Payday Routine: 6 Money Management Tips
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It's payday today, so I thought it’d be fun to show you:
How I figured out what amount to pay myself from my business's revenue.
The finance-related tasks I do every month as a business owner.
It can be pretty confusing to know what a reasonable income is to take from your business.
I personally was very confused by that question for quite some time 😅 and I know y'all are curious about all things to do with how I manage my money, finances, and business. So let's get right into it!
Step #1: Calculate my salary.
I do this by calculating my business’s average monthly revenue over the past 12 months.
the reason that I do this is because businesses have massive fluctuations in revenue.
If our business makes a really big sale one month, then we make a lot of money. 💰 However, if we DON’T make a big sale that month, then the business makes much less money. On the other hand, my personal expenses stay roughly the same month to month.
So in order to even out the revenue roller coaster, I average the past 12 months of business revenue. That means my calculation would be the total revenue of my business divided by 12 (for 12 months of the year), and then I keep a percentage of that.
I actually set up this system with the help of the book Profit First by Mike Michalowicz . I love this super handy chart in the book. 👇
It explains the target percentages that you should allocate to the different envelopes of your business. Of course one of these envelopes would be paying yourself (Owner’s Pay).
So for example, if your business makes under $250,000 per year, the goal is to pay yourself 50% of that.
Now, as your business grows in revenue, the percentage that you pay yourself goes down because your expenses typically grow. You're therefore getting a smaller percentage BUT since the revenue is growing, your income still grows as the owner.
Okay let’s look at an example:
Your business made $200,000 last year. 💰
So you divide that by 12 months = $16,666/month
Now you calculate 50% of $16,666 to find out what you pay yourself.
Your salary is $8333/month.
If you want to learn all about setting aside money for paying yourself, your business expenses, savings, taxes etc. I would say that the book Profit First is absolutely essential reading for every single business owner. So definitely grab yourself a copy on Amazon or your local bookstore.
*Psst…your business isn’t making enough yet for you to pay yourself what you want? I’ve got you covered! 😉 Here’s a free webinar on 4 steps to double your site sales:
Step#2: Transfer the Money.
And I know that sounds simple, but in my case, it actually isn't because there's a lot of currency exchange involved.
I charge U.S. dollars in my business because the vast majority of my customers are American and I want the sale to be easy for them. I don't want them to be freaked out by paying in Swiss francs, or be concerned about fluctuations in the currency exchange rates between Swiss francs (CHF) and USD if they're on a payment plan.
So to make it easy for my customers, I run the whole business in USD 💵
But because I live in Switzerland (and use Swiss francs for my day-to-day spending), I have to do this currency conversion thing. In order to do that, I use Wise.
*This blog is not sponsored by Wise. I really do just LOVE their service.
if you're dealing with currency exchanges in your personal life or for your business, do not trust your bank when they say that they don't charge fees for their currency exchange! I totally fell for that one.
Banks have their own “special” exchange rate, which is worse than what the actual exchange rate should be. Over time this exchange rate adds up MASSIVELY. 🤯
So Wise is my solution to getting the best possible exchange rate.
We use wise for my business bank account, and I also have a Wise account for myself personally. So I transfer the money (and currency convert it in the process from USD to CHF) from my business bank account to my personal bank account.
And in that process, I can see really clearly what amount of fees Wise charges. 👇
Again, this is SO. MUCH. LOWER. than the banks that I used in the past. So I'm in love with Wise. 🙌
Step #3 Review Budget & Organize Funds.
My bank account has spaces in it, and I will not use anything other than a bank account which has spaces anymore!
I have used almost all of the European fintech banks (N26, Revolut, Starling, Wise). The reason that I love them ALL is because they have spaces where you can organize your finances.
These spaces have been the biggest game changer for simplifying my monthly finance routine and helping me to know wHICH money is for what.
I actually have no idea if spaces in bank accounts are normal in the U.S. or not… 🤷♀️
If someone could let me know in the comments that would be super lovely!
If it is an option, I highly HIGHLY recommend it.
These spaces help me know what’s my money to spend and what's intended for something else.
So since the money for the usual bills gets taken out of my account at the beginning of the month, I know that whatever is left in the main account is my money to do whatever I want with!
I used to track every single expense & transaction in A budgeting app (like YNAB). But it was SO time-consuming to categorize every transaction. I just could not be bothered to keep up with that. 😮💨
So I gave that up and went for my lazy, efficient method: organizing my money in a way that whatever is in my main bank account space is my daily spending money.
If that account starts to get low, I know to rein back in on the spending until I get paid next month. And that's basically how I stick within a personal budget without having to categorize every single transaction.
