Ask any small business owner and they will tell you the same story. They didn't garner a paycheck for 1, 2, even 5 years in business. Is that a good strategy? In this episode, Dr J reveals how he eventually broke the mistake of paying everyone but himself, which allowed him to move his business forward.
Hello, and welcome to Dr. J's Path to Success Podcast. Dr. James Fedich is a successful practice owner, best selling author, an speaker. Listen in as he shares his secrets to a successful business and a successful life. So now, here's Dr. J!
Hello everybody. Welcome to this episode of the podcast. This episode we're talking about paying yourself first. So here's another one of these things that I remember hearing a whole bunch of times and took many years to really understand it, comprehend it, and I'm going to try to get you to that point a little quicker today.
So the first time I remember hearing this pay yourself first, one of my first and earliest mentors, Dr. James Santiago, great chiropractor in Newark. And as a side note, I've been very blessed to have great mentors, really right out of school up until this day. Currently I have three coaches now, I've had great mentors that really got me to where I've been. And that's really one of the reasons why I do this podcast, I wrote the book and I do some coaching, is to kind of give back because I really had some great people helping me along the way. And Dr.Santiago is one of the first to really kind of help me.
Some of these lessons he was trying to teach me at 26 right at the end of school there, 26, 27, I really wasn't ready to hear or didn't understand at the time. But he was one of the first persons to say, "Pay yourself first." And since then, you've probably read it in a business books, and everybody kind of says it. But I'm not sure most of us understand it. I say it myself probably 8, 10 years later before I really understood really what that meant and how to apply it in my life for success. I wish I'd kind of learned this lesson a lot, lot earlier as I heard it a lot of times, but I just didn't really understand it. Kind of like the harder slow, fire fast other episode we talked about. You know, I heard that a hundred time and probably just the last few years I really understood it being in business for 14, 15 years now.
Pay yourself first, there's kind of two meanings. If you own a business, there's kind of one section of that pay yourself first, the way I see it. And then there's on the personal side. So whether you own a business or a practice, or not, there's definitely implications either way. If you own the business, there's even more, but again, both ways there's kind of two ways I see pay yourself first. I'm certainly no CPA or financial advisor, so don't take that advice that way, but it's just kind of my personal observations.
So, first pay yourself first out of the business end of it. Most of my listeners are chiropractors, physical therapist, acupuncturists, you own professional practices. And pay yourself first. So I remember hearing that and for years, I really didn't understand. So the bills, you know, money comes into the practice and the business checking account, goes out to pay bills and kind of, most of us, at the end of the month, if there's something left over, we write ourselves a checks. That's how a lot of practice owners work. But what'll happen really is that the bills and the expenses are going to match that income. So it doesn't matter how much gross income you start bringing in $10,000 a month, $20,000 a month, seem like you can pay all the bills. And now our bills are $100,000 a month in the practice. So the bills are going to meet up with those income. And if you don't get money out of there, the expenses are just going to gobble it all up, whether you're doing $10,00 a month, $100,000, or $1,000,000 a month. Your bills are going to eat it all up. You've got to get the money out of there.
So what does that really mean? There's tax and legal implications of this, but basically ... I'm an LLC for the practice and I paid myself like basically a draw, where you just kind of write yourself a check and you do quarterly estimates. And I found a lot of my coaching clients, doctors, do that as well. State rules vary, you got to talk to your accountant, et cetera. But basically what I did to start paying myself first out of the business, you've got to get that money out of the business. So the point of the business isn't for the business to make money. The point of the business is to give you money, get money out of there. That's the only point to being in business. It's great to give jobs and all that other fun stuff, but the point of that business is to get money out of there into your personal account. So the game that I ... the way I see it, when you put this all together, the money comes into the business, you want to get as much money of that out of there, into your personal accounts as possible. And then we'll talk, in a minute about getting it out of your personal account into your investment account, as well.
So, but anyways. Step one, we're going to get it out of the business account. You want to get as much money out of there as soon as possible. What I did was actually switch the way we file with the tax returns, from just a regular LLC to now we file as an S-corp or a pass through corporation. And again, I'm not going to be your accountant or your legal advisor, et cetera. You need to definitely talk to your accountant for this, but basically there's some advantages of that. Big advantages I saw, pass through income, and mainly I can put myself on a payroll. So here's the million dollar lesson I learned for many years. I just wrote draw checks and I tried to do automatic transfers regularly and all that stuff. It's just so easy to skip your check. But basically what I did is I put myself on payroll, like the whole staff and every two weeks we do payroll. And I'm there with a set dollar amount that comes out. There's other strategies I take money out other ways that we won't get into here. But I'm on payroll just like everybody else. And there's a bunch of us that are salaried and then there's my hourly employees. So I do payroll every two weeks to pay them all up.
