Your Household Number: What Your Business Has to Cover

Short Answer: Your household number is what your household spends and saves in a year, after tax, minus any income that doesn't come from the business. Build it from three months of real statements, add irregular costs as a monthly average, add back what an employer used to pay for (health insurance, retirement), and include the saving you want to happen. That after-tax figure is the job your business has to do before anything else.

Every question about owner pay runs through one number: what the household actually needs. Many owners guess it, and the guess is usually low, because the costs that don't arrive every month are the ones that get left out. A low guess makes a thin business look healthy until a car repair lands on a credit card.

Why Start From the Household?

A business can be judged many ways: revenue growth, margin, customer count. For an owner-operated business, one test comes first: does it pay for the life it was started to fund? You can't answer that without the household number, and every later step (the pre-tax pay you need, the profit the business has to make) is built on it.

Step 1: Start From Real Spending

Pull three recent months of bank and card statements and total what left the household each month. Three months catches most regular bills and smooths out one odd month. Use what you actually spent, not a budget you'd like to keep.

Step 2: Add the Costs That Don't Come Monthly

Irregular costs are the most common gap: annual insurance premiums, car repairs, gifts, travel, medical bills, the property tax bill. List what they came to over the past year and divide by 12. If a three-month window happened to include one of them, don't count it twice.

Step 3: Add Back What an Employer Used to Pay

If you left a job, some of your living costs were quietly paid for. Health insurance is the big one. A retirement match is another. As an owner, both come out of your household number now, at full price.

Step 4: Put Savings in the Need

Saving that depends on what's left over rarely happens. Put the retirement contribution and the emergency-fund saving you want into the number as line items, the same as rent.

Step 5: Subtract Income That Isn't the Business

A partner's take-home pay, rental income, or investment income all reduce what the business has to cover. Use after-tax amounts, since the household number is after tax.

A Worked Example

Take the owner of a hypothetical landscaping company, Greenline Landscaping: one owner, a crew of four, about $520,000 a year in revenue. The owner files single, lives in a state with no income tax, and was a crew lead with employer health coverage before starting the company.

The irregular line is travel ($2,400 a year), car repairs ($1,200), gifts ($1,200) and medical bills not covered by insurance ($1,200). Left out, the owner would have planned on $5,500 and come up $6,000 short by December.

The owner has no other household income. So the business has to deliver $72,000 a year after tax. The health insurance line alone, $6,600 a year, was the employer's cost when the owner was a crew lead. It's the line owners most often leave out of their first estimate.

From the Household Number to the Business

The household number is after tax. The business has to earn more than that. Our article on how much to pay yourself takes the next step: grossing $72,000 up for income and self-employment tax gives about $92,000 of pre-tax pay. Greenline also keeps $20,000 a year for equipment and a reserve, and the owner pays tax on that too, so the profit target comes out at about $120,700.

In short: household number, then pre-tax pay, then profit target. Get the first one wrong and every number after it is wrong by more, because each step adds on top.

Should I Add a Safety Buffer?

Many owners add one, a margin of 10% to 20% on top of the household number, to cover costs they haven't thought of. It's a reasonable choice while the numbers are new. As you track real spending for a year, replace the buffer with the actual lines it was covering. Greenline's owner chose an emergency-fund line instead of a percentage buffer, so the money has a place to go.

What to Look For

• Irregular costs as a share of the total. If they're under 5% of your monthly number, something is probably missing. Greenline's are about 8%.
• The job-to-owner gap. Add up the lines that didn't exist when you had an employer. They're the most commonly forgotten part.
• Savings as a line, not a hope. If the household number has no saving in it, the business is only being asked to keep you where you are.

What a Finance Consultant Would Do Next

A consultant working with Greenline's owner would test the $6,000 against a full year of statements, then carry the household number through tax to the profit the business has to make, and set that as the target every business decision is measured against.

That analysis is what Occam's Model runs on your household and your books. It takes your monthly and irregular expenses, other income and tax situation (filing status, state, dependents), adds a safety buffer on top of expenses (20% unless you change it), and works out the extra monthly income your business needs to provide after tax. That figure then becomes the target your business plan has to reach. When you need extra help, an expert can review it with you.

Common Questions

How much income do I need from my business to live?
Your household's annual spending and saving, after tax, minus any other household income. Then gross that up for taxes to get the pre-tax pay the business has to provide.

Should I include my savings in the number?
Yes. Retirement and emergency savings belong in the need. If they only happen when there's money left over, they rarely happen.

Should I use my current spending or what I'd like to spend?
Start with current spending from real statements. Adjust for known changes, such as losing employer health coverage, but don't plan on cutting costs you haven't cut yet.

How often should I update my household number?
Once a year, and whenever something big changes: a move, a child, a new loan, or a partner's job.