When it comes to money, almost every family has some complications when it comes to managing household cash flow. But when one or both of the earners in the same home have an irregular cash flow new issues of cash management can arise. So, having a method for paying yourself is an essential component of managing your company and your home.  Peter and I work with many Real Estate agents and small business owners who both need to manage the erratic income in their businesses and the effects that they have on their homes. This is a spectacular space for a CFP® to assist these solopreneurs with how to measure, modulate, and manage their cash flow.  Here are the first steps for small business owners and solopreneurs can use to get a handle on their cash flow and prepare themselves for change: Step 1: Figure out your monthly expenses The first step in knowing which direction to head is knowing where you need to be. A common misstep for solopreneurs is living off of what “comes in” each month. This leaves them reeling when business slows, taxes are due, or there is an unanticipated expense. This is an easy trap to fall into, especially when you are starting out and your income might feel lean. It’s an easy, yet often overlooked, essential step, to determine how much you need to cover each month. This means, summing up mortgages, insurance, electricity, gas, groceries, and other essentials that make your home function. This is the number to build our plan from. Let’s call this number “Core 1” Step 2: Determine the regular monthly salary you need The number from above is a good starting point, but we need to get to a comfortable baseline so that we can begin crafting the automation and calculation from that point. A successful business should be able to support your costs at home and pay the taxes on that income.  Your salary should be: “Core 1” x 12 months + Expected Taxes (%) = This is “Your Salary”  If the income from your business is less than “your salary” you will need to secure other sources of income (investments, savings, other employment) Work with a CFP® or CPA® to determine your expected taxes, but you will most likely be between 20% and 30% when it’s all settled (State Income + Federal Income + Payroll taxes). Having an InSight-Full® financial plan is helpful because we will know what the current and future expected tax rates will look like.   Step 3: Set up your “owners pay account”  The owner’s pay account is going to be the reservoir of cash that you will depend on going forward. All of the expenses you incur in the “Core 1” plus taxes are usually very regular. Each month these bills get paid, so the idea in the “owners pay account” is to keep those costs maintained and cash flow regularly meeting those needs.  This means if month one income is $12,000 and “Your Salary” is $8,000 then $4,000 will stay in the account for now. This also means that if your income for month two is $7,000 and “Your Salary” is still $8,000 you will be able to pay yourself regularly.  Paying yourself constantly, and programmatically is key to forging stability in your home. It will pay dividends in the event you need to apply for credit (mortgage, auto loan, etc). A stable, predictable income is the best reason to work for someone else – and through this step, we have replaced that comfort for those people forging their own path.  This is a major milestone – celebrate this moment. In three steps, you will have saved yourself years of heartache, concern, and confusion.  I know some readers are sitting there asking themselves “what if these owners’ accounts end up too large”. It is perfectly okay to expel excesses deliberately on some established cadence. Think of “quarterly bonuses” and work with your CFP® to make sure your other accounts like an emergency fund, retirement plan, college fund, or brokerage account are funded where you want them. If everything is healthy, save more or spend it! Have fun and reward yourself for your hard work. The idea here is to avoid the risks that come with cash flow management – not hold all your funds in perpetuity. Caution: The “Owners Pay Account” is NOT an emergency fund. This is an important distinction. While they can both be made available in the event of a dire need, they shouldn’t be viewed with the same intention. The “owners pay account” is expressly for creating regular and maintainable cash flow. Step 4: Fund your emergency fund (EF) Let’s face it, running your own business or being a solopreneur is living on the ragged edge of risk. The joys are tremendous – but so is the risk. To mitigate that risk you should take seriously the practice of an emergency fund (EF). The goal of the “owners pay” account is to streamline your payroll, the purpose of an emergency fund is to limit the contagion of other financial setbacks.  Ideally, you already have an EF in place and it is fully funded. But if you do not, work with your CFP® to determine the number you should hold. This number is typically 3-6 months of your expenses, and because your employment is tied to the success of the business and the success of the business is tied to the broader economy, you as a solopreneur likely need a larger and more well-defined EF strategy. So here are some characteristics that will make your Emergency Fund different from people who are traditionally employed:  Your Emergency fund will likely be larger than others, think 6-12 months of expenses, depending on how employable your skills are should the business fail. As the business becomes more lucrative and established you can back this number down.  Your fund should be a well-defined number. Many people will have a pool of cash