And the five of us ... whatever, eight of us are on salary, go out automatically, direct deposit and the eight hourly employees work this many hours each and she does the payroll. And what this did is make me pay myself every two weeks. And I didn't really feel in the business all that different. Before you'd skip a week, you'd skip another week. Instead of every week, you're paying yourself every two or three weeks. You skip too many weeks. But when you're doing payroll for the whole staff and team, you're on that list of people, it actually takes more effort to take you off the payroll, so you got an email, I'm going to skip a payroll this week. And you can always do that when things are tough, but every since I did this ... before, you're skipping checks all the time, "oh, it's a slow week" or collections, I got to pay this or something would come up and you skip it. When you're on payroll, I don't know if I've done that maybe once or twice in five, six years I've been doing that. You just get used to it and you just take that money out every two weeks.
So, that's a big tip to get yourself on a regular pay period. When you write yourself your own check, which a lot of you guys do, it's just really easy to skip it. Put yourself on payroll. The other nice thing with that, I went from quarterly taxes to taking them out every two weeks with your paycheck. So those of you guys that have read the book, is the [inaudible 00:05:25] growing quickly, when I found out those estimates that you do ... if you owed $40,000 in taxes last year, you pay $10,000 four times, quarterlys, but your practice went up 40% this year. So instead of owning $40, you owed $70, that's just raw numbers. At the end of the year, you got to come up with another $30,000. And just because you made it, as you guys know, doesn't mean it's sitting in your business checking account, right?
Just because the gross went up, doesn't mean the net went up. So I really got off that rollercoaster. It's stressful. There's quarterlys and those last minute payments. So I put myself on the payroll and then what I do, is I over deduct. So I make sure they take out extra on top of what normal payroll deductions would be, because you're the business owner and there's other ... it gets complicated. There's other stuff going on. So they take out what you normally would for payroll person making x dollars and then some. And basically, I end up doing pretty good. I kind of planned that out with the accountant, how much to overtake and we look at it as we're growing throughout the year, et cetera. And you got to think, maybe a little short, maybe a little long ... I think one year, they owned me five, I owed them 5. It kind of keeps it a little more tight, instead of owing 20. And you can kind of look at it throughout the year and see where you're at. But it just takes it out every two weeks, instead of coming up with these big estimates. Now, I'm ... our volume, we're looking at a quarterly estimate of $40, $50,000 every quarter. I mean, it's just much easier to take out a couple thousand every paycheck when you come up with $40,000 every quarter. So, that's more advanced stuff. You definitely need to talk to your accountant. You may have to talk to your lawyer.
Basically if you do that LLC, you can file a form with the IRS to just change the ... keep it as an LLC, but you file as an S-Corp, it's a simple one page form your accountant can help you out with. I was talking to another business owner about this. What you'll notice, you start taking a lot more money out of the business if you do that. And it's really easy, too, if you're growing a little bit or you're just feeling that you can just up your salary a little bit a couple hundred dollars every two weeks, that adds up and it's just another way to keep drawing more money out of the business. So that's what they mean by paying yourself first. Most of us are paying yourself last. You say at the end of the month you pay all the bills, you pay all the staff, your employees, the rent, the this, the that, and you forget to pay yourself.
I'm obviously the largest payroll and every two weeks, it's coming out of there. I'm first out. If I'm getting it out, my tax point is going right over to the government and I'm getting the rest right away and it's coming out of the business first. So that's what pay yourself first means to me. There's other strategies to get money out of there and this could get very complicated. But that would just be the real simple thing to get the money out of there. You don't necessarily need to put yourself on payroll and change the filing like I just said, but there's a lot if you're an LLC, you can't just put yourself on payroll, you got to change the filing status. That's what we had to do in New Jersey. But again, not a CPA or a tax advisor or anything like that. Those are just kind of what works for me, your accountant can talk you through this as well.
You can do it other ways. Maybe you're writing yourself a check every week and you can do it that way or you can do auto draft, too. You can do ... I actually do that as well. So I do both strategies where I have the payroll and I also have auto draft, every week there's a certain amount that comes out from the company checking account into my personal checking account as a draw. And that's ... again, we don't want to get too complicated for you guys. But you got to get that money out of the business.
