If you have your own business, whether you like it or not, there’s an added layer of complexity to your personal finances. You not only need to consider where your own money goes and how it gets there, but you need to think through the same questions when it comes to the revenue your business generates.
Keeping separate bank accounts can help keep your business finances organized — which is important with a complex situation! — but having too many can become hard to manage.
Here are a few suggestions on what bank accounts you need and why for your business, so you can send money to the right places without being overwhelmed by multiple accounts to track.
Your checking account for operations is like the hub of your business’s financial web. All earnings should flow into this account, and you should use it to pay expenses and credit cards. You’ll also transfer funds out of this account and into other savings and investment accounts.
This account is for money that’s coming and going, which means every dollar has a purpose. But you may also want to leave a small cash cushion here to protect against accidental overdrafts.
Consider leaving $500 to $1,000 in your business checking at all times. If you do so, associate a $0 balance with your cash cushion amount so you don’t purposely slip under that balance.
2. Account for Taxes
Business owners are responsible for paying their own taxes throughout the year. No one is withholding money from the earnings coming to you — so you need to separate out what you owe the IRS and your state from money you can use to pay expenses (and yourself).
Exactly how much you owe in taxes depends on your state, your revenue, and your filing status. Talk to a CPA to get an estimate, and decide on a percentage of your earnings you’ll set aside in a bank account earmarked for taxes.
Putting 30% of your monthly earnings into an account designated for taxes is a good rule of thumb. You can pull from this fund when you need to pay estimated taxes throughout the year and when (if) you need to pay annually every April.
Ideally, you won’t actually need to pay 30%. But setting aside this amount means you’ll have the cash available when taxes are due and can pay your bill out of this designated account (instead of digging through your checking or savings to come up with enough to send to Uncle Sam).
3. Savings Account for Your Goals
Want to attend a specific conference or build a new website? Set a business goal for yourself by looking at the total cost of what you want to accomplish. Then break that number down by the time between now and when you want to achieve the goal so you know what to save every month.
Let’s say you want to attend an event for people in your industry. You estimate the cost of the conference plus travel and hotel at $2,000 — and the event is 8 months away. You need to save $250 per month between now and then to achieve the goal and attend the conference.
To keep yourself organized, put that $250 per month into a separate savings account designated for business goals. This will keep you from accidentally spending those funds on something else between now and you goal’s deadline.
4. Account for Emergency Savings
Keeping an emergency savings account is a huge piece of the foundation for financial success. You likely keep a cash reserve set aside to cover big, unexpected expenses in your personal savings — but your business can experience emergencies, too.
Designate a liquid savings account that you can access easily at any time as your business emergency savings. While the 3 to 6 months’ worth of expenses guideline works great for your personal life, your business may require something different for its rainy day fund.
The amount of cash you should set aside for those “just in case” scenarios depends on your business expenses and responsibilities. If you have employees or contractors you need to pay, your business emergency fund should maintain much higher amounts of cash than if you’re a freelancer who works on their own with minimal expenses.
Your business likely needs some amount of cash to operate, from paying bills and buying supplies to making sure there’s enough in the bank come tax time to pay the IRS. Look at your regular monthly costs that you have to pay no matter what and add in a cushion just to be safe.
5. Optional “Flexible Spending” Account
Those 4 accounts above should serve your business well. But you can use other accounts, too, especially if you want to earmark money for specific purposes.
If you want the money available for opportunities as they arise, consider opening a separate savings account and making a small monthly contribution to it.
Keeping this account separate from other accounts can help keep you organized. You’ll know the money here isn’t for a specific goal — but it’s also not just to spend.
Cash held in this “flexible spending” account provides you some freedom to spend on things as they arise instead of trying to plan for every single thing throughout the year. Keeping it separate also helps ease the temptation of using other funds (that are supposed to be for savings or a set goal) to make a purchase or investment you didn’t foresee.
Keep Your Business Bank Accounts Organized and Manageable
All this being said, you don’t need an endless array of bank accounts for your business. There is such a thing as too many accounts (and you may be there if you frequently forget about a few of them).
But if each account you maintain has a purpose and helps you reach your goals while paying all your costs, you’re probably in good shape.
Marriage is all about the combining of two elements. Two people, two households, two families – and usually two sets of finances.
But that isn’t always the case, and more couples these days are choosing to remain separate financial entities. Still, deciding how to deal with money in a marriage will always be a tricky subject, and what works for one couple might be disastrous for another.
If you’re engaged to be married – or know someone who is – here are some considerations couples should take into account before deciding whether or not to combine finances.
One bank account simplifies everyday transactions because every expense is shared equally. There’s no question of who’s turn it is to pick up the dog food or the dry cleaning. There’s no need to keep tabs of who paid last month’s rent or the mortgage bill.
It can also strengthen the notion that each person is part of a team and not a solo player. For the fiercely independent, combining finances can be an opportunity to let their guard down and embrace a more vulnerable approach to marriage.
Mixing money doesn’t prevent marital discord, however. A saver could be shocked at their spouse’s daily latte intake, while a spender might feel like a child being nagged. If there are stark differences in how each spouse approaches money, they’ll become apparent very quickly.
The best way to prevent disagreements is to establish a compromise early on. Couples who combine their finances can still have allowances to spend money as they wish. Each person receives a set amount every month to use on discretionary items like clothes, concert tickets or hobbies.
Some experts think that separate accounts build distrust and acrimony between couples. Others say it’s the same as individual email addresses, and allows each party to maintain some semblance of independence.
