Bookkeeping Basics: Separating Business and Personal Finances
Do you have a side hustle? If so, it’s vital that you follow certain bookkeeping basics – especially if you have your side hustle organized as a certain type of business. The method I’m about to describe requires a little bit of up-front work, but it’s totally worth it.
So, what is this super-easy way to manage your business finances? Well…
Separating Business and Personal Finance
The easiest way to manage your business finances involves keeping them completely separate from your personal finances. Doing so makes your life so much easier on so many levels.
Most new side hustlers simply use their personal bank account and credit cards to manage their side hustle finances. Unfortunately, unless you have an excellent way of tracking your business finances, mixing the two is a nightmare when you need financial information about your side hustle. By separating business and personal finances, you can access the information you need without any headache.
If you ever need to know how much money your business made or spent in a month, you can do so without looking through all of your personal accounts and sorting the transactions. This also helps should you ever have the unfortunate experience of getting audited by the IRS.
Setting Up and Managing Business Finances
I personally went to my local credit union to open two new accounts for my side hustle. First, I opened a free business checking account. (Unfortunately, my first choice of credit union didn’t offer free checking, so I had to keep looking until I found one that did.) Then I opened a business savings account.
As far as spending goes, I personally like using a credit card for a variety of reasons. If you’re like me, I recommend getting a business credit card. You’ll likely have to personally guarantee the card and give them your Social Security number (SSN). That’s fine, but make sure to put the credit card in your business’s name, not your personal name.
If you don’t like credit cards, simply use your business debit card that came with your business checking account.
Putting Your Plan Into Action
Once you have your checking, savings, and credit card accounts open, you’re ready for your side hustle finances to take on a life of their own.
Your Checking and Savings Accounts
Whenever you receive any money for your side hustle, deposit it into your new business checking account. And whenever you have to make a side-hustle-related purchase, put it on your business credit or debit card. It sounds obvious, but these basic bookkeeping skills will help your side hustle in the long run.
Never use your business accounts to make a personal purchase or your personal accounts to make a business purchase.
So what about the savings account? Personally, I like to use the savings account to set aside enough money for my quarterly tax payments. This way, the money is physically separate and I can’t accidently spend my tax money on business expenses without going through the steps of transferring the money.
There’s one more important thing to keep in mind: you should keep all of your receipts. This is bookkeeping 101. I have a folder on my desk at home, where I put physical receipts as soon as I get home. For digital receipts, I have a folder on my desktop and save all my receipts there.
Why It Matters (Legally Speaking)
Separating business and personal finances isn’t just a convenience. In some cases, it’s required to protect yourself and your business. If you set your side hustle up as a limited liability company (LLC), you likely did so to protect your personal assets should something bad happen to your company.
One requirement of an LLC to keep the personal protections is to keep your business and personal finances separate. If you mix the two, you’ll have committed an error known as “piercing the corporate veil.” If you “pierce the corporate veil,” people can go beyond your LLC to your personal assets to settle debts or litigation, which is downright scary.
Keeping your business and personal finances separate isn’t difficult. Simply open a couple of bank accounts, carry an additional card in your wallet, and make sure to put the right purchases on the right cards. It makes life easier when you need financial information on your side hustle. And depending on how you set up your company, it may even help protect your personal assets and prevent the need for legal advice in the future.