Business owners who underpay themselves year after year are costing themselves in the long run.

Lots of business owners underpay or altogether forgo paying themselves in the interest of “investing” in their business and its needs. In the initial stages of a start-up or in tough times, one might have to make sacrifices, but doing so year after year points to a much bigger problem. To promote profitability, it may seem to make sense to habitually pay yourself less. In the long run, however, it will cost you and your business more than you might anticipate.

As the business takes off, it’s essential to start taking a decent salary for yourself and your partners. Whatever you pay yourself, it should be enough for you to live comfortably and allow you to save and invest for your future. Let the power of compounding work for you. If you own the building, make sure to charge the business a fair rent. You aren’t doing anybody any favors by hiding the actual expenses and giving yourself a false sense of profitability.

One of my consulting clients, let’s call him Steve, was in his 15th year in business but was paying himself barely enough to meet his household expenses. His wife also worked in his business. They hardly took any vacations or saved for their kids’ education or their own retirement. After I had a few meetings with him, he finally understood and realized the importance of taking care of themselves first. He gave his wife and himself a decent raise. They went on a family vacation that they thoroughly enjoyed, and came back rejuvenated with a new vigor. The following year, their business experienced a 10% growth in revenues and a 5% growth in profits.

Steve realized that he hadn’t performed at his best for several years. With the excessive number of hours he was putting into his business and the small return he was getting, he had lost the needed energy and motivation to think creatively and focus on profits. With the rotten mood he brough home at the end of the work day, his relationship with his family had also taken a hit. As a result of increased compensation, things were looking up. Not only could he pay for his immediate needs, but he could also sock away enough and invest for a comfortable life in his golden years.

How much should you pay? This question comes up all the time, and there is no one formula that fits all. It depends on variables such as type of business, legal structure, profitability percentage, tax bracket and others. Some possible solutions are:

1. At least the pay needed to hire a manager to replace you in case you can’t work anymore
2. Anywhere from 3% to 6% of your revenue
3. A certain percentage of profits, leaving enough for reinvestment into the business, ensuring its continuous growth
4. Enough to cover your necessary expenses plus maintain a rainy-day fund, among others

Family business dynamics. I have seen situations where the father, who has owned the business for years, hires children to management roles and pays them more than his own salary in order to “keep them motivated.” I find two issues with this situation. One, the children must earn their way up to management by proving their worth. Two, paying more than your own salary sends the wrong message of you being of less worth – it undermines your credibility as the leader.

Greed can kill the business. I have also seen the opposite happen. I knew an owner of a printing business who treated it as her ATM machine. She kept taking money out of her business to splurge on her luxurious lifestyle, including building a second house and taking multiple vacations a year. The number of employees went from seven to two. Sales kept shrinking. She lost most of her customers. The only reason she’s still in business is because of a contractual agreement with one large client.

You’re the one taking all the financial risks, having sleepless nights and making sacrifices; there’s nothing wrong with reaping the rewards. If you have managed your business with a focus on profits, you should not have to worry about finances after your exit – which, by the way, you get to decide, not your age, personal situation or circumstances.