Why More Accounts Equal Less Worry
So, we’ve already discussed not mixing personal financial transactions with business transactions in the same bank account. You’re probably set in your ways. You’re resistant, ahem, I mean hesitant to make changes. It’s uncomfortable. I get it. After all, I’m a creature of habit, too. However, aside from keeping CRA off your back, conceding to separating business and personal transactions has other benefits.
There are some things that just shouldn’t mix unless it’s truly unavoidable:
- Church and state
- Oil and water
- Fruit and meat (That’s for my husband. He’s not a ham and pineapple or pork chops and applesauce kind of guy)
- Friends or family, and money (It’s a sure-fire way to lose friends and strain family relationships)
- Business and pleasure (Whether it’s bank accounts or relationships, don’t mix these. It’s messy.)
With this in mind, not only will I ask you to get a dedicated business chequing account, but I also want you to have two (2) of them, AND a dedicated savings account for business.
While you’re reeling from that seemingly crazy thought, I’m going to slip this in, too…do the same thing for your personal banking. Two (2) chequing accounts and (at least) one (1) savings account.
I know convention says that less is more, but when all your Smarties are in one basket, you can never tell how many of each colour you have at any given time! Right? Ponder that for just a moment.
Sure, you think I’m right off my rocker by now, but we’re both late to the party. Many finance experts have come before me with the same recommendation, such as Paco de Leon of the Hell Yeah Group or Shannon Lee Simmons of the New School of Finance, and please go check out their websites. They’re both really clever and fun to learn from. They’re both going to tell you the same thing, and here’s why.
Fixed Expenses
In both your business and your personal life, you have fixed expenses that are consistent from month to month. Rent/lease payments, vehicle payments, taxes, utilities, insurance, subscriptions or memberships, debt payments, bank fees, long-term savings like RRSP contributions, etc.
Let’s assume that all of your incoming funds land in Chequing Account #1. The first priority each month is to take a sum from your income and set it aside in Chequing Account #2 (which we’ll rename Money You Can’t Spend). Whew! It’s like the “set it and forget it” theory from the As Seen On TV channel. Once you’ve set the money aside for your fixed expenses each month, you can breathe a sigh of relief because your bills are covered.
Purposeful Savings
Next up…let’s discuss that Savings Account. You want to set aside the funds that Shannon Lee Simmons calls Meaningful Savings. Although meaningful sounds all warm and fuzzy, in this circumstance, Meaningful Savings may or may not mean sentimental or with a heartfelt purpose. Focus on the word purpose. When you set money aside for an intentional purpose, you’re much less likely to accidentally dip into it. Here are some examples of Meaningful Savings:
- Money to pay taxes (so you don’t have the gut-wrenching experience of a big tax bill and no money to pay it at the end of the year)
- Setting aside the HST you’ve collected on the products or services you’ve sold in your business (so you don’t spend it before it needs to be remitted to CRA)
- Money for a vacation
- Saving up for a big-ticket purchase (furniture, electronics, tools or instruments, vehicles, etc.)
- Short-term savings goals (like a specialty clothing item or small appliance for the kitchen)
When we’ve been good, little, fiscally responsible members of society and set our funds aside for the most important things, we can now consider Chequing Account #1 as Money You CAN Spend.
Spending Money
When the bills are paid and you’ve prepared for emergencies, rainy days, the tax man, and whatever dreamy notions you might have, you can relax in the knowledge that all of the money you have left is for the express purpose of spending!
Summary
Parsing out your funds with a clear and defined purpose takes the stress out of payment obligations such as taxes, it lets you see readily what’s available to play with (re: spend as desired), and it proves to CRA that you really have your ducks in a row if they ever want to come and sift through your financials.
So go get your ducks in a row…open those bank accounts!
The fine print:
The information and opinions expressed by Lori K Aitken on this blog are based on her own personal experiences. Please consult your own legal and accounting professionals for specifics regarding how any of the topics covered here may apply to your business’s unique structure, needs, or operational policies and procedures.
