How Much Should Solo Operators Pay Themselves? Finding the Balance Between Earnings and Business Reserves
As a solo entrepreneur or consultant, one of the most pressing questions you might face is: how much of your revenue should you keep in your business versus what goes into your personal pocket? This balancing act can be particularly nuanced for those operating with minimal overhead.
I operate as a consultant, working with a handful of reliable clients. My setup is quite lean; I have no employees and a modest work-from-home environment. This structure allows me to maintain low operating costs, which prompts me to consider how I manage my earnings.
Looking back at the previous year, I was pleased with my net profits for 2024. To celebrate this success, I treated myself to a substantial end-of-year bonus and increased my monthly salary for 2025. In fact, this year, I decided to draw 70% of my earnings as salary while retaining 30% within the business. This strategy not only provides a comfortable cushion but also sets me up for a nice bonus at year-end.
However, I often ponder whether it’s more beneficial for me to invest that additional capital in my personal finances rather than leaving it stagnant within the business. Since my operational overhead is low thanks to my work-from-home model, it raises the question—would that money be more effectively utilized in investments or personal savings?
As I plan my budget for the coming year, I’m considering increasing my salary draw to somewhere between 80-85%. This change would allow me to take advantage of my earnings more freely, while still maintaining a safety net for the business.
If you find yourself in a similar situation, I’d love to hear your thoughts. What percentage of your earnings do you typically take home, and how much do you leave within your business? Let’s share insights on how we can optimize our financial strategies as solo operators.
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bdadmin
As a solo consultant with minimal overhead costs and a successful year under your belt, it’s excellent to hear that you’re taking proactive steps to manage your finances wisely. Striking the right balance between personal salary and reinvestment in your business can significantly impact your long-term success and financial health.
Understanding Your Financial Landscape
Assess Your Business Needs: First, consider the financial needs of your business. Although you currently have minimal overhead, factors such as potential fluctuations in client workload or unexpected expenses are crucial. It’s advisable to keep at least three to six months’ worth of operating expenses in the business to maintain liquidity for sudden shifts.
Create a Cash Reserve: While it’s tempting to draw a larger salary, having a cash reserve can be invaluable for peace of mind. This reserve can not only buffer against lean months but may also allow you to take on projects that require upfront investment. You’ve already started laying a solid foundation with your current 30% retention. Aiming for 20-30% can provide a good balance while still allowing you to enjoy a higher personal salary.
Future Growth Considerations: Consider any growth plans you might have. If you foresee needing resources for marketing, technology upgrades, or even hiring subcontractors as your workload increases, you might want to retain a larger portion of profits. Setting aside funds for these potential investments can accelerate business growth and lead to even greater earnings in the future.
Salary and Drawing Strategies
Salary vs. Bonus: Drawing a monthly salary provides consistency, but you might want to establish an end-of-year bonus system based on your profit performance. This allows you to reward yourself when the business does well while keeping your base salary stable. It’s a great motivational tool that aligns your earnings with business performance.
Retirement Contributions: If you’re drawing a salary, make sure you’re also considering contributions to a retirement plan. As a solo consultant, options such as a SEP IRA or Solo 401(k) allow you to save significantly and reduce taxable income while securing your future. This can be a strategic way to utilize some of that business income effectively without drawing it into your personal finances immediately.
Investing Wisely: If you feel confident in your financial cushion, consider investing excess funds instead of simply holding them in business accounts. This could be anything from a high-yield savings account to investments in stocks, bonds, or mutual funds. The aim here is to make that money work for you rather than sit idle. Create a diversified investment portfolio to mitigate risks.
Review and Adjust Regularly: Financial situations can change swiftly due to market conditions or personal circumstances. Review your earnings, expenses, and business goals quarterly. Adjust your draw percentage based on your current needs and future projections. Such regular assessments can ensure you don’t miss opportunities or face financial strain.
Final Thoughts
Finding the right balance between personal salary and retained earnings is a dynamic process tailored to your individual situation. Drawing 70–85% of your earnings while retaining a suitable buffer is reasonable, but always let your business’s performance and future plans guide these decisions. You may ultimately choose to draw more consistently from your earnings if it aligns with both your income stability and your long-term financial strategy. Always consult with a financial professional to ensure that your decisions align with your broader financial goals. By being strategic with your cash flow, you’re setting the stage for sustained growth and increased personal wealth.