Now, for things like housing, phone bills, and utilities, I leave the budgeted amount for those in my main banking space, and they all just get taken out and auto-debited a few days after I pay myself. Things like grocery money, vacation savings, or savings for my annual car insurance bill or my tax bill have their own budgeting categories/space in my bank account.
again, the reason for that is if I have that money in my main bank account space, I find it very confusing to know what is mine and what needs to be used for something else later.
Step #4: Check Emergency Fund.
Typically, people like Dave Ramsey will tell you to save three to six months of expenses and an easy-to-access emergency fund. However, when you run a business, however, it's typically recommended to save a few more months of expenses.
My husband and I like to keep nine months on hand. It took us a really, REALLY long time to save that. But we did it! And that emergency fund has been the best peace of mind to help us sleep well at night.
But it also serves a really practical function too. We have used it on many occasions:
An unexpected $7,000 car repair bill right after buying said car. 🤦♀️
A $5,000 bill to get the gutters replaced on our house…3 days after we moved in.
A tree cutter quoted us one price and then sent a bill for double the amount. 🙄
These types of things happen all of the time so it's just really great to have money set aside for it. It makes the whole experience of those rather annoying things way less difficult.
The money in the emergency fund is scattered across a few different accounts. So that means that every month I tally up what's where and check if we need to fill it back up or if it's happily full with nine months of expenses money in it.
Step #5 Add Money to Retirement Savings.
The percentage that I take for my retirement savings has changed over time but right now, I'm taking 25% of what I make and investing it to grow for my retirement.
In order to invest my money, I send it to a brokerage account.
A brokerage account is an account THAT allows you to buy AND SELL A VARIETY OF INVESTMENTS, SUCH AS STOCKS, BONDS, MUTUAL FUNDS, AND ETFS.
At the moment I have an investment account with Interactive Brokers. I am loving it because as a resident of Switzerland, it gives me access to American ETFs which tend to have the lowest fees.
And if you know anything about investing, you know that there is a massive difference between a fee of 0.03% vs. 1% per year on your investments.
I know that might sound like a small difference in percentage, but that difference can result in literally hundreds of thousands of dollars less for you come retirement age!
If you would like to know how I plan and manage my investments, definitely let me know in the comments below.
Investing isn’t typically a massive conversation topic for women. I’ve definitely noticed that a lot of women I speak to are really uninformed about these things. I'm really passionate about making sure that all women live happy and wealthy lives (both now and in their retirement). 💪
So basically if giving you a SparkNotes version of what I've learned about investing helps, I would be more than happy to share!
If you're wondering what my investment choices are…
So instead of picking individual stocks, which I definitely do not have the time or the desire to do (plus, literally every single investment book says that's a bad idea!) I buy baskets of companies, also known as ETFs.
This also means that my risk is diversified between all of the different companies within that ETF basket. For example if one company in the basket does terribly and the others in the basket do really well, then overall I'm still doing well with my investment.
At the moment I'm buying three different types ETFs 📈
VOO: this is investing in the 500 biggest companies in America.
VGT: this is the riskier and more growth-focused area of my portfolio. It's all American tech companies.
VEA: this is investing in large companies in the rest of the West. Companies in places like Japan, the UK, Canada, Switzerland, etc. It doesn't have any US stocks in it but I already have those in the VOO. So basically VEA assures that I diversify my portfolio between companies all over the world.
Now, what investments you choose is a super personal choice and should reflect your risk tolerance and level of knowledge on investing. So what I choose to invest in might not be right for you.
I truly believe learning about investments is probably the best time ROI you could ever make in your entire life.
So definitely check out this list of my favorite finance books. There are a few beginner-friendly ones as well as some more advanced reads, so feel free to pick the books according to your current level of financial knowledge.
Step #6: Track my Progress toward Financial Freedom.
This is an idea that’s quite popular in The Fire Movement. I am actually not a fire person (that is not my goal or the way I want to live my life). However, I do like this specific idea from the fire community:
tracking my progress towards my financial freedom or financial independence number.
I'm different from The Fire Community because I do NOT plan to stop working early. That’s because I genuinely love my work (actually, I think I have the best job I could ever dream of 🥰).
But I DO totally see the value in tracking progress toward a goal.
*Feeling motivated to plan out your business’s goals and strategy? Check out my free workbook & checklist here! It might not be the new year but any time is a good time to start!👇
So even though hitting my financial freedom number is a fair ways into the future, I find a lot of joy and motivation in just keeping an eye on it. I like tracking the progress towards hitting my financial freedom number.