For second or third marriages where both parties have established retirement accounts and assets, more experts will recommend staying separate. Older couples often keep their finances separate after marriage, especially if they have kids from previous relationships. It can be too complicated to merge everything after decades of separation. People who have been in abusive relationships might also feel more secure and autonomous having separate finances.
Two accounts can also prevent financial disputes and unnecessary conversations – like why your partner bought a new fishing pole if they already have five in the garage. It promotes an element of personal responsibility, where each spouse is responsible for their own financial well-being – and therefore free to spend as they please.
With separate finances, couples can still work together to pay the bills. They can set up a joint account where each person contributes an equal amount, or a sum proportional to their income. This system can be used for all household bills, as well as any family emergencies that crop up.
Two possible issues to consider are retirement and different standards of living. How can you reconcile a couple if one person has a solid nest egg while the other is dependent on social security? Does one person take vacations alone or do they pay for their partner? Anyone considering this strategy should discuss these possibilities with their partner before it’s too late.
Why Money Talk is Important
Discussing money is important since financial disputes cause the most amount of stress in relationships – and are the biggest predictors of divorce.
Communicate with your partner before choosing a method and discuss your money fears, dreams and hopes. Each person might have their own idea of what’s best, and agreeing on a strategy will allow your relationship to move forward without any lingering doubts or resentment about the financial situation.
Struggling couples can talk to a counselor or financial therapist, who can help to find a middle ground each person is happy with. If money is an issue in your relationship, try to deal with it as quickly as possible. It won’t go away on its own.
Episode 06: Ask Mary Beth - How Many Bank Accounts You Need and Should You Buy a Home When You Have Student Loans?
HOW MANY BANK ACCOUNTS DO I NEED?
SHOULD I PURCHASE A HOME IF I HAVE STUDENT LOANS?
One of the fun parts of being a financial planner is getting to field and answer questions from clients and readers all around the country. In these Work Your Wealth episodes I’ll be taking time to address and answer questions I’ve come across from readers and clients throughout my career. Today I’m answering the above questions.
WHAT YOU’LL LEARN FROM THIS EPISODE:
The number of bank accounts you need.
What to consider when opening multiple bank accounts.
Tough decisions you may need to make when working towards goals.
How to keep one-time expenses from derailing your cash flow.
Cash flow considerations for locking in a mortgage.
What your debt-to-income ratio is and what percentage it should be at or below.
Items to keep in mind when saving for a down payment.
For most of us, the first dollar made is always special. Some of us even frame that dollar bill and hang it in a place of honor along with degrees, certifications and plaques. But for business owners, there’s often another milestone that gets forgotten: the first dollar you actually pay yourself from the business that you created. Paying yourself from your own business is an important step in setting up a healthy, functioning enterprise. After all, what’s the point in starting a venture that won’t ultimately benefit you? Unfortunately, many business owners don’t put much thought into that process – at the cost of their own misfortune. There are plenty of considerations to take on before you write yourself a check, and a few you probably wouldn’t think of. Here are some items to take into account as you reap the benefits and cash in on your hard work.
Pay yourself based on last month’s earnings. Projecting your income is difficult for new business owners, who may still be finding clients and getting used to the market cycle of their industry. You can remedy that by basing this month’s salary on last month’s earnings. This way, you won’t be forming your spending habits based on the current month, which is still in flux.
Don’t forget to deduct taxes. One common mistake that new business owners face is forgetting to set aside money for taxes each month. Depending on how your business is structured, you’ll want to set aside between 30 – 35% of your net business income (after expenses) on a monthly basis into a separate bank account. This will ensure you have the funds on hand to pay quarterly estimates. Pay yourself after you’ve set aside for taxes or ensure a portion of the taxes are factored in to being withheld from your paycheck if you’re also doing payroll.
Pay yourself a set amount. This is my method of choice. Instead of zeroing in on a percentage of income to pay yourself, simply choose to give yourself a salary and decide on an amount to be paid at the same time each month. To do this, you can schedule automatic transfers from your business account to your personal checking account. Any excess funds can build up in your business account and act as a buffer when times slow down. You can modify the amount if you find yourself earning more or less over time.
Your salary depends on how your business is structured. Sole proprietors have the most freedom in how they’re paid. You can transfer money every time your invoice is paid or once a month. Those with other business structures may have strict rules on how they’re paid, especially s-corps or corporations. Make sure to consult an accountant to verify that you’re paying yourself correctly per government regulations.
Change your tax structure and get paid differently. While many business owners start as sole proprietors, they may decide to change their business entity once they become more established. Some structures require that you pay yourself a fair market wage and then receive any remaining profits, which will be taxed at a lower rate. This can save you money on taxes, but can also get more complicated. Consult a tax professional who can tell you what forms to file and how much of a salary to draw.
Keep separate bank accounts. Having separate bank accounts is a must for any business, no matter if you’re working alone or with a small team. A business account provides proof to the IRS that you have a business and not just a hobby. When it comes to getting your paycheck, you can schedule automatic transfers from your business account to your personal account or do it manually every time a client pays you. You should also use a business credit card for all expenses and use a personal credit card for your regular spending. This will also help you divide your expenses when tax time comes.
Consider business and personal goals. When it comes to determining how much money you’d like to or need to take home from your business, be sure to consider your personal lifestyle expenses along with the goals you have for your business. Can you reduce your take-home pay while you invest in team growth and putting systems in place? Can you reduce your personal lifestyle expenses and goals while you build your business? What are you hoping to achieve in your personal and professional life in the next year to three years? Are you setting aside for those things? Be sure to consider how outside factors can influence your pay and adjust where necessary.
Ready to make smarter money choices? Sign up for my newsletter to start now.