Building wealth behind the chair starts with a plan. No matter if you’re new to the world of independent beauty professionals or have been navigating it for years, knowing how to manage your finances effectively can be the key to not just getting by, but truly excelling in the industry. Read our quick guide below to learn the essentials of managing your money to keep you and your business thriving.
Separate Business & Personal Finances
First and foremost, keeping your business and personal accounts separate allows you to maintain better organization, simplifies tax season, and boosts your confidence in managing your independent business like a true CEO. After establishing this separation, you can allocate your income across various “buckets” to stay in control of your expenses and effectively plan ahead for both your career and personal life.
Business Buckets
Divide your cash flow into these three accounts to keep your business on track:
-
Payday account: This is your paycheck! Take 55% to 65% of your total weekly or daily earnings and transfer this to your personal accounts. Check out the Personal Buckets section to learn what you should do with this money!
-
Tax account: Put 20% to 25% of your daily earnings into this account to prepare yourself for tax season.
-
Operating account: After you pay yourself and add to your tax account, put the remainder in your operating account to cover any business expenses, like rent, color, and other salon needs.
Personal Buckets
With your business accounts in order, it’s now time to organize your personal finances to keep you covered in emergencies, save for the future, and reward yourself with a treat every now and then. Here are four accounts to open so you can maximize your personal wealth:
-
Emergency Fund: Life is full of unexpected and expensive surprises. Open a bank account that you do not have easy access to in your everyday life (that includes no debit cards!) and get at least $2,000 saved. This prevents reliance on credit cards for emergencies.
-
Four Months of Expenses: This account is here for peace of mind. Perhaps you had a slow week or month, want to take a vacation, or need to take parental leave. Having four months of expenses on hand can keep you covered for any slower season of your life. The amount you save varies on your monthly expenses, and it may take some time to save this amount, so don’t get discouraged with slow but steady progress!
-
Freedom Fund: Want to make a big purchase or invest in an opportunity? Saving for a down payment on a house or an upcoming wedding to your significant other? Contributing to this account can make that happen. How much you add to this account can vary by the amount needed to make your dreams happen. Consider saving this money into a high-interest savings account to make your money grow faster.
-
Retirement: The earlier you start saving for your retirement, the more it will grow. Retirement account options include an SEP IRA, Roth IRA, Solo 401(k) and a Traditional IRA. How much you save in this account depends on your retirement.
Why Investing is Important
Inflation – or the continuous increase in the general price of goods and services over time – can eat away at your purchasing power. What $100 buys today could only buy you $85 worth of goods and services in the future. By investing strategically, your money can outpace inflation and grow exponentially to keep you wealthy into the future and through retirement.
Want to learn more about how to build financial security? Check out this month’s webinar or consider consulting a CPA or personal financial advisor to keep you sane and saved.
