Attention business owners: Pay yourselves first!

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Do you find it difficult to save as a business owners, despite your best intentions to do so? This is especially challenging for business owners, who are responsible for paying the running expenses for their business, such as rent and staff wages and often neglect looking after themselves and their own family.

We find that our most successful business owners make a commitment to automatically pay themselves first from their business a “set amount” each week. This is best achieved by business owners setting up an automatic payment such as a direct debit from their business account to their personal account or investment account.

Treat yourself and your family with the same respect you treat your suppliers and staff. By autoamtically paying yourself an amount each payrun, you will set the habit for saving. Remember, you work hard in your business – reward yourself with a paypacket! It doesn’t have to be huge to begin with, it’s the habit that’s important.

Create a surplus income for yourself

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Whether you are a business owner, self-employed, or working for someone else, managing your personal cash flow is critical.

The basic message is that you need to make sure that you earn more than you spend.

It is surprising how many people spend more than they earn and even more surprising how many people just don’t know they are in that position.

The starting point is to work out how much it costs you to live each year and compare that with how much you are drawing out of your business or earning from your employment income after income tax.

At HYD Advisory, we have developed some fairly basic personal cash flow models that can help you calculate whether you are living beyond your means or whether there is a “surplus” income available to work with.

If your current spending is too high we can then look at some smart strategies to get this situation under control.

Once you have created surplus income you now have something to work with. You can look at options , such as; accelerating paying off your home loan or start building an investment portfolio.

Reduce bad debt and maximise your savings

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The basic principal here is to pay off your private non tax deductible debt as soon as possible.

This is commonly known as “Bad Debt” because you pay for it with your after tax dollars. This means if you are a top marginal rate taxpayer, you basically have to earn $2 pre tax to keep $1 in your pocket after tax, which is then used to pay the interest on your bad debt, such as your private home loan or credit card.

At HYD Advisory Finance we can show you how making small changes to the way your home loan is structured may result in substantial savings in the amount of interest you pay over the life of your loan and help you pay it off years earlier.

“Good debt” on the other hand is debt that is used to invest in growth assets such as investment property. In this case, the interest is tax deductible, so if you are a top marginal rate taxpayer the after tax cost is almost halved.

The sooner you get your bad debt under control and down to a manageable level, the sooner you will be able to look at taking on Good Debt to allow you to invest in growth assets such as investment property that will grow in value over time and provide you with capital growth and passive income in retirement.