Reinvesting Your Online Earnings Back Into Your Business is the Smart Thing to Do

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I was doing some income tax prep work for a friend of mine who is also an internet entrepreneur like many of us are or aspire to be.

I have been doing his income tax returns for a couple years now and this year I noticed a SIGNIFICANT increase in his earnings from online activities.  He makes enough to make many quit their full time jobs.

What I also noticed is a consistent trend in how he manages his online earnings.  That trend is consistent with my own beliefs and the approach I take in managing my online earnings.

What is that trend? Instead of spending the online earnings outside the online business or businesses, he and I favor reinvesting our online earnings back into our online business.

Why Reinvest Online Earnings Back Into the Business?

Building and growing a business requires spending money.  Most expenses in our lives are incurred with after tax dollars, which means that we work hard doing whatever it is that we do, pay taxes on the money we earn and then use the after tax dollars to spend on things we spend on.

Income taxes are probably one of the most neglected and misunderstood concepts, at least in my experience. Many truly do not know how much they are really paying in income taxes.

But after you come to realize how much you are really coughing up in taxes, figuring out how to spend pre-tax dollars rather than post-tax dollars becomes more enticing and exciting.

Two Major Financial Benefits of Reinvesting

Strictly speaking from a financial perspective, there are two main benefits of reinvesting your online earnings back into your business.

First, you will be able to reduce your current income tax expense. This is best demonstrated by a simple example.  Let’s say your online business generates $20,000 in earnings and that you are in a 20% income tax bracket. When you file your taxes, you pay 20% or $4,000 in taxes and keep the remaining $16,000 to save or spend.

Now say you spent $250 a month to outsource some work (perhaps more content creation or building back links) which comes out to $3,000 per year. You get to deduct all $3,000 from the $20,000 earnings to arrive at a taxable income of $17,000 from your online business.

After paying 20% in taxes (or $3,400), you get to keep $13,600 of your earnings. Sure, your net take home pay or “pay to keep” is less ($16,000 vs. $13,600), but you end up paying $600 less in taxes ($4,000 vs. $3,400).

Also don’t forget that you spent $3,000 on your business’ growth, which will pay off in a larger business and higher online earnings as a result down the road.  So if you think about it, not only would you keep $13,600, but you also spend $3,000 of pre tax dollars on your business’ growth, totaling $16,600 in total disposable dollars.

This is $600 more than the first scenario in which you would’ve kept only $16,000 in disposable dollars.  The $600 more in disposable dollars is the result of you paying $600 less in taxes as a result of spending $3,000 on your business. It all reconciles in the end.

Second, you will experience expedited business growth.  One person (You) can only do so much. When you start to hire, delegate and outsource business related tasks, you experience much faster growth than you would if you did everything on your own.

Instead of making $20,000 in online earnings today and $30,000 a couple years from now, you may be able to grow the cash flow to $60,000 in the same time period if you engage outside help.

So down the road when your business is established and at a level you had envisioned it to be or want it to be, providing you have built it in a way where you can sustain it without as much outside help, when you stop spending on outside resources at some point down the road, you will start realizing a healthier cash flow.

Basically, you get to keep the earnings that don’t spend on salaries or outsourcing fees.  But now your online earnings are much larger than what they would’ve been had you not hired help to begin with.

Concluding Thoughts

Although focused mainly on online earnings, the premise of this post applies to all businesses in general.

I realize that the message I am trying to convey in this post may not resonate with everyone.  That is because some are in a position to be making a full time income from their online business, while others are earning money online while maintaining full time jobs.

When you are solely relying on your online business, you have to think about paying your bills and feeding your family first before reinvesting back into your business.  However, if you have a successful career or a stable job and are making money online on the side, reinvesting your earnings back into your business is the best thing you can do assuming you have no other pressing financial commitments and obligations.

Which category do you fit in?  What are you doing to make that dollar go farther? Do you have any suggestions for our readers on how to better manage and use their earnings from online endeavors?

Here is a relevant post on minimizing income taxes on your online earnings.

17 Responses to “Reinvesting Your Online Earnings Back Into Your Business is the Smart Thing to Do”

1. Nigel Chua says:

   August 9, 2011 at 1:25 am

   Hey Sunil

   Reinvesting back into business is a definite must do, and one should allocate about 5-10% to be reinvested (at the very least) to ensure growth and sustainability. The way my wife and I run our business is that close to 50% of our income is reinvested into the business – this is incredibly high (and riskier) but we decided to do so because we want to accelerate business, financial and personal growth, and 50% reinvestment is the best and only way to go.

   As you say, not everyone agrees with it as it depends on their life and business plans – some people are happy with creating a job where they are the one and only employee, some wants to create more etc. It depends on one’s goals and desire for themselves and for their business. Many people whom I come across prefers the “cold, hard cash approach” as they want to have the money in the hand, perhaps they feel more secure that way. Perhaps they need the cash in hand.

