading, and editing.
Although individually, these costs aren’t exorbitant, they accumulate to a significant sum. Managing a content business can feel like tending to a financial vacuum if you don’t set clear spending limits.
Initially, I grappled with the balance of compensating myself versus reinvesting in my content business. This struggle intensified as I began undertaking new, costly projects, such as launching a website in a different niche.
Enter The Profit First Model
Mike Michalowicz shared his insights with me over Skype, promoting the idea of Parkinson’s Law, which suggests that work expands to fill the time allocated to it.
If you give a new solopreneur a day, a week, or a month to create a course, they will utilize the entire timeframe. This principle also applies to a business’s income.
Just as work fills the allotted time, a business’s expenses can consume all available funds. Content creators who defer their own compensation often find themselves exhausting their earnings on marketing, advertising, and hiring freelancers.
When payday arrives, they withdraw a minimal amount, despite their hard work, leading their content business to become a financial drain—an unsustainable approach.
During my conversation with Michalowicz, he pointed out the flaw in this mindset:
“I would never say, ‘I’m going to prioritize my health last,’ as it implies it’s unimportant. If we value our health, we must put it first.”
The same principle applies in business. “For every transaction, we should allocate a predetermined percentage as profit and set it aside.”
A New Financial Formula for Solopreneurs
While traditional accounting formulas state: Sales minus Expenses equals Profits, Michalowicz suggests flipping this formula: Sales minus Profits equals Expenses. By placing profits first, you enforce discipline over your spending.
According to Michalowicz, over 100,000 businesses have successfully implemented this formula. He illustrated its impact on his own work as an author:
“In the past, when a royalty check would arrive, I’d think, ‘Okay, I have X amount to support my business,’ and I’d often overspend on marketing and hiring support. Now, I prioritize my compensation and tax reserves first before assessing what's left to sustain my business.”
How to Prioritize Profit
Begin by establishing a separate bank account for your business income. Create additional accounts for your profits, compensation, taxes, and operating expenses.
Ideally, use a different bank for the profits and tax accounts to limit immediate access. Conduct bi-monthly reviews of your income and expenditures, then pay yourself. Allocate a percentage of your income to each of the other accounts, reserving what’s left for expenses.
If you notice insufficient funds in the expense account, it signals a need to reduce costs, boost sales, or increase your efforts.
Michalowicz emphasized, “With less money, I ask myself, ‘How can I achieve the same or better results with fewer resources?’ and that encourages innovative thinking.”
This bi-monthly strategy fosters financial discipline and allows you to monitor your business’s health. Initially, mastering the allocation across multiple bank accounts took time, especially considering tax regulations in Ireland.
Michalowicz advises content creators to adjust their allocations over several months to determine what is necessary for survival (guidelines are available in his book, Profit First).
After a few months, I realized I didn’t miss the extra money for expenses. Similar to the creative process, constraints prompted me to seek new avenues for additional income.
Michalowicz notes,
“Businesses that prioritize profit consistently discover ways to operate more efficiently and enhance profitability.”
This model’s effectiveness lies in its requirement for content creators to first secure their earnings, then optimize the use of remaining resources. Remember: creativity thrives under constraints.
“I take my compensation and profit first, ensuring my taxes are accounted for before assessing what remains for business operations,” Michalowicz states.
“I operate within the limits of what’s available, fostering frugality and innovative thinking. If there’s extra money after covering my expenses and compensating myself, that indicates readiness for business expansion or investment opportunities.”
If you find yourself running low on cash, it’s a sign that costs are too high or it’s time to roll up your sleeves and put in more effort.
Tips for Implementation
Avoid substituting your accountant or bookkeeper with the Profit First model. Depending on your location, you may need to adapt principles to align with local tax regulations. My accountant had reservations about multiple bank accounts but supported the idea of setting aside a small portion of profits each month.
In the resources section of this book, I’ve included a spreadsheet to help you apply the Profit First model to your content creation business. Additional resources are also available on Michalowicz’s website.
Chapter 2: Video Insights on Paying Yourself First
Video Description: Explore why prioritizing your earnings is essential for solopreneurs and learn actionable strategies to implement this principle effectively.
Video Description: Understand the potential pitfalls of the "pay yourself first" mantra and discover alternative strategies that can work better for your business.