Should you keep business and personal funds in one account? In short, no.
But look, I get it. A lot of self-employed business owners do combine their business and personal funds together. You can’t beat the convenience of having everything in one account. Life is complicated enough — why further complicate it by setting up multiple bank accounts for different things?
So yes, despite my advice to all my self-employed clients to set up separate bank accounts, I can empathise with those who want to keep it all in one account. So instead of telling you that mixing your business and personal funds in one account is bad, let’s take a nuanced look at:
Depending on which part of the world you are from, some banks will charge you an establishment fee and/or a monthly fee for your bank account. In which case, you are entirely justified in not wanting to give the (already disgustingly profitable) banks even more money.
That being said, depending on how expensive it is to set up new accounts, you may consider the benefits of having clarity over your finances to be worth the price of maintaining multiple accounts. However, you should always be on the lookout for fee-free bank accounts. More competitive banks will offer fee-free banking, and you should take advantage of these offers to set up multiple accounts.
I mean, yes, it is. I don’t dispute that. Life is hard, the world is a geopolitical mess, and the rich keep getting richer while the rest of us struggle to survive. Why add more stress to your life by having to worry about multiple accounts?
Having one account means that you only have to worry about one bank, one fee (if any) and one account statement each year. But let’s be honest. If you wanted the easier way out, you wouldn’t have been self-employed. Being an employee is way easier than being a business owner or contractor. And you wouldn’t have to agonise over opening multiple bank accounts. But if you are reading this, I’m assuming you are self-employed or are planning to be soon.
If you’re going to make that step into self-employment, then you should do it correctly. Unless there are financial reasons why you can’t set up multiple bank accounts. You should set up separate accounts for your business and personal funds.
Uh. No.
You know what is more confusing? Trying to identify what is a business expense and what is a personal expense out of the 1000+ transactions in your bank statement each year, just so you can file your tax return.
Also, if you have an accountant, they will quite likely charge you extra for the privilege of having to separate out the personal expenses from your business expenses at the end of the financial year. I say this as a practising accountant!
In saying that, there are ways to mitigate this confusion. Using accounting apps like PocketSmith allows you to categorise which transactions are personal and which are business. But it does require you to be coding on a regular basis. And coding is a lot easier if you have a dedicated business account, as you can easily bulk code transactions instead of having to figure out, line by line, where each transaction should go.
At the very least, you should have one account for personal use and one more for self-employed/business use. It’s just one more account.
Having all transactions come out of one account will lead to difficulties in terms of working out which transaction goes where. In some cases, you may think that it is simple. For example, Gabbie is a tradesperson, and she knows that all spending at the hardware store is for the business, and all spending at the grocery store is personal. But what if Gabbie spots a bargain buy for cleaning products at the grocery store for her business? Unless she pays separately for the items for the business, it will be difficult to tell at the end of the year if the spending was for the personal or business side of things.
That’s just one example. As a self-employed individual, you will have situations where the delineation between your business and personal life is not so clear-cut. Having a separate account for both items will make it a lot easier to keep track of things. If Gabbie from above wants to buy cleaning products at the grocery store, she can whip out their business debit card and pay for them.
At the same time, she can use their personal debit card to pay for all the other personal items that she bought. At the end of the year, she knows exactly what transaction goes where!
With your personal and business funds intermingling, it is difficult to keep track of how your business is performing. Unless you are diligent in keeping up to date with your transaction coding (assuming you are using PocketSmith), it will be challenging to tell what your business’ monthly profit and loss looks like.
There is a tendency among first-time business owners to treat business earnings like a regular salary. However, business/self-employed earnings tend to be more variable and irregular than salaries. For example, Jeya is a business owner. In June, he made $10,000 in sales. This money went into his mixed personal/business account. He then immediately spent this money on personal items (rent, groceries, loans). Because it is difficult for him to keep track of his business expenses, he didn’t leave much for business. He reckons leaving aside $2,000 should be enough. Then July comes along, and it is a slow month where he makes no sales. However, he still has costs to consider — then July becomes a tough month because he can’t pay his personal expenses.
Treating your business funds as your personal funds is a poor show of financial discipline. Any successful self-employed business owner will want to maintain enough cash to cover their business expenses. You should only be paying yourself what your business can afford to pay you (after tax and expenses). The easiest way to keep track of this is by having separate business and personal accounts.
By the end of the day, you will want just two separate accounts. One for your personal spending, one for your business. I have come across clients who took it to the other extreme and have 10 separate accounts for all sorts of different things. I personally find that unwieldy and a bit hard to keep track of everything (which kind of defeats the point of achieving simplicity with multiple accounts).
If you are looking at setting up more accounts than just the two accounts, here are some useful ones you can set up in addition to your personal and business accounts:
If you’re looking at setting up a third account, this is the priority. The tax savings account is a separate account that you shift money into from your business account to save for, you guessed it, taxes!
Being self-employed means that you have to manage your own taxes. You don’t have an employer who will pay your taxes for you out of your salary. It is important that you put taxes aside in a separate account before you pay yourself from your business account. If you are GST-registered, this is a handy account to put in your GST into as well.
Handy to have if you’re planning on saving up for big purchases in the long run. Let’s say you want to purchase a new vehicle for the business (and you don’t want to take a loan). You can shift money over from your business account into this account to save up for the vehicle.
Generally speaking, you will be moving cash into the long-term savings account if you have the cash to spare. So first, set aside money for taxes, then pay yourself, and then move money into the long-term savings account. This long-term savings account can also function as a rainy day fund, in case things go south for your financial situation.
So yes, you can run your business and personal transactions from the one account. But I don’t recommend it. Having a separate account for each line of income is the best solution. But you know what is even better? Getting accounting software to manage your different account streams.
PocketSmith is pretty good at managing your personal expenses and self-employed expenses. Especially if you’re just starting out being self-employed and don’t want to pay top dollar for expensive accounting software suites.
So stop mixing your personal and business expenses and start categorising them neatly. Prep yourself for financial success in the future. And as always, stay positive!
Sam is the director of SH Advisory, an online accounting firm for small businesses and startups in NZ. He is also the creator of The Comic Accountant, an internationally-read finance comic blog. With 15 years experience in accounting and finance, he loves sharing quality financial advice with small business owners everywhere. In his spare time, he likes to nerd out over the latest board game launches and great PC gaming deals online. If you need help with your small business and startup, Sam is the person you want to talk to!
