In any employment situation there are two parties: employer and employee. As a self-employed person you are both. You have “hired” yourself so now you must supervise, manage, and pay yourself too. You must learn to wear two different hats: one that reads you the Employer, the other You the Employee. You cannot wear them at the same time because employers and employees think and operate differently. You must also learn how and when to switch hats.
You, You, and Your Business
As a self-employed person, you have to be both Mr. Wilson and Wanda. You must do double duty. You work for yourself so you have to wear both hats. How foolish it would be for you the Employee to demand all of the money that you the Employer bring into the business each month. This is why the two of you need to sit down and negotiate a fixed salary that you the Employer can afford to pay and you the Employee can afford to live on.
The First Step
As a self-employed person you must determine what is the least amount of money you must have every month to live, not the most you can possibly wrangle out of you the Employer. If you created your Rule 5 Spending Plan, you know how much that is. It’s a bottom-line number that includes Reserves Payment, your rent or mortgage payment, transportation, insurance, food, and so on. Let’s say you determine that you cannot live on less than $3,000 a month. That is the least that you the Employee must receive each month if you are going to work here.
Can You Afford You?
You the Employer must determine if your business can reasonably commit to hiring a $3,000-a-month salaried employee. Let’s assume that you can, so you offer you the Employee a job.
No matter how small or part-time your self-employment situation is, the secret to your success will be in maintaining a separate checking account for your business. You should never deposit personal funds into it or pay for personal expenses from it.
The Way It Should Work
This is how the self-employment situation of Scenario should be handled. First, even though you are an employee of a company that pays you by commissions, you need to open a checking account that you designate to be your “business account.” This is separate from your personal household bank account. The January $10,000 check gets deposited into your business checking account. You guard this account from You the Employee as any good business owner would. Employees should not have direct access to business funds. Even if there are household needs and expenses, you do not use a dime of that $10,000 to pay for them directly.
Give Yourself a Raise
In time, as things continue to go well and you’re able to build sufficient reserves, you the Employer might decide to negotiate a raise for your favorite employee. But don’t be too hasty. Weigh the pros and cons. Consider the position of the prudent employer against the needs of the employee. Employers cannot afford to deal from emotion. They must consider the best interests of both the company and the employee.
As a self-employed person, your biggest challenge will be the temptation to live it up when a big check comes in. Worse, you will be tempted to multiply your best month by 12 and convince yourself that is your annual income. Let go of that. The only way that you can establish your annual income is by looking at your past years’ tax returns and taking an average.
That’s reality. Your success as a self-employed person lies in your ability to discipline yourself to be a fair yet strict employer and at the same time a grateful, restrained, and patient employee.
If your business is unable to pay You the Employee a living wage (in money, not credit), it’s time to decide if you have a viable business or if this is a hobby that might one day be a business. A business’s ability to pay its employees and expenses is what makes it viable. If you determine that you have a hobby but you need a paycheck, go to work for someone who can afford to pay you. When your hobby becomes a viable business, you’ll be able to offer yourself a real job.