People think of business the wrong way. The point of any business, anywhere, whether it's healthcare, donut store, whatever the heck it is. The object is to get the money out of the business into your personal account. That's the objective of the business. It's not to fund a million jobs and do all this other stuff. And all that stuff is great, we'll talk all about that. But financially, the point of the business is to get money into your personal checking account.
So I want you to think of the business funneling, as much as you can out of the business into your personal checking account. I just want to pay the bills and run everything, but you'd be surprised how much more you can take out of there. I guarantee just doing these strategies, you don't grow your practice or business, you can just grow your personal income by taking more out. The business will survive. Your expenses will rise up to meet what you leave in there. So if you take it out, you can't spend it in the business. So that's step one. Get it out of the business into your personal.
If you don't have a personal ... a business, that part might not have made a lot of sense to you. The next part will. So really, the big picture you want to look at is the business is to make gross profit, take some of that money out ... or as much as you can out into your personal account and the next step to paying yourself first, is to get it out of the personal account and into your investment account. So really you want to think of this funnel, business money into personal account, personal account into investment account. And that's how you're really going to get wealthy down the road. So it goes from business to personal and the personal you're going to pay for your mortgage, you know, all that kind of stuff that you got to pay, all the bills. And then you want to get money out of there.
So in personal finance people, like Dave Ramsey, who's books are good on this kind of stuff for the most part, by the way. Talk about paying yourself first, so the personal side, what they're talking about is kind of the same deal. Getting that money out of that personal account and into some sort of investment or savings account right away. So that's another objective. So how do we do that? Every two weeks, you're getting paid, I do some other stuff as well. Money's going in there, the bills are going to eat that all up. Whatever you leave in there is going to get eaten up by bills. Just like in the business. It's a lot of the same kind of stuff.
We want to get money out of there. So, like I said, big picture, out of the business to into the personal and you want to get it out of the personal. A lot of people, even if they get step one, business into personal, they leave it in their personal. Or even if you're an income earner, regular employee, whether it's practice or whatever, that money's sitting in the personal account, just sitting there and it's going to get eaten up by expenses. No matter what.
There's people that make $1,000,000 a year and their expenses are $1.2 million a year and they're losing $200,000 a year, right. So it doesn't matter how much you make. You've got to do this. And you can get wealthy following this, no matter what. So out of the business into the personal. Or, just from your paycheck into the personal. You've got to get it out of there next. So how do we do that?
Basically I've tried a lot of different stuff and long story short, I do an automatic transfer out of personal checking into my investment fund. Every month, there's a certain amount that goes in. Right now, we're doing 15% of gross. So there's a chapter in my book as well, but basically ... 15% of your gross income for the year is a good savings goal for most of us. If you do more, great. You know, it's basically 40% to get real wealthy, 10%, but 15% is a good goal for most of you. It might seem crazy, so if you just take your gross income for the year, you made $100,000 last year, that's $15,000 is 15% of that. This is gross, don't use take home. So you gross $100,000 and then taxes will come out. So 15% of that total gross, that's $15,000 and divide that by 12, it's $1100 a month or whatever it is. And that's what you're going to transfer out. That's basically what I've done. So it's 15% of what my gross is, ballpark numbers and there's more complicated stuff in this. But basically, this is what we want to shoot for.
So 15% of your gross. Last year we made $100,000, 15% is $15,000, divided by $1200, $1150 whatever it is. That's going to automatically come out of your personal account every month on a set date and go into your investment account. And that's it. That's how you're going to get 15% out of there. You probably don't want to start at 15, for most guys we're in debt and we're going to do an episode just on debt and all this other kind of stuff, as well. But you just want to get 15% out of there.
If you're not at this point, which you may not be, if you're in a lot of student loan debt and all that kind of stuff. We're going to do an episode on debt. You may not be ready to put 15% aside. I'd still encourage you to put something aside. It's $100 a month, it's $200. Even if you've got big student loans and loans and debts and all this stuff. Start getting in the habit of getting some of that money investment account, just a little bit as well. But, if you're a little bit more on, you don't have as much debt ... and even if you have a home loan and all that kind of stuff, which we'll talk about. You still want to do that. But that's the goal, 15% of your gross, whatever you grossed last year, 15% divide by 12. That monthly amount should go out of your personal checking now and into an investment account.
