How To Earn A 6-Figure Income (REALLY)
I see a lot of talk about “how to make a 6-figure income”. This is not only in our industry but also outside. A lot of people are playing up to fantasies of becoming rich quickly. I used to be an auditor and thus have an insatiable urge to validate this with calculations… honest-to-god facts and figures.
This week, I’m going to share what it *REALLY* takes to make 6-figures. Here’s a hint: REAL hard WORK! No more, no less. But, read on for the nitty-gritty details.
The MATH behind 6 figures
Let’s go through some easy-peasy math first. I want you to really understand what 6 figures looks like from a small-business accounting angle. First, let’s have some assumptions for the example I’m going to give. The example business is a wedding planning firm that:
- Has been in business for about 3-4 years
- Is in a mid-sized metropolitan area
- The business has 3 packages that are priced at $2000, $4000, and $6000 ($4000 being the package that is sold most often)
- Does not have permanent staff members but has 2 event assistants as contractors (These event assistants are paid $150/event and are generally both hired for each partial or full planning client’s event)
- The business has $2500 in monthly expenses (which comes out to about $30,000 annually)
- The business is an LLP which means that the owner draws their own personal income from earnings (in layman’s terms: the owner takes a “draw” not a “salary” and typically this is taken after expenses are paid, from an accounting standpoint)
Example #1:
Now when most people talk about “6 figure income” they are referring to the sales made. (A sale being exactly what you charge your client.) This means that sales total at least $100,000.
Let’s move into the math. Using the average package of $4000, this business needs to do 25 events to achieve $100,000 ($4000 per event x 25 events = $100,000) VOILA! You now have your 6 figure income! NOT SO FAST! Let’s see what this looks like with your BOTTOM LINE:
Income $100,000
Costs of Services Rendered – $7,500 (cost of labor: 2 assistants at $150/each for 25 events)
Profit Margin $92,500
Expenses – $30,000
Net Income $62,500 (BOTTOM LINE)
This Net Income is what you are left with as the owner of the business. THIS is what you actually draw as the owner of an LLP (or a sole proprietor.) THIS is your personal income: $62,500 – not the 6 figures of $100,000. Hell, it’s a really nice income, I think. But it’s NOT a 6-figure income.
All that matters in terms of your own income is the bottom line. What happens if this business’s expenses were $7500/month – or $90,000 for the year? (I know this is a LOT, but play along with me.) The bottom line would be $2500. That sure doesn’t look like 6-figures to me.
You see… making 6-figures in your sales doesn’t really matter. You have to examine your business as a whole. You have to look at your bottom line.
What do you think about this?
Read part 2 here… I’m going to do some more math and show what it takes to get $100,000 as your BOTTOM LINE! HINT: a LOT of HARD WORK.
I think another thing people forget about are all the taxes to be paid as a small business owner. So you’ve got your $62,500, which is a fantastic income but wait, you’ve not been paying any income taxes out of each paycheck like you would at a “real” job. So now that $62,500 is more like $51,000 after taxes (assuming zero deductions which is, admittedly, not realistic). So now we’re a far cry from 6 figures, if we’re looking at actual take-home.
You are SO right, Chris! This doesn’t include taxes… something that is a personal expense and people need to budget for on their personal finance budgets. But – like you mention – because it’s not being taken out of our paychecks bi-monthly, that quarterly or year-end hit can be a killer. Even on $100k draw (taxable income), you’re still left with ~$85k take home pay… still not the 6 figure income we dream about. Great observation!
I had someone else comment on Twitter about the tax issue… so I want to make sure to explain this a bit further. An LLP and sole proprietorship pays taxes once – on the owner’s draw. You pay yourself the $62,500 and then what you do with that money is up to you (pay your mortgage, your groceries – and YOUR taxes.) (In this example you would pay taxes on your schedule C for your 1040.) 1040 taxes are individual taxes and therefore a personal budget item – meaning you need to make a budget for yourself (the same one that you use to calculate your mortgage and your groceries) and slap this onto there. This budget is where all your personal expenses are made from – and comes from this $62,500. Now, if you have a corporation, you pay taxes twice: the corporation pays taxes and the individual pays taxes (generally as a salary expense and W2). As a corporation, you would DEFINITELY have to include this in your company’s budget. Your income statement would look different. It would have another section at the bottom of this showing taxes and then your earning after taxes. Does that help? (Tax is a CRAZY thing – talk to your accountant to make sure you’re doing this right!)
Thank you for touching on this topic. I’ve heard a lot of it going around, too, and it’s always nice to see it broken down so that everyone understands what actually goes into the numbers behind the business.
Michelle, I love you for doing this series! So helpful in setting in motion my dreams & goals.
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Nicely broken down. I live in Fresno, Ca which is a smaller area but I branch out into manageable areas to grow business. I keep things organized in a way to assure I have time for family and I still enjoy what I do. As I add another date I really consider if the income and growth are right for my business. I want to grow but I want to make sure my quality of service isn’t suffering due to burnout. Thanks a bunch for sharing this!