Being good with money is an innate skill that many successful business owners have. However, it’s not just about knowing how to manage the business’ funds properly. It also has a lot to do with the proper management of personal finances.
While personal and business finances are two separate entities that should never bleed into one another, handling your personal finances can also affect how you manage your business’ money. That said, avoiding personal money mistakes is imperative to help ensure proper management of your business finances.
Here are the most common personal finance mistakes that you should start avoiding today:
Not separating business and personal finances
Of course, the first mistake you can make is to fail to separate your business and personal finances. When you start a business, you have to instill within yourself that your business is a separate entity from yourself. It is a source of income, yes, but it is not an extension of your personal finances.
If you haven’t done so, open a separate bank account for your business—or several, depending on your needs. All of the business’ income should go to this account, and all business expenses should come from it. Avoid paying for business expenses using your personal account or personal credit cards unless it is necessary.
Making large personal expenses
While it is crucial to keep your personal and business accounts separate, there may be instances where you need to use your own money to finance business needs. These emergency expenses can be avoided if you proactively improve business cash flow, but sometimes, there is no other choice but to dip into your personal funds.
If you make large personal purchases, such as a new car, a new house, or a luxury vacation that leaves you with little to no cash at hand, you lose your financial safety net if your business runs into an unexpected issue. That said, hold off large personal expenses until your business is stable and you have a more than comfortable amount of cash in your personal bank accounts.
Incurring debt while expecting future revenue
For anyone who earns an income, one of the biggest personal finance mistakes you can make is to incur debt with the expectation of future cash. There is always a chance of that cash not arriving at all, and the chance is more significant for business owners. If, for example, you incur a lot of credit card debt because you are anticipating next month’s income to pay for it, what would happen if you end up not being able to pay yourself next month?
No matter how stable your business may seem, avoid this habit at all costs. You never know what can happen tomorrow, and if you don’t receive the revenue you are expecting, the debt you incur beforehand will undoubtedly hold you back.
Not having an emergency fund
It is a good business practice to have both a personal emergency fund and a business emergency fund. Starting a business without a personal emergency fund is mistake #1, and failing to save for rainy days after that is mistake #2. You never know when unexpected expenses might come your way, and having personal emergency funds for both your personal expenses and business will help keep you from ending up in a tight financial spot.
Pro tip: save at least three to six months of living expenses for your personal emergency fund, ideally before starting your business. On top of that, save at least three months of operating expenses for your business before launching.
Not paying yourself
Some business owners choose to invest their income back into the business, either paying themselves too little or not paying themselves at all. While reinvesting in the company is a good financial practice, not paying yourself enough can negatively affect your personal finances. You likely have no other source of income if your business takes up most of your time, so how are you going to pay your bills? And more importantly, invest in your future?
Develop the mindset of “paying yourself first.” Not only will doing this help you meet your personal needs, but it will also help you build a nest egg for your future and motivate you to improve your business further.
Although personal and business finances are two separate bodies, they are not entirely unrelated to each other. Going from that idea, proper management of your personal finances will likely allow for better management of your business’s finances and vice versa.