Many years ago I wrote a blog post that looked at the reality of how much money you actually make when you run your own business.
You can read the article here – Do You Want to Run Your Own Business? Read this First!
My premise back then was that most business owners don’t make a whole lot of money until they sell their business.
This situation is very similar to what an employee, who stays with the one company for many years, goes through. A business owner can make a salary level income year after year, and then one day, likely at retirement age, the business is sold and a nice lump sum of cash is returned, much like a superannuation or retirement settlement an employee receives at the end of a long career.
Obviously this situation isn’t ideal if you are an entrepreneur looking to create freedom in your life, both time and financial freedom. If you spend all day, possibly beyond normal working hours, in your business, and you’re taking home an income pretty much equivalent to a salary (plus you have many more responsibilities than an employee), you are not in a great situation.
If I look back over the last five years of my business life, there have been a handful of significant “spikes” in my income.
The spikes have occurred because of either of these events –
If you go back to before I sold any websites and before I did any product launches of my own, I was in a good situation in terms of time freedom, but not ideal in terms of financial wealth.
I had web businesses that made cash flow that I didn’t have to work hard to generate, but the income was on par with the average starter salary for a university graduate. That’s not bad mind you, certainly enough spending money to have fun, but like a good entrepreneur I craved more.
At that point I didn’t have a car, I was either renting or living with my parents, and although my sites were not time-sucks, I had to look in on them at least once or twice a day.
The day I realized that an income producing website is a saleable asset, was a good day, and in a few short years after this my financial situation changed dramatically.
In the space of two years I sold several websites, bought some more, sold them for a profit and used the cash, along with what I was making from blogging, to buy a car and a home.
At exactly the same time as I was receiving the final payment for the sale of my proofreading business (my biggest one time cash injection up to that point, see here – How I Made Six Figures In One Day), I was conducting my first ever launch of the Blog Mastermind program. The end result of these two events was a huge spike in income.
I used the money I made to travel the world for eight months, returned home to Australia and within a few months had paid back my entire home loan.
I now owned my house, my car, had traveled the world and come back with more money than I had left with. I had both freedoms I was striving for – time and money.
The tax year in Australia finishes at the end of June. Just a few short weeks ago as I write this article, once again some major changes happened in my life:
The tax year I just paid for was an interesting one because it covered a year where I did those major income producing things I talked about above, like selling websites, plus my business structure was very simple from a tax point of view (i.e. not good).
I wasn’t structured to get maximum tax deductions for the year, so I feared a large tax bill. Initially I wasn’t too alarmed because I had prepared for a specific amount and had kept the money aside to cover it.
Unfortunately it turned out that my tax bill ended up twice what I was expecting, plus I had a university loan that needed to be paid off because I had seriously jumped in income brackets. This led to a rather hefty tax bill, equivalent to what I would probably be earning now in a year if I went down the employee path.
It’s a good thing when your tax bill is as much as most people earn a year working a professional job, but it’s still a shock when you have to pay for it. What made things even more interesting was I had made an offer on a new apartment, which was due to settle around the same time as my tax needed to be paid.
The new property is an inner city party-pad as I like to call it. It’s located in my favorite area of my hometown, it has a huge balcony, a great kitchen, is very modern…and darn expensive!
Unfortunately my favorite suburb is also a favorite for a lot of other people, so there is a big demand, pushing prices high even for apartments. Nonetheless, this purchase was all about me. I want to live in my dream location, with a great lifestyle, and although it cost me, I’m extremely happy to be moving back to the inner city (I’ve been driving in nearly every day anyway!).
I certainly have no rights to complain, I’m doing very well financially, but buying a second property, getting a home loan (again) and paying tax, showed me how difficult it is to accumulate wealth rapidly, even when you are earning well above the average.
So, the question begs to be asked? Do I still believe that you really only make big money when you sell your business?
In many ways, I do. Most of the really big success stories I know of that result in a millionaire being born, came about because the person built a great business and then sold it.
Usually while the business is developing, the owner might be wealthy on paper because of the valuation of the enterprise, but in terms of real dollar wealth, they are not taking home anything more than a salary.
The salary might be large, but as I learned recently, after you take out tax, even if you are making $100,000+ a year (which could be almost half that after tax in terms of dollars in your pocket if you live in Australia), if you don’t have any potential leverage beyond that, you’re facing a slow and steady path to wealth.
Obviously there are exceptions to this situation and many millionaires are born simply because of the business model they use and the system they have set up, but it’s not common. If you want wealth quickly, building something and selling it, is the typical path to wealth.
Of course not everything is about speed. If you take to heart the message in a book like The Richest Man In Babylon, long term wealth can be created by simply saving 10% of your income and reinvesting it at a 10% or greater return. Compounding will take care of the rest.
I’ll end this article with a few key take-away points based on my experiences from the previous years, to help you if you’re still not as rich as you want to be…
One last point I feel important to mention: Don’t forget to think beyond the big pay day.
Often we get so caught up in meeting a financial goal, that once we get there, we realize that it’s having the drive and acting on your passion to meet the goal that is actually more satisfying than getting there.
It’s about the journey, so if you don’t have a destination, you can get quite depressed. Take that to heart, because you might think it is rosier on the other side, but usually it is not. The pursuit of one’s passion provides much more ongoing satisfaction than meeting a financial goal, although it’s certainly nice to be rich too.