Normalizing Personal Income: A Business Owner’s Guide

One could make an argument that there is no such thing as normal. Or, at the very least, they could question who determines what normal is. For example, everybody is familiar with the classic—and very normal—pairing of peanut butter and jelly. However, I know a guy who makes the claim that the classic PB&J isn’t normal until you’ve added onion to it. I guess that’s proof enough that normal is a subjective proposition… except when it comes to the world of finance. I’ve spoken on the topic of normalization in the past but today, I want to look at it from a different angle. Today, I want to talk about normalizing personal income.

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TIME INDEX:

• 00:49 – Should I Normalize My Income
• 01:49 – What is Normalization
• 02:59 – Which Areas Do You Normalize
• 05:38 – Normalizing Personal Income
• 10:38 – Getting to the Point
• 12:53 – Summary

What is Normalization, Anyway?

Before we can really discuss normalizing personal income, we need to understand what normalization is? Well, according to the Corporate Finance Institute, normalization is the adjustment of non-recurring expenses or revenues in financial statements or metrics so that they only reflect the usual transactions of the company. Essentially, if you go out and buy a new company car, it isn’t considered a normal expense because, unless you run a car dealership, you’re not buying cars on a regular basis. But how do we normalize our personal income?

Normalization of Personal Income

First of all, let me just say that the IRS is very clear that you cannot deduct personal, living, or family expenses from your business. So let’s clear things up a little more. It isn’t uncommon for business owners to own or lease a vehicle for their business purposes. But what about when you leave your business? Will you still need or even want that extra vehicle? Probably not. In fact, I was speaking with a friend who recently retired and he owned three vehicles. One of them was his personal vehicle, another was his wife’s, and the third was his business vehicle. He told me that he had no use for three vehicles now that he was retired so he gave one to his daughter and was thinking about selling the other so that he and his spouse only owned one. That type of thing happens all the time, folks.

Likewise, we may have extra salaries and wages that provide an income to you if we employ our spouses and children through our businesses. Then we have supplies, rent, utilities, tax payments, insurance, and even travel that can go away when we retire or sell our businesses. These are business expenses that benefit us, as business owners. Some of them are expenses that we won’t continue to utilize (like the extra vehicle) when we move on from our businesses. However, we will still have rent/mortgage payments, utilities, tax payments, insurance premiums, personal vacations, etc. The difference is, once we’ve retired or sold our businesses, then these expenses will need to come out of pocket. That’s where the normalization of personal income comes in.

What Does Your Lifestyle Actually Cost?

The point that I’m getting at, friends, is this; as business owners, we are fearful about many things. But we don’t have to be. In my last post, I discussed the wealth gap and how we need to know exactly what we currently have, what we will need in retirement, and what it will take to get there? You see, that’s why normalizing our personal income is so important. We must take stock of our lives and assess what it truly costs to live our lives. What expenses will come out of pocket that are currently coming out of our businesses?

We must account for every penny when we are conducting our wealth gap calculations or we will come up short when it matters the most. That’s the point that I’m trying to make. I don’t want any of you to be surprised or caught off guard when it comes to planning for your financial future. Similarly, I don’t want any of you to lose sleep at night because you’re fearful of things that can be controlled with the proper knowledge and planning. Many of the things that cause anxiety in business owners are only scary because we don’t really know how to take them on.

Friends, business ownership is hard. But it’s so good. Knowing how to normalize your personal income to prepare for the retirement you’ve always dreamed of can be complicated. But it doesn’t need to be. With a little information and some careful planning, we can at least make your personal income financially simple!

Interested in learning more about how to bridge the wealth gap in your own life? Contact the professionals at Financially Simple to schedule a free consultation. We’re here to help!