As an entrepreneur or small business owner, one of the most challenging financial questions you’ll face is: Should I pay myself first or reinvest in my business? While there’s no one-size-fits-all answer, finding the right balance between personal financial health and business growth is essential for long-term success.
This article explores the pros and cons of each approach and outlines a smart strategy to split your income wisely.
What Does It Mean to “Pay Yourself First”?
Paying yourself first is a common personal finance principle that prioritizes setting aside money for your own needs—such as savings, retirement, or paying down debt—before covering business expenses or reinvesting profits.
This method ensures that your personal financial well-being isn’t overlooked while you build your business. After all, a thriving business doesn’t mean much if you’re personally struggling to meet your financial goals.
Benefits of Paying Yourself First:
- Financial stability: Regularly setting aside income gives you a financial cushion, reducing stress and dependence on your business for emergencies.
- Clear boundaries: It separates your personal finances from your business, helping avoid the “all eggs in one basket” problem.
- Long-term wealth building: Consistent contributions to retirement accounts, savings, or investments grow over time, securing your future.
The Case for Reinvesting in Your Business
On the other hand, many business owners choose to reinvest a significant portion of their income back into their company—especially in the early stages. Whether it’s upgrading equipment, hiring talent, launching a marketing campaign, or developing new products, reinvestment fuels growth.
Advantages of Reinvesting:
- Accelerated growth: Putting money back into your business can lead to faster expansion and increased revenue.
- Compounding business value: Every dollar reinvested can improve operations and potentially raise the overall valuation of your company.
- Tax benefits: Business reinvestments may be tax-deductible, helping reduce your taxable income.
However, continuously reinvesting without paying yourself can lead to personal burnout and financial vulnerability, especially if the business experiences a downturn.
The Dangers of an All-or-Nothing Approach
Choosing one approach at the total expense of the other can be risky:
- All business, no paycheck? You might build an impressive business, but be left with no personal savings, retirement plan, or safety net.
- All paycheck, no growth? You might enjoy short-term financial comfort but miss out on long-term business expansion and scalability.
The smart strategy lies in balancing the two—ensuring you’re supporting both your personal financial goals and your business’s future.
A Smart Approach to Splitting Your Income
The key is to develop a plan that aligns with your business stage, personal financial goals, and risk tolerance. Here are some steps to create a sustainable income-splitting strategy:
1. Determine Your Minimum Personal Needs
Calculate your essential monthly living expenses: housing, food, insurance, debt payments, and basic savings. This gives you a baseline for the minimum salary you should draw from your business.
2. Establish a Business Emergency Fund
Just like your personal finances, your business needs a safety net. Set aside funds to cover 3–6 months of operating expenses. This reduces pressure when revenue dips and allows you to maintain consistency in both reinvestment and paying yourself.
3. Use a Percentage-Based Split
Many entrepreneurs use a percentage system to divide income. For example:
- 40% to business reinvestment
- 30% to owner’s salary
- 20% to taxes
- 10% to business reserves
Adjust the percentages based on your business stage. Startups may lean heavier on reinvestment, while mature businesses can prioritize personal income and wealth building.
4. Revisit and Adjust Regularly
Your needs and priorities will evolve. What works during your first year may not work in year five. Set quarterly or biannual reviews to assess whether your current split is still effective.
5. Don’t Ignore Retirement and Insurance
As a business owner, you’re responsible for creating your own retirement plan and health coverage. Paying yourself should include contributions to a SEP IRA, Solo 401(k), or similar plan, and securing adequate insurance.
When Should You Prioritize Business Investment?
Consider reinvesting more when:
- Your business is in a growth phase or launching a new product.
- You have a solid personal emergency fund.
- You’ve met your minimum financial obligations and want to scale operations.
- Market conditions create a time-sensitive opportunity.
When Should You Pay Yourself First?
Prioritize personal financial goals when:
- You lack an emergency fund or have high personal debt.
- You’re nearing retirement and haven’t saved adequately.
- You want to diversify your income and reduce reliance on business performance.
- You feel financial stress impacting your mental health or decision-making.
Final Thoughts: Balance is the Best Business Strategy
The debate between paying yourself first and investing in your business doesn’t need a winner—it needs a plan. By taking a balanced, percentage-based approach and reassessing your financial priorities regularly, you can fuel business growth and secure your personal financial future.
Remember, your business is an asset, but so is your peace of mind. The smartest entrepreneurs know that long-term success comes from taking care of both.