So, you're saying, what kind of investment account. You're going to do it all set on this, not a big fan of financial advisors, nine out of 10 are just there to take your money. And even if they're not, they're just going to skim one or two percent off the top. So people don't realize is financial advisors, the market goes up 7% one year, financial advisors taking ... it actually adds up to about 2% by the time their fees and commissions and all that kind of stuff. So the market went up seven, you only made five. That's not good. If the market goes down five, you lose 2% more. You're going to go down seven, instead of five. So, over 30, 40 years investing, this adds up to a fortune and it's going to actually crush you. We'll probably do an episode just on these fees and stuff, too. And kind of everybody's waking up to this, there's Vanguard Revolution. So basically I have everything with Vanguard, I save with post-tax money, which means I'll pay the tax when I take it out, which we won't get into in this episode. And then we'll put all low cost index funds. And again, we won't get into this this episode either, but their cost are average a .05, .06% fees for Vanguard. It's very low, there's no money transferred over there, no money to set up an account, no minimums.
I encourage you to set that up. They are very good. Their service is great, you can call up, they'll walk you through it. You can do it all online without doing that. Again, we're not going to get all into that this episode, but I am a fan of this more passive, low cost index fund type of investing. And the way we divide that all up and all that kind of stuff. We'll get into it in another episode. There's a good book on that, Index Card Revolution, is the simplest book. There's a bunch of other ones about this kind of stuff. We'll do a whole show on this investing, but the point of the matter is, you need to get it out of there. We're going to set this auto withdrawal. I'd like for you to set about 15% of your gross coming out monthly. I'm going to do it once a month through Vanguard. It'll transfer into money market account. You can leave it in there and then purchase the funds later or ... I kind of try to do it right away mostly. And again, we're get into investing in another episode. But, get it out of the personal into this account right away.
Now the one key thing with this is timing. So we've kind of nailed this timing down at my house, when these transfers and everything all happen. So, the Vanguard transfer from the personal account into the investment account happens somewhere around the 20th or something. But basically, you guys probably mostly the same way, beginning of the month there's a lot of bills, you got to pay your mortgage. We have a rental property we have to pay and then we got to wait for the rental check and all this kind of stuff goes on at the beginning of the month. And then the balance starts building up near the end of the month as you get paid the second time. So, we've kind of timed that transfer to Vanguard out of that second paycheck. Kind of my first paycheck will pay the mortgage and all that kind of stuff and the rentals. And then more money come sin to replenish that and then the balance is up higher and Vanguard takes it out.
So think about this timing. I won't get into this too much. The same with the other accounts, as well. And kind of what I've done for the most time, what I'll do with the business, because myself is on payroll and I have a large staff, a bunch of doctors and stuff, that payroll hit is pretty big every two weeks. And what I timed that as well, is the payroll's every two weeks and I pay the bills on the other two weeks. So, I'll probably do an episode on that, as well. You don't want to pay your bills as they come in. You want to set this all up, plan your finances a little bit better. We do a little bit more on this stuff, if you guys like this. But you just want to time all these transfers. So think about when you do it and it'll make it a lot easier.
Like I said, if you do that first transfer, usually the third of the month when you've paid your mortgage and all those kind of bills come in, it's better off to do it a little bit later. So think about all that, but pay yourself first, just really means get the money into the business. You want to get as much money out of that business into your personal account, as possible. Out of the personal account into an investment account and a good solid investments, low cost solid investments after that. And that's what pay yourself first means. Get it out of the business. Try and think about this, get it out of the business, get it into your personal account, and get it out of your personal account into an investment account. You guys are missing one or two of these steps or a lot of these steps. But that's really the big point of business.
the other nice thing is when you keep taking money out of the business account, it pushes you. I know people who will let $200,000 in their business checking accounts accrue. For one, you should be earning money on all that and all that kind of stuff, and it just kind of makes you lazy and not pushing. I keep the balances a little trimmer and you know, it keeps you pushing. I had a balance a little low this week, we had a slow week, let's push a little bit more. So it's good motivation, as well, to keep the business building. So, pay yourself first. Get the money out of the business into your personal account. Out of the personal account into an investment account. Automatically get it transferred, get it set up. There's some good resources for you. We'll do some more info on that, but don't forget to pay yourself first.
Thanks for listening to Dr. J's Path to Success podcast. Make sure to subscribe on iTunes and leave us a review. For information, please visit drjamesfedich.com. Dr. James R. Fedich, Clinic Director at Village Family Clinic. His book, Secrets of a Million Dollar Clinic, is available on Amazon and online at icanstartafamilyclinic.com or drjamesfedich.com. Www.drjamesfedich.com.