The great thing about becoming a freelancer is you are able to determine your own schedule and workload. But you also have to decide how much to pay yourself. While the exact amount will depend on your precise situation, you can work out how much of a salary to take from your business by calculating your personal expenses, your business costs, and your expected revenue, and determining your business goals.
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Work Out Your Personal Expenses
The first step is to know what your personal monthly outgoings are. When you know the total of your personal expenses, you have a good baseline for determining how much to pay yourself. Begin by working out your current essential costs like groceries, mortgage payments, utilities, and insurance. You will then know the bare minimum you need to earn. As your business grows, you will have the opportunity to earn more, so you can adjust your baseline accordingly later on.
Consider Refinancing Your Home
One of your biggest monthly expenses will be your mortgage payments, so it could be worthwhile refinancing your home to lower your monthly personal expenses. With fewer personal expenses to pay each month, you will not need to pay yourself as much and can instead invest that money into your business. Consider whether it is worthwhile doing that. It will depend on your precise financial situation.
Recently, mortgage rates have been historically low, so it could be a good time to refinance your home. Due to the pandemic, as a freelancer, you now have to prove that your income has not been harmed in the last few months, but refinancing your home to reduce your personal expenses could be a good idea.
Work Out Your Business Expenses
Next, work out your business expenses, which could include things like utilities, taxes, and business development costs. You also need to think about the different business expenses you will have at different times. When you are just starting out, you may need to pay for up-front capital investments like office equipment. Later, you may need to add additional expenses when you are ready to expand your business. Once you have a good idea of what your outgoings will be, you can subtract expenses from your estimated revenue to determine how much to pay yourself.
Determine How Much You Want to Pay Yourself
Once you have worked out what your expected revenue is and what your monthly business and personal expenses will cost, you will be in a much better position to know how much you should pay yourself. Take an honest and detailed look at your personal needs and goals so you can determine what you want and need from your personal income.
It can be helpful to look at yourself as two distinct people: the business owner and “the employee.” As your own “employee,” you will want to earn and save as much as possible. But as the business owner, you will want to put the interests of your business first.
Many freelancers choose to minimize their personal requirements until the business grows to a certain chosen size. Other freelancers prefer to pay themselves handsomely from the start without setting goals for growing the business. There is no right or wrong answer as to how you should approach things. But you will need to decide whether it is more important to have a business at a consistent level that pays you a good monthly salary, or whether you are more interested in growing your business over time and therefore taking a low salary until things really take off.