Creating separate budgets for personal and business
I've been using YNAB for a while but to be honest I've been really bad about looking at the budget instead of the account balances. I'm thinking about making a clean break and starting my budget over from scratch with everything I've been learning. I need to simplify and organize. Here is what I'm looking for suggestions on:
I have two main categories of income and everything comes in as a 1099. One category is my Transportation Services and the other is a network marketing business. Right now most of my income is coming in from transportation services but I do have a small amount coming in from network marketing that I want to grow going forward. However, everything currently is in one YNAB budget. I do have separate bank accounts for my two businesses where all the income gets deposited. However, I've mainly been transferring the income to my personal account and making all my purchases from there. Some expenses overlap like cell phone use, transportation expenses (although I do mileage for that), etc. Technically I understand how to create multiple budgets in YNAB. However, here is my question:
What is the best way to make a clean break and keep my two businesses and personal accounts all separate? My challenges right now are that I don't have a lot of extra money to keep extra funds in my three different accounts for expenses. I was thinking I could take my Transportation Services budget (which is my main source of income currently) and create a budget item for taxes and deduct that then transfer a portion to my personal account to live off of. Then while I'm getting my network marketing business going I can transfer money from my personal account to that account to make purchases from if it's a business expense. However, that sounds like it's going to be tricky to manage without having much extra money in my accounts right now. I'd greatly appreciate any suggestions on how to manage things moving forward. I watched a lot of YNAB videos last night about setting up multiple budgets for business and personal but I don't want to start switching things over and make things worse.
I would not separate these things. You're being taxed on this income as a personal entity, anyway. You're paying business expenses out of your "personal" account, and you'll have to track this as reimbursements in 2 budgets if you continue this practice. Overlapped phone service, etc. is far easier in a combined budget.
If you want to separate, it's best to go whole-hog. Separate CC accounts. Separate budgets. Expenses for partial phone service in each budget. Outflows from the business budgets for "Owner Draws" when you do transfer to the personal account (treated as income in the personal budget).
YNAB should mirror reality, and right now you're not treating these like standalone businesses. It's probably important to ask yourself what you expect to gain from this separation?
It sounds like you are on the right track. A separate budget for your business is a good practice. You have to be careful when claiming expenses and do not want to be seen as attempting to claim a hobby as a business, which is what can happen if you don’t remain professional & organized about your documentation. But you probably don’t need separate budgets for each business since they have their own bank accounts, unless you just really want to keep them completely separate. Naming the accounts can help you with pinpointing expenses for each.
Then, like you said, move funds from personal to business if you need to make a purchase and enough funds are not there. I’d suggest figuring out the monthly expenses and make one transfer a month, if you can. Or submit an expense reimbursement form to your business at the end of the month to make sure that you have proper documentation. Just never make personal purchases from the business account; transfer the funds as Owner’s Draw, or whatever your accountant says to title the fund for paying yourself.
As far as phone and other shared expenses like a home office, you will need to determine what percentage is used for the business, then that is what would get reported. Don’t forget that if you have a home office, portions of your utilities and maintenance expenses are attributed to the business; so be sure to have a dedicated space for your business, not the kitchen table, so that you can actually determine the percentage to write off. Remember, we are giving suggestions here based on our experiences but always consult a professional accountant, as tax laws are always changing.
I agree with dakinemaui : splitting off your business(es) into a separate budget is a great idea, but only when the time is right, and that means having truly separate finances for your business.
Your business budget serves two different purposes, both vital: (1) keeping income and expense records so you can produce the reports you need at tax time, and (2) actual budgeting—giving dollars jobs, making sure you're not overpaying your salary without taking your business's True Expenses into account. Meat and potatoes YNAB.
If you're running into difficulties with either (1) or (2), it's probably worth the trouble to split out at least one business budget. I have two (very) small businesses myself, but they fall under a single sole proprietorship, which means a single Schedule C, and for that reason I've found it easiest to have them share a single YNAB budget, separate from my personal budget.
If you are filing Schedule C for your taxes, try creating an additional budget for your sole proprietorship, and make the categories right off Schedule C. That way you can be sure of tracking separately what you need to for tax time, and have everything trackably separated from your personal finances.
Jeff Altman said:
* Expenses Already Decided (Yearly) - I gave each yearly expense a subcategory and organized them by the month they are due so as money comes in it's easier to give each dollar a job.
If you're not handling these with monthly contributions, I'd suggest you move to that. Having expenses normalized to a monthly basis makes it easy to understand and apply priorities. It's far easier to see how much your effective "burn rate" really is. Check out Rule 2.
Jeff Altman said:
With everything so tight right now I thought it might be better to keep them separate but still put the target on them
Yep, lots of people put the due date in the category name and drag them into whatever order they like.
While there is no "normal" month, there is always Plan A, or how you hope the month goes if Mr. Murphy cooperates. Even when he doesn't, most of Plan A stays intact, with reallocations hopefully hitting a small subset of categories and always moving from lower to higher priority.
I think breaking out the non-monthly expenses (a.k.a., True Expenses) into their own group is a good idea because the farther away the due date, the lower the priority (for most people). Funds are especially tight when starting out since you're usually having to pay for the past (catch up on True Expenses due sooner than the ideal and/or pay down debt) as well as the present (monthly outflows) and the future (True Expenses at the nominal level). While the TE catch-up goes away eventually (e.g., contributions for a yearly expense go down to 1/12 the outflow), until it does the lower priority things simply have to wait. The more easily you can identify those, the better.
While the TE catch-up goes away eventually (e.g., contributions for a yearly expense go down to 1/12 the outflow), until it does the lower priority things simply have to wait.
Something to consider in your spare time (!), is that you'd like to understand your "steady-state" budgeting needs, which are those when all True Expenses (TE) are at their nominal contribution levels (e.g., 1/12 for annual bills, 1/4 for quarterly, etc.). If your monthly income doesn't support the total of these and your normal monthly expense contributions, you're in an infeasible situation. The sooner you know this, the better.
Jeff Altman for the ezpass and mileage: As per my accountant, I can only deduct miles OR costs, I don't do both. I'm not sure if tolls fall into that category, or not, but at any rate, the way I would