Your business needs its own money
Imagine this. You’re an employee at a big company, paid every two weeks. But instead of issuing you a paycheck, the company leaves the money in their bank account, and you have to have to ask for money to pay for rent or food. That would be nuts, right?
If you’re self-employed and you don’t separate your business and personal finances, you’re doing the same thing. Keep reading to learn why there should be a clear line between your business and personal money, and how you can set it up today.
Why should you separate your finances?
1. It’s good business!
Businesses (even solo ones) cost money to run, and it’s important to keep track of just how much you’re spending (operating expenses), as compared to your overall income (revenue). If your business expenses- product supplies or audition prep classes- are all mixed up with your clothing and grocery purchases, you can’t easily tell what’s business spending and what’s not. Instead, all of your income and business expenses should come in and out of one bank account (or one bank account and one credit card), that doesn’t interact with your personal spending, so you’ll easily know how much you’re spending in your business
2. It shows you’re THe Real Deal (street cred!)
This might seem like a minor reason, but to me it’s the most important. Imposter syndrome runs rampant, especially for those of us that make money as artists or run very small creative businesses. When your business has its own money you’re taking it seriously. It can feel risky, like putting a stake in the ground that says “I’m a professional and this is a real business”. But the truth is, you are a professional and this IS a real business, and the easiest way to show that is by treating it like one.
3. It sets you up to grow
Strictly speaking, you should be making this separation from day one of any business, but it’s common not to make this leap until it’s legally required, such as when you have an LLC or S-Corp. In order to take advantage of the biggest benefit of an LLC/S-corp - liability protection- you need your accounts separated. Incorporating is a time of major change for most businesses - there are new filing requirements and different accounting practices that go along with changing entity type, and it can be overwhelming to set everything up at one time. By starting out separating your business and personal finances, you’ll be ready to scale , and limit your headaches down the line.
4. It makes tax time wayyy easier
Keeping your business money and spending completely separate from your personal money will make your tax time 10 times easier. You’ll only have to examine the spending made from your business accounts in order to figure out your deductions. There may be one or two crossovers, such as the home office deduction or your home utilities if you’re working from home, but those should be limited and very easy to pick our from your personal expenses to incorporate into your tax filings at the end of the year.
5. It simplifies personal budgeting,too
The Biz/life separation is beneficial in your personal spending too. It’s really helpful to see what your lifestyle costs in total, separate from the needs of your business. If every time you sit down to figure out if you’re overspending anywhere personally, and you have to sift through every business expense and payment, it sucks and it’s easy to get frustrated. Same goes when trying to figure out if you’re investing too much or not enough in your business - the separation makes everything cleaner and clearer and allows you to spend less time thinking about your money, which is the goal in the long run.
How You can get started today
While setting up an official business bank account is the gold standard, they can come with high daily balance requirements or monthly fees. If you’re not ready for that, start by open a basic personal checking account wherever you already bank, and use that as the “business” account. The most important thing when you’re just starting out is to have that separation so that you can start paying yourself.
Here’s how to do it:
Set up a second personal checking account where you already bank
Fund this account with whatever the minimum required balance is (hopefully not more than $100, otherwise maybe find a new bank)
Start depositing all income from your business into this account
Begin paying all of your business expenses through this account (alternately you can designate a credit card your “business credit card” and charge your expenses, but make sure you pay it off every month).
Transfer what you need to cover your personal expenses into your personal account - this is your “salary.” Use your salary to pay all of your bills - bonus points if you can set it up so you’re paying yourself a set amount every month, but if you’ve got variable income don’t worry about that for now.
There you have it! Now you’ve got separate business and personal accounts like a true professional. In upcoming posts, I’ll be covering my tips for business budgets and personal budgets, how to handle a variable income, and more!
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