Episode 105: The 3 Business Savings Accounts Every Creative Business Owner Needs (Tax Reserve, Emergency Fund, Opportunity Fund)

Woo woo! Welcome back to another episode of Creative Minds, Smart Money. Today we’re talking about business savings, such a boring topic. No, I’m just kidding, business savings is so fun. I’m energized by the fact that my dogs are in here with me, so I’m super pumped. Anyways, business savings is not a boring topic, and there’s a lot we can touch on in this episode.

There are a lot of different ways you can set up your business savings, but I want to talk about the cash architecture you can set up now that’s going to help you forever. When I think of business savings, I think of more than one account. I usually think of one to three, and most of the time it’s at least two if not three accounts. There’s a reason for that, so let’s dig in.

The tell that you’re going to lose sleep over money this year

When I first have a 15-minute conversation with someone about their business and their finances, the tell that lets me know if they’re going to lose sleep over cash this year is when they’re talking about how they just don’t know if they have enough to cover expenses, or if they have enough for a vacation, whatever it is.

It’s a lot, and it’s what happens when you’re only looking at one savings account. A lot of times they’ll say “I have a savings account” with no follow-up, and that usually means there’s trouble. They might say “I have a savings account for taxes and everything like that,” but they’re not fully looking at the bigger picture. The money in that one account is doing three jobs at once, and the owner is keeping track of which dollar belongs to which job mentally, whether that’s taxes, emergency fund, whatever it is.

The pattern works really great until Q2 taxes, slow season, or an opportunity all show up at the same time. Usually when we’re in that mid-year hump, that’s when it really tends to show up.

The 3 jobs your cash has to do

There are 3 jobs that cash has to do in a healthy business. People will ask, “Samantha, isn’t this kind of like Profit First?” Not really, because we’re not splitting things up that way. There are 3 things your cash is actually being asked to do.

The first one, and I’ve said this many times, is a tax reserve. This is money you owe to the tax authority. It’s untouchable for any other purpose other than taxes, and it’s essential. You need to have it in your business. That is the first savings account, and one of the most vital you should have.

The second one I talk about most often is an emergency fund. This is 3 to 6 months of operating expenses that’s only spent when something breaks, when you’re taking time off, whatever it is. If a family member passes away and you need to take 6 days off in an emergency, you have money to cover yourself. That’s the purpose of your emergency fund. I know it seems really dull to just have money sitting there, but it’s also not the worst thing for you, right? If you don’t have that money put aside and something happens (like we talked about a few weeks ago, a family member dies, medical leave, whatever), you’re going to regret it when you’re panicking.

Then you have the third one, the opportunity fund. I don’t mind if people keep this in their main bank account. I have a client who does that right now and we use YNAB to track all of it. The opportunity fund is money for hires, equipment, courses, expansion. It’s almost like a savings bucket, where we put money we’re saving up for bigger opportunities, things that cost more than $30.

Why one account doing 3 jobs feels heavier

When all 3 of these end up sharing an account, they feel heavier because you’re making a call against all 3 jobs at once. That might sound silly, but it’s 110% one of the things I notice the most. When people have all 3 in one account and they see the balance drop or a bunch of different things going out, they panic. It seems silly to have accounts labeled this way, but it’s so helpful to your brain.

“Okay, my taxes went out, that’s great, they’re paid.” Or you can look at your opportunity fund and say, “okay, I’m $5,000 from being able to afford a website redesign.” That’s going to help you. And knowing that you have an emergency fund sitting there, maybe $5,000 or $6,000 in your bank account, you’re like, “I’ve got money stocked up in case I have an emergency.”

There’s always the moment when people say, “I can just be better with my money, I don’t need 3 accounts.” Being good with money has nothing to do with it. The structure of where the money sits creates the clarity, not the willpower. You can be an amazing person with really good willpower, but when you see things reflected in the proper account, it changes everything. Physical separation makes the math automatic instead of mental.

You can literally look at one account and say, “yeah, I want a website redesign, I’ve got $5,000 in my opportunity fund, done.” The setup ties back to your forecast, because the right tax reserve percent depends on your revenue picture and your entity structure, which makes sure everything is tied together.

The CFO layer

This is a very CFO-level conversation. It’s about how cash should flow when you have a good forecast. Most of the time with your cash flow forecast, we’re purely looking at your operational account. When you move money into your opportunity fund, you can spend that money without worrying about it affecting your operating cash flow, because your operating account just stays clean.

When you have all this set up, it helps you a lot emotionally and mentally. A lot of clients tell me they feel a weight lifted, because when your tax bill arrives and the money’s already in the reserve account, it’s easy to just pay it. They don’t feel like, “oh my gosh, am I ever going to have enough to pay taxes?” A slow month isn’t going to trigger you to get a loan or a credit card, because your emergency fund absorbs it. And an opportunity that you would’ve had to pass on becomes a real conversation, because the answer turns into “yes, no, or let me check my forecast.” You can still say no, but now you can also say yes.

You stop calculating risk against the whole pile of your cash. Now you can look at things and calculate against what’s actually in each account. So if you’re thinking about a website redesign and then an opportunity comes up for an educational course, you get to make that decision now and say, “is this educational course worth more than my website redesign?” That’s something you definitely get to think about.

The 25% rule (and why it’s almost always wrong)

There’s a rule of thumb where we usually say save 25% for taxes. 25% is an average that’s wrong for almost every individual. I usually tell my clients to put in more, more like 30%, because I want you to hopefully get some sort of refund back. It depends on your entity type, your owner’s pay structure, your deductions, your state, and your revenue, because they’re all tied to that tax number. The right percentage is also forward-looking, because revenue growth changes the bracket math, and that’s a conversation to have with your CPA, not me.

When we’re looking at your business and pulling your taxes, we’re not basing it on your revenue number, we’re basing it on your net income, because net income is the number that’s actually going to be taxed. The right tax reserve looks at the forecast and the P&L and answers from there.

The build order

I know it might seem like a lot to have all these different savings accounts, but it’s really simple. The main one you want to be concerned with is the tax account. The emergency fund can be built slowly over time. I always tell my clients, maybe just put $10 into it over the next month. When you have a little extra, put it into your emergency fund and slowly build it up to the 3 to 6 months of expenses you want. You don’t have to feel pressured to build it all in days. It doesn’t have to happen instantly, but it does have to be there.

Your opportunity fund is the last thing you need to build up. Focus on having enough for taxes. Focus on building the emergency fund. Then work on the opportunity fund. As much as it sucks to have to set money aside, once your emergency fund is funded and your taxes are covered, the extra money is the money you actually get to play with for opportunities.

3 accounts sounds like a lot, but it’s really not, and if it’s something you want to talk about or you’re wondering “Samantha, is this right for me? How much should I be setting aside for taxes?”, shoot me a message and let’s have that conversation. The deeper tax stuff is meant for your tax accountant, whoever that is, but I’m always here to help guide you in the right direction.

As always, if you liked this episode, please like it, share it, subscribe, share it with your friends and family so we can get more people listening and have more conversations like this.

I wish you the best week ever, and we’ll see you next week.

Farewell, fellow travelers.