The Major Mistake You’re Making with Personal and Business Money

If you have a business or a side hustle you want to turn into a business, then let’s talk about a major money mistake that happens often and how to avoid it. Revenue from a business is a great way to rake in more income or the path to living life on your own terms. Perhaps you’re selling a product or offering services. It’s been hard work, many sleepless nights, and skipped outing with friends, but now you’re bringing in revenue. Great! Here is where many start to make this major yet common mistake with their money.

Whether you started the business to supplement income from your primary job or you’re full-time working your business, you may be using some money from your personal account to purchase things for the business and using business funds to handle personal expenses. You’re likely using personal money or income to fund the business anyway right, especially as a new entrepreneur. You’re the first investor. I know I was my first investor. I started my business with personal savings, but I avoided a major mistake when doing this and I want you to avoid it too or correct it if you’re already doing it.The major mistake is mixing your personal money with your business money. Here is why this is a big mistake and can cost you money later.

1) You can’t show positive cash flow. If you’re consistently mixing your personal funds with your business income to make business and personal purchases, it’s hard to show positive cash flow into your business. You won’t be able to properly assess the health of your business and adjust your strategy to ensure continuous revenue and growth. This looks very sloppy and high risk to investors, so they’ll want no part of it. You have to be able to see exactly how much revenue is coming in and the amount of expenses the business has. You should know the exact dollar amount of how much it takes to run your business every month. Are you making that? What’s your profit margin? Will you have enough floater money for your slow months?

2) You’ll pay more in taxes. The IRS will think you have a hobby not a business that means money lost as they deny legitimate deductions. They will only allow deductions if you can clearly show that the expenses were for business. You don’t want the nightmare at tax time of sorting through old receipts and combing through bank statements trying to determine if something was a real business or a personal expense. Definitely not.

How to AVOID this:
1) Have separate bank accounts. You should have separate savings and checking accounts for your business. Only use the business account for business expenses and only use your personal account for personal expenses. It looks more professional, you will look like a real business owner if the business name is on the check or debit card. The money can be clearly tracked and the IRS is less likely to audit you or deny deductions. One of the first things I did after officially filing my paperwork was to go to a bank and start a business checking account. I felt so official once I got the debit card. I kept looking at my business name on it and smiling.

2) Pay yourself a salary. If you’re thinking but the whole reason I started this business is to supplement my income, no worries. You will be cutting yourself a check like an employee. You own the business so simply write yourself a check or transfer the money from your business checking account to your personal checking account. Start off with however much you need $25, $300, $3,000. Just be sure not to go overboard. Leave funds in the business to cover operating costs at minimum.

3) Create separate budgets.  Design a personal budget that is completely separate from your business budget. Of course include your salary line item and if you give funds to your business every month include a business line item as well. Also, account for the salary and income in your business budget. Budgets will help you see what your operating costs are for the business and operating costs for your household. You can then make sure those aforementioned line items make sense.

4) Use separate tracking software. You know I’m a big proponent of tracking your money. Track your personal and business income and spending, just don’t use the same account or system. You can use something like Excel and have separate files and folders for the business vs. personal funds. Or use accounting software such as Mint or Quicken for personal and Quickbooks or Xero for business funds. I like Mint for personal and Quickbooks for business.

About Dr. Maria James
Dr. James, The Money Scientist, has expertise with designing income management, debt management, and wealth strategies to help you live your best life. She is the founder of Pocket of Money, LLC and the creator of The Wealth Protocol™. Dr. James has also been a guest financial expert on ESSENCE, WEAA, Madame Noire and more. Connect with Dr. James in Baltimore, MD at the Unlimited You Weekend, April 10-12, 2015. Visit www.unlimitedactions.com for more details.

10 Ways to Make Yourself Save More Money

Saving money can be difficult as you’re usually putting money away for an intangible item, out of sight out of mind problem, for a future occurrence that may never happen. Maybe you make a general statement such as I’m going to start saving because it’s important. This is not motivating enough to consistently save money. You may save for a week or two, but then you’re going to fall off.  Ask yourself: Why is it important? What exactly are you saving the money to buy? Here are a few more ways to make you save more money.

