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Why You Should Separate Personal and Business Finances

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Personal and Business Finances: Which is What and How not to Mix Up?

"Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are."

- James W. Frick

Young entrepreneurs tend to devote all their time and resources to the business. The very start always requires maximum efforts, and it’s okay to invest more than you earn. Despite this, an important aspect is to keep yourself from going for extremes.

Instead of taking cash loans online, cutting off expenses or refinance the whole project, businessmen use their personal savings to overcome hard times.

The consequences of mixing up personal and business finances may be catastrophic. Make sure of it yourself, by learning the main principles of budget separating.

Identify Personal and Business Finances Difference

First things first, what is NOT business assets?

Emergency fund, saving for holidays, education and your family needs are exclusively for private use. There is no way for them to be imposed in your work.

Business finances are money for a commercial purpose that includes seed capital, special savings, and actives.  

See more differences in the comparison.

 BusinessPersonal
HolderOrganization  Individual
UseManufacture, salaries, distribution, rent of equipment and space, company expansionEveryday needs, savings, emergency fund, credits and mortgage
RisksLeverage and entrepreneur loans as a way to increase your project is a common practice; the only thing at stakes is the business – in case of defeat you continue to live  almost similar life without big stressPrivate money is a basement of the budget; from this point of view, your life may be ruined in case of a job loss, credits and unexpected charges;
StabilityThe budget changes every time depending on various factors such as season, customers’ activity, funds circulations and success in this particular monthMuch more stable and almost similar from month to month; expenses depend on your lifestyle – that’s why you can predict charges and plan them in advance
PlanningThe plan is commonly built based on reporting, production needs and predicts either of near future and long-term perspective;The schedule is usually the same and varies from time to time depending on special outgoings (holidays, medical services, celebrations, traveling and so on)

As you see, business requires much more responsibility and has nothing in common with other ways of income.

The best way to finally separate these objects of expenditure is to treat it as an organization’s budget, not yours. The worst mistake people usually make is identifying themselves with their projects.

Why is it so dangerous? Here is a list of significant reasons.

Why I Have to Separate My Business Actives?

1. Taxes Mess

After the separation of personal and business finances, you’ll give a wide range of opportunities to improve your situation and make more analytics.

At first, the amount of tax you have to pay will decrease – it happens because of the different percentages for organizations and individuals. Let’s see how it works:

There are such types of business expenses as deductible and non-deductible. Deductible payments are ones, which you don’t have to pay for or pay less. They include advertising, insurance, telephone and utilities, and so forth.

Contrarily, non-deductible expenses are personal activities, capital expenses, equipment, and so on.

In case you separate your business budget and build a system of circulation, you can define your expenses and lower some of them at the legislative level.

Another option for entrepreneurs is a tax deduction. It is a sum of taxes you can return for several reasons – mostly for production needs. There is no such opportunity for individuals.

2. Social Status

Let’s be honest – having your venture is a big honor. You invest ideas, efforts and time in what you believe in.

On the contrary, commitment and efforts to make the ends meet make you look as illiterate and unreliable person. Who would like to deal with the project, even the head of which cannot control it?

3. You May Need a Loan

Taking a loan may be a necessary measure in hard times or a way to increase an enterprise. This matter is actual now when small ventures suffer from the coming crisis. US Government has already adopted a law concerning Coronavirus Aid, Relief, and Economic Security. With the help of it, you may take a loan with a small rate of interest from the state and get other benefits.

Prepare yourself an airbag for such a situation now. You’ll need a good credit story and reports concerning credibility. Mixing actives, you won’t be able to create a clear account.

4. Psychological Pressure

Making personal life apart from your work, you always feel a duty to invest more and more in the project.

You can be a fan of your job – but denying yourself and your family the rest, holidays, and other aspects of life is not healthy.

Remember who you are and why you are at this point in life.

5. Financial Stability

Living without awareness of what your monthly budget is, what income do you have from the business and does it work at all may lead to bankruptcy.

Money circulation is a system you must build yourself with the help of discipline and financial literacy.

How to Make It Work Out?

Messed up in the finances, you may find it hard to split them into sectors at once. Try to do that with minimum stress:

  • hire a financial advisor
  • review the reporting of the last months to define the main spheres of charges
  • open a separate account in the bank
  • Establish the salary for yourself as an employee – it allows you to separate you as a personality and as a worker mentally. 

It this case, all methods are fine, if they help you to reorganize your budget.

We are all on the threshold of change now. Uncertain about the future, you should at least care of your present state. It is time to refresh your approach to the financial sphere and create a reliable system of fund circulation. The first step here is to define your actives, make them stable and easily understandable.

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