   Whatever it is, as long as people take consistent action to improve their lives, business and finances, I’d be more than happy =)

   Reply
   • Sunil says:

     August 9, 2011 at 3:58 am

     there is a key point you mentioned Nigel – which is consistent action. do this, or do that, as long as you do something.

     personally, in growth stage i reinvest pretty much all my earnings back into my business. had i not had stable and consistent cash flow from existing ventures, the amount would probably be a lot less.

     Reply
     • Nigel Chua says:

       August 10, 2011 at 3:04 am

       Yes, I realized, over time and testing that

       “consistent, persistent action in the correct direction” is the way to go.

       It doesn’t matter how motivated I am, what I feel, what I say, what people say, what people do – what matters is what I do everyday, and whatever I do daily must bring me steps closer to my goals in business or finance.

       Reinvesting is one of the key fundamentals to accelerate growth, but many people dont/cant/wont do that because of personal or financial reasons. It all comes from planning, sacrifice and consistent action.

       Reply
2. Terry Wright says:

   August 9, 2011 at 12:08 pm

   Hi Sunil,

   Thanks for an excellent article. I’m just starting out with my online business but I try and re-invest as much as a can. I never re-invest less than 66% as that way my business keeps on growing.

   Nice article.

   Terry

   Reply
   • Sunil says:

     August 9, 2011 at 1:20 pm

     Welcome Terry and thank you. With 2/3rds back right in you should see expedited growth 🙂

     Reply
3. Nishadha says:

   August 9, 2011 at 11:21 pm

   I don’t earn a huge amount to be taxed but I always invest a percentage of my earning to develop my online business and it has paid off with increased earnings. If you are not making a lot it is a hard decision to invest a portion of your earnings.

   Reply
   • Sunil says:

     August 10, 2011 at 4:08 am

     That’s a good point Nishada, especially if you rely on your online income solely. Welcome to the blog and thanks for the contribution.

     Reply
4. Ryan @ Roth IRA says:

   August 10, 2011 at 3:58 pm

   Do you have any advice for highest ROI for outsourcing? Do you find backlinking or content creation is better? For me, the only thing I’ve outsourced thus far is backlinking because I haven’t found consistently good writers to write about specific niche topics.

   Reply
   • Sunil says:

     August 11, 2011 at 1:21 pm

     Welcome Ryan – different things work for different niches, as well as different entrepreneurs because each one of us runs into different freelancers. I have found for some sites content creation has been best ROI, and for others it’s been article marketing, but nothing trumps paying to find private advertisers. Once an advertiser, always an advertiser providing budget exists as your site doesn’t fall off the cliff.

     Reply
5. The Financial Blogger says:

   August 10, 2011 at 11:57 pm

   I COMPLETELY agree with you!

   I’ve been reinvesting almost 100% of my online income in my business for the past 3 years. This is how I went from 18K to 125K last year!

   I’m expecting to make about 100K on a steady basis for the upcoming years and I’ll probably see this figure growing since I still reinvest my profit.

   I use my money to create more websites, buy some and hiring VA’s and writers so I don’t work more than I used to 😉

   great post!

   Reply
   • Sunil says:

     August 11, 2011 at 1:23 pm

     Welcome Sir – Glad you visited. I have been following your stuff and know you reinvest quite a bit. I even witnessed your high revenue but negative cash flow month. But no worries right? Your model is interesting and it’s fun for me to watch the snowball. I hope it keeps growing. All the continuing best as always and I hope to see you around more.

     Reply
6. Dana says:

   August 11, 2011 at 8:05 pm

   Yeah, re-investing our earning is a must if we want to grow our business as well as our earning in future. Indeed, that’s how a small business can be a giant business.

   Reply
   • Sunil says:

     August 12, 2011 at 3:18 am

     Welcome Dana – you are right, sometimes money drives money

     Reply
7. Down Or Just Me says:

   August 12, 2011 at 1:34 pm

   I’ve heard of reinvesting before and that it’s a great idea, but never in such detail! This really explains *why* you should put the money earned back into your business and what it can do for your earnings, so thank you for the valuable advice! I appreciate it. 🙂

   Laurie

   Reply
   • Sunil says:

     August 12, 2011 at 8:10 pm

     Welcome to the blog Laurie. I love the icon. El Penguini!

     Reply
8. Paul says:

   July 8, 2014 at 2:10 am

   I’m just starting an online retail business. What happens when at the very beginning stage if you reinvest 100% in order to get more products? Since “profit” is zero are you not taxed?

   Reply
   • Sunil says:

     July 29, 2014 at 8:41 am

     you are always taxed on net profits. the $ you reinvest buys you more inventory to sell later for more profit. always keep a reserve for taxes

     Reply