If you are like most painting business owners, you put immense effort into your business. You serve customers well and you take care of your workers. But you, like many others, forget to serve the most important person in your business: You.
Think about when you started your business. You probably started out with the idea your business would provide you financial independence. However, many painting business owners get caught up with running their day-to-day business, and lose sight of their original goal: Creating a business that allows them to prosper financially.
How to create a business that serves YOU:
1) PAY YOURSELF FIRST
This idea simply means you get your cut of the profits first; before expenses and labor. Simple idea. However, sometimes this is hard to start without the right strategy.
One strategy is to use Mike Michalowicz’s Profit First system. Michalowicz recommends you divide your profit, salary, taxes, and business expenses into separate bank accounts. This allows you to keep your profits, salary, and estimated tax money separate from your ongoing business expenses, giving you a clearer picture of how much money you actually have to spend in your business, after you pay yourself first. This also makes it easier to stick to your budget and make more money.
2) MARK YOUR (EARLY?) RETIREMENT DATE ON THE CALENDAR
The best way your business can serve you is by creating enough wealth for you to become financially free, and give you the option to retire early. JL Collins recommends in The Simple Path to Wealth that you save enough money so your savings pays you enough in interest per year without decreasing the principle.
The first step is to determine your overall retirement savings goal. Multiply the amount of money you need per year by 25. For example, if you need $35,000 per year to live off of, you will need to save a total of $875,000 for retirement. Assuming a 4% return, $875,000 will give you interest of $35,000 a year forever.
The second step is to find how much you need to save per year to reach your retirement savings goal. Again, assuming a 4% return, you can hit $875,000 in under 20 years if you save $29,000 per year toward retirement. To determine how much you need to save toward your retirement savings goal, you can do an Internet search for a ‘compound interest calculator’ and use the online calculator for your own numbers.
3) PLAN FOR TAXES
Now that you have a profitable business that allows you to save for retirement, you need to consider taxes. Luckily, the IRS has plenty of incentives for savings for retirement. If done correctly, you can avoid a large tax bill at the end of the year with a sound retirement strategy that incorporates tax planning.
A great strategy to lower your tax bill is to put money in a traditional IRA. This allows you to delay paying taxes on the money you contribute until you withdraw during retirement.
Here are a few retirement savings programs for businesses that offer the same tax-delaying feature as a traditional IRA:
• No Employee Retirement Plan: If you are a sole proprietor or single-member LLC without employees, I highly recommend you consider the solo 401k. For 2017, the IRS allows you to save up to $53,000, or 25% of your business profit plus $18,000, whichever is greater. Up to these limits, retirement contributions are tax-deductible.
• With Employee Retirement/Pension Plans: If you have employees, you should consider a SIMPLE IRA or SEP IRA. These programs allow your business to deduct any matching payments or contributions made to employees’ retirement. Plus, any funds the business owner contributes to their retirement accounts are not taxed until the business owner withdraws the funds during retirement.
All retirement programs are subject to certain limitations and rules. Discussing these with your accountant or financial advisor is the best way to go before executing your plan.
Bottom line: Ensure you set up your business to serve you. You are putting the sweat and tears into the business. Make sure you get what you deserve.
Daniel Honan is a former painting business owner, and current bookkeeper and tax accountant at BookkeepingForPainters.com. With both painting and accounting experience, he is uniquely positioned to help painting contractors save time and money.