The 50-30-20 Method: How To Divide Your Money
Once your business starts building a profit, what should you be doing next? Pay yourself all of it, spend the money now, save the money, or reinvest it back into your business… It can feel so overwhelming making that decision, so I’ve created a quick and easy method for you to follow each month in your business.
It's called the 50-30-20 method, and it's a consistent way to allocate your profits so that you're paying yourself, paying taxes, and saving. This method is a quick way to start assigning a purpose to your profits. It's super helpful in assigning a purpose to your profits in every stage of business growth - from newbie to established business owner. It eliminates the budget surprises that comes along with owning a business, plus it is goal focused.
Here is how the 50-30-20 Method works
At the end of every month you take your sales and subtract out all of your expenses to determine your profit for the month. From there, you’ll assign your profits into three categories: 50 percent to paying yourself, 30 percent to pay taxes, and 20 percent to save and reinvest in your business.
So, lets say you’ve make $4,000 this month after all expenses have been taken into consideration…
You would break it down to paying yourself $2,000, $1,200 would go towards taxes, and $400 would be saved.
This method is goal-focused, but it is flexible if you need it to be. If it is a big marketing year or you are planning on attending a conference, you can increase the allocation for savings in order to save up for each of these expenses. Or, you might find that 30% in taxes is well beyond your tax rate this past year. So, adjust that 30 percent down and allocate more to paying yourself or saving.
This method takes the issues, which are paying yourself, estimating taxes, and reinvesting in your business, and puts them into a formula that makes sense.
Remember: The 50-30-20 Method:
50 percent to paying yourself
30 percent to pay taxes
20 percent to save and reinvest in your business