Episode 3: Why You Need to Separate Business and Personal Finances as a Creative Entrepreneur

 Hello, fellow dreamers and doers. You’re listening to the creative minds, smart money podcast. I’m Samantha Eck, your host. Ready to sprinkle a little magic on the seemingly mundane.

Today’s quest dives into why separating your business and personal finances. Isn’t just a good move. It’s essential for every creative business. Ready to unravel this mystery. Let’s set forth into this financial tale.

Let’s start with the fundamentals. Why should you keep your business and personal finances in different realms? I think of it as keeping your work life and your home life distinct. It leads to better balance and less stress. If you’re working a W2 position, you wouldn’t mix your work-life with your home life usually. So why would you do it with your business?

Here’s why clarity matters. By having separate accounts, you eliminate the need to sift through months of mixed transactions. When you’re preparing financial statements or gearing up for tax season. Especially if you’re still doing your books on your own. It can take hours of work to figure out if something was business or personal if you’re not as organized as some people are.

Maintaining separate accounts, not only boosts your professionalism in the eyes of clients of vendors. But it also streamlines processes like invoicing and expense tracking. And ensuring that your financial reports reflect a true picture of your business’s health. When you incorporate so much personal in your business, your equity can get thrown off, causing your business to have you bad numbers. This could lead to it being harder to get credit or grow because you’re not having the accurate numbers that you really need to have.

Mixing personal and business finances might seem convenient at first, but it can quickly turn into a financial nightmare. Some of the dangers of this can include mixing expenses, which lead to tax filing errors. And potentially triggering an IRS audit. Imagine trying to explain personal grocery trips in your business tax filings. This leads, auditors to question all of your expenses.

And if you can’t justify a transaction is actually for business, they’ll most likely force you to write it off as personal, which means all of those deductions that you got and the amount of money that you were able to save on taxes can mean nothing. If your business has ever sued, having mixed finances can lead your personal assets to be at risk. Creditors and legal actions could potentially target your personal savings and property.

If you’re not clearly separated from your business’s assets. This means if someone sues you, you could end up losing your home because you chose not to separate your business and personal finances. How do we go about separating this? How do we get to a point where we can keep our personal and our business separate so that we’re not colliding in both worlds. Equipping yourself with the right tools and strategies.is like gearing up for a battle and here’s how you can fortify your financial defenses.

Your first step should be to get a business bank account. I use this account to handle all business transactions from income to expenses. If you’re unsure on what bank to choose. As a reminder, our first episode goes over the best bank and the benefits and disadvantages of both physical banks and digital banks and helping you figure out what might work best for you as a creative business owner.

If you get a business credit card, charge, all business related expenses to that credit card, it helps you to keep track of spending. It can help you to build credit history for your business. Again, this is optional. If you don’t like to keep things on a credit card or you don’t like to gain debt then using a debit card will work just as well. There’s no advantage or disadvantage to using a debit card over a credit card. Obviously for someone who’s very passionate about building up credit, then you’ll want to get that business credit card and build that credit.

The next thing you want to do is to determine how you want to pay yourself and transfer this amount from your business to your personal account. This helps you to keep your personal finance, independent of your business operations. A lot of my clients will often pay their personal credit cards through their business account, or just pay things out of their business. Because they don’t want to transfer the money to your personal account.

It’s as simple as a transfer. If there’s nothing more complex than that. You don’t need to set up some special way, unless you’re an S-corp an LLC or a sole prop, you just need to transfer that money into your personal account and that you can use right away. There’s nothing stopping you from using that you’re paying yourself out of your business, which is what you’re supposed to do. If you get a bank that you have your personal and your business account at, it’s really easy to just transfer back and forth and it makes your life so much more streamlined.

The next thing you want to do is use accounting software apps to track every financial move. You want to regularly update your books and review your financial statements to ensure everything is in order by looking at. You know what came out personally, you can actually see how much that’s impacting your equity. How much has impacting your balance sheet? How much that’s impacting your profit and loss and really seeing the importance of why separating business and personal is essential.

If you need help picking an accounting software, our second episode goes over different options and the benefits of each that again, you can decide what best fits your business. And that’s what we’re here to do. We wanted to make sure that this was our third episode and that we talked about separating business and personal. After we talked about the right steps to get you there.

Now let’s look at some amazing technology that helps you maintain that business and personal boundary.

Budgeting tools like Monarch money or why YNAB can help you manage your finances by setting budgets and tracking expenses against your income. It helps you to understand what you need to keep in your business account versus what is free money to invest back into your business or for you to take as a draw. Now what I mean by that is the YNAB’s philosophy is that , you can only assign money that you actually have on hand. So, if you put all of your expenses on there, you put your Canva subscription, you put your Chat GPT subscription, whatever you’re using, you put all of those into YNAB. And you’re tracking all of that it lets you know that if even if your income is variable, you need to have $21 by the 16th of the month for Chat GPT, or do you need to have $15 for Canva by the 14th of the month to make sure that you are funding that, that way, as client money comes in throughout the month, or even if it’s at the beginning of the month, you can assign all of your money there and, you know, okay my business has taken care of. I have managed all of my business finances. Now everything else can move into my personal account. And I can pay myself this much.

Platforms like QuickBooks zero or fresh books offer comprehensive features that are not only helpful in tracking every penny, but also in generating reports that are crucial for financial planning and analysis. You can also connect your bank account and credit card and can automatically categorize business expenses. Saving you time and reducing errors.

Now automation is not the best way, obviously to categorize your transactions because AI can only go so far. I know a lot of people rely on AI, but it is a tool. It is not the end all be all. When you utilize it as a tool, it can be helpful, but oftentimes it can lead to a lot of,, categorization, errors and issues. So you really want to rely on categorizing it yourself. Even if you’re adding a rule to QuickBooks, you want to make sure that you’re categorizing your transactions yourself. And making sure that they’re going to the proper category so that you’re not ending up with personal transactions mixed in with some of your business expenses.

It’s so important to really just get a grasp of how much money you need in your business versus how much you need personal that way you can separate the two and really get a grasp on what you need.

Let’s take a look at a case study to see someone who is trying to get help with their financial management. Meet Ella, a digital artists who transformed her financial management with clear boundaries.

Her challenge was that she used to mix her personal and business finances, which blurred her understanding of her businesses profitability. She took action and opened a separate business account and started using a dedicated business credit card for all related expenses. Once she started doing this, the separation, not only simplified her tax prep but also improved her credit worthiness, leading to better terms on a business loan, which she used to expand her art studio.

It’s important to remember that separating business and personal is not necessarily me telling you that you’re doing something wrong. It’s me telling you that I want you to protect your business. I want your business to be protected. I want you to protect your house. I want you to protect your car. I want you to protect your hard earned money and your investments. So by separating business and personal, that is how you do that.