1) Write down your goals (previous post about resolutions and goal setting). In order to achieve something you first have to state what it is. The goal should also be specific and measurably. You should know exactly when you have successfully reached the goal, give it a dollar amount and deadline.

2) Create a visual reminder of your goals. Out of sight, out of mind is a big factor. You’re more likely to spend and not save if you can’t remember why you should be saving, especially when the impulse to buy a want occurs. Create something visual to hang on your wall, place as a screen saver, etc.

3) Break your savings goals into daily or weekly amounts to make it more manageable in your mind and so you know exactly what to aim for every day or week. For example if you want to save $6,000 for the year, then you know you need to save $500 each month, $125 each week, or $17.85 each day. If you’re saving up $1,000 for a trip coming up in 5 months, then you know you need to save $200 each month, $50 each week, or $7.14 each day.

4) Wait and come back. When you want to buy an item, wait for at least a week, come up with reasons as to why you need it, not want but need it. If you can’t think of any reasons then leave it. If the item will no longer be available in a week, then wait at least 24 hours. You’ll be amazed how this simple trick will get you to decrease unnecessary spending.

5) Shop your closets. I don’t know about you, but sometimes when I clean a closet or cupboard I find things that I’d completely forgotten existed. There may be things in your home suffering the same fate. What’s in the back of your closet? Check the clothes closet, hall closet, pantry etc. What forgotten items may be in there? How can you re-purpose them for the new season or a new use?

6) Get a bottle for loose change. When you buy something, put the loose change in a bottle (aka piggy bank for adults), or just get a piggy bank and have fun with it. Once your bottle is filled, wrap the coins in the appropriate wrappers and take them to the bank. It’s better to take them to a bank where you have an account as you can deposit the money in savings right then and there.

7) Only charge items you can pay off in full before the end of the month. Don’t carry a balance on your credit card and you’ll save all the money you would have paid in savings. You’ll also maintain a good credit card history and credit score while not increasing your debt.

8) Make a realistic not extremely frugal budget. One of the top reasons a person doesn’t stick to a budget is the budget isn’t realistic. The budget is so limiting, there are no rewards or real entertainment factored into it. No one and I mean no one can stick to a budget like that one and if you can’t stick to the budget then you’ll overspend. Make sure the budget is frugal so you’re getting the most out of your money and moving towards your financial goals, but don’t make it so restrictive that you can’t enjoy yourself a bit. You won’t overspend and you’ll save money.

9) Calculate how long you have to work to afford the item. Every item you buy you can figure out how much time you have to work to be able to afford it. For example, if you’re buying a jacket that is $200 and you make $20 per hour, you worked for 10 hours in order to get the money to purchase the jacket. Is it really worth 10 hours of work? Do you feel comfortable trading 10 hours of your time for the jacket? Do this before making a purchase and you might just decide the item isn’t worth it.

10) Delete your saved card information on the shopping sites. Major shopping sites will allow you to create an account and save your payment information. This is offered as a gesture in convenience for the shopper. If you have an account you don’t have to take out your card and spend time entering the information. Or looking at it from their view, you won’t spend time thinking about the purchase and potentially deciding that you really don’t need the item. Convenience can and does lead to more spending. Delete the information, take the time and save more money.

What are your biggest obstacles to saving money and how do you overcome them?

Want to learn more about creating your own wealth check out Financial Blueprint for Quitting Corporate.

About the Author: Maria James has a compassion for people that makes her involvement in Heal a Woman to Heal a Nation a sure fit. She is a biomedical scientist who is public health conscience and has always worked for the betterment of others. Maria is the founder of Pocket of Money, LLC which provides tools and tips to help you take control of your money and live your best life. Dr. James is our resident Money Scientist.

10 Actions Needed for Financial Freedom

The terms financial freedom and financial independence generally refer to the same concept or ideal. However, individuals consider them to mean different things. For some they mean debt free, having the ability to live without working to earn income, or being financially secure and not stressing about money. Whatever your definition of financial freedom, there are some key actions that you should take to get you on the right path to achieving it. 

1) Calculate your net worth
Your net worth is a snapshot of your financial health at a specific point in time, your wealth status if you will. Understanding where you currently stand financially will help you in defining realistic goals. Use the formula net worth = assets - liabilities. You need a baseline to work from as you move toward financial freedom. Calculating your net worth at the start will provide that for you.

2) Define and write down your goals
You need to know the goal in order to achieve it. In other words you can't hit the target if you don't know where it is. Take some time to reflect on where you are currently with money and where you would like to go. Define your goals so you can accurately determine the steps needed to reach them. Some common goals are saving an emergency fund, saving for retirement, saving for a yearly vacation, adding to an investment portfolio.

3) Design a money strategy
A money strategy is a comprehensive plan to detail what you plan to do with your money. This is the action plan to achieve your goals. For each goal detail the steps needed to achieve it, resources you'll use and how much money is involved in each step.

4) Create a monthly and annual spending plan
You need to create a spending plan to determine where your money is going. You should have a clear view of how much you will spend in what categories and how much you will save. This allows you to see where you can cut costs and free up money aka keeping more money in your pocket. Creating an annual spending plan will allow you to also see big picture and determine how much of your money is truly going to certain items. You may decide to skip that Starbucks latte or forgo certain subscriptions after all. The money you free up and save can then be put towards a few luxuries and income generating assets!

5) Create a specific debt reduction strategy
If you still have debt, you need to pay it off to be able to use the full potential of your income. You can't reach financial freedom if you have debt holding you back. Work on paying your debt down, "good" and "bad" debt must go. Debt is debt and you'll save yourself thousands of dollars by getting rid of it. Make a specific plan of what order you'll target the debt accounts. Aggressively pay down one at a time to make the most impact and not spread the money too thin.

6) Freeze your credit cards
Now that you have a plan to eliminate your debt, dont rack up anymore. Put the credit cards away and make them very difficult to use. Literally putting the cards in the freezer is a great way. Take the cards out of your wallet and leave them at home. Spending within your means is a must for financial freedom.

7) Open a separate savings account
You need one savings account for your emergency fund. As indicated by the name you don't touch this money unless it's a true emergency. Did you know you should also have another savings account? This is a small account to house money for non-emergency expenses that are in your spending plan, but may not be used every month. If you leave the money in your checking account it's likely to be spent.

8) Cut costs not quality
When you create your spending plan, you'll see places where you can cut back. However, cutting back to lower expenses doesn't mean sacrificing quality. Think of ways to get equivalent products or services for less e.g. shift providers, eliminate things you don't use, find coupons and deals etc. You don't want to feel deprived, but you want to plug money leaks and free up as much money as possible that can be used for saving and investing.

9) Create side income as needed
You've streamlined your expenses, but may still need a little more money. Whether you just want more money to invest or enjoy luxuries or you need more money to make ends meet, having side income is beneficial. This is income outside of your main income source. Some examples are part-time jobs, freelance work, etc. (check out 23 Ways to Make Money).

10) Open a 401(k) and traditional IRA
We know saving is only part of the journey to wealth. Putting your money to work for you is also necessary to reach your goals. At bare minimum open these two accounts. If you work for an employer, make sure to speak with HR (human services) about reanalyzing or starting a retirement account. In most cases this will be a 401(k) or 403(b). If you started one a while ago make sure you check how much money is going towards it and how you can increase the amount. You should also open a second retirement account, an IRA. You can only add so much to your 401(k) so when you hit that maximum you want to still be able to save. The IRA will allow you to do so.

About the author: Maria James has a compassion for people that makes her involvement in Heal a Woman to Heal a Nation a sure fit. She is a biomedical scientist who is public health conscience and has always worked for the betterment of others. Maria is the founder of Pocket of Money, LLC which provides tools and tips to help you take control of your money and live your best life. Dr. James is our resident Money Scientist.