What's a fair salary for an entrepreneur - how much should you pay yourself?
As the owner of your own business, you have the privilege and responsibility to set your salary. Many people would assume that this means you get to take home a nice check every payday—and they wouldn’t be wrong. However, as an entrepreneur, you also have to think about what’s best for your business long term. Is it worth selling yourself short now so you can potentially grow and invest in your company later? If you’re just starting out as an entrepreneur, these considerations might seem secondary or unimportant, but the truth is that how much you pay yourself could directly impact how successful your business is down the road. After all, if you can only afford a small salary and aren’t able to reinvest money back into the company for research and development, new product lines, or new employees, it will almost definitely stall future growth. If this sounds like something worth considering before diving into business ownership full-time, read on to learn more about what a fair salary is for an entrepreneur - from taking home a minimal wage to giving yourself too little and risking failure in the future.
When should you pay yourself as an entrepreneur?
Many people start their careers by taking on a side hustle or consulting work to get a feel for entrepreneurship. If you’re doing this, you’re probably not earning a full-time salary yet since you’re supplementing your income with your side hustle or consulting work. While this isn’t the same as running your own business, it can help you figure out if entrepreneurship is right for you and gauge how much you should be earning. If you’re working as a consultant, for example, you might earn anywhere from $50 to $250 an hour depending on the type of consulting work you do and the experience you have. If you own your own business and are still supplementing it with a part-time job or consulting work, you might earn a set salary.
How much can you afford to pay yourself as an entrepreneur?
Before you decide how much you want to pay yourself, you first need to figure out how much you can afford to pay yourself. Depending on your business model, this could mean taking a salary that’s just above the country’s minimum wage or well below it. For example, an entrepreneur who owns a cleaning company might decide to take a salary of $30,000 a year since he knows that’s the amount he needs to live comfortably and cover all the costs associated with running his business. That same entrepreneur might decide to take $60,000 a year if he wants to be able to afford a new car, put money into savings each month, and put his kids through private school. Another example: If you plan to take a salary that’s well below the country’s minimum wage, be sure to consider how your finances will look when your business is earning money. If you aren’t making enough to cover the basic costs of living, you’ll need to make some tough decisions. Our Owner Pay Calculator below will tell you how much you can afford to pay yourself based on your projected income and expenses.
Is it worth paying yourself a minimum wage?
This is a tough question to answer. While it’s true that you don’t have to earn as much as you earn as an employee, it’s important to keep in mind that you’re paying for more than your time as an entrepreneur: you’re paying for the risk of failure that comes with any new business venture. While your salary won’t be as high as the salary you might earn as an employee, you can make up for this by taking on a few side projects or looking for a part-time job to earn extra cash.
Is it worth waiting to pay yourself?
If you’re just starting as an entrepreneur, you might feel pressured to take a high salary right away, but this isn’t a bad idea. By waiting to take a substantial salary, you’re giving your business the chance to grow and expand, which means you’ll have more money to reinvest in it later on. For example, let’s say you want to start your bakery, but you know that it will take some time for your business to get off the ground. If you’ve made a budget and know that you can live off of $25,000 a year without struggling, you might decide to take a low salary while your business is still getting established. If your bakery takes six months to get on its feet, you’ll have six months worth of saved-up salary waiting for you.
When is it fair to pay yourself first?
You should always be paying yourself first and putting money away for your future. This can be difficult if you’re just starting as an entrepreneur, but it’s important. If you’ve managed to save 15% of your annual income, you might consider taking a slightly lower salary than you would otherwise. This is especially true if you’ve just started a new business and know that it might take some time to get off the ground, or if you’ve taken a low salary for a few months (or even a year) so your business can get established. If you’ve done the math and know that you can comfortably live off a low or minimal salary, it’s important to pay yourself first so you can save money and make sure your future is secure.
Bottom line
Being an entrepreneur is a risky, demanding venture. It requires a lot of time, energy, and dedication, so it makes sense that you wouldn’t want to take a ridiculously low salary—but it’s important to be careful not to take a salary that’s too low. While the salary you take at the beginning of your business will likely be lower than the salary you make as an employee, it should be substantial enough to cover your basic expenses and provide you with some additional income. While you might not take home as much money as an employee, it’s important to remember that being an entrepreneur comes with a lot of responsibility.
You might think that you’d be better off leaving the business behind and going back to being an employee. After all, it’s a lot harder to get a job on a low salary than you’d like. But remember that the real reason you’re an entrepreneur is because it allows you to make a living without having to worry about income or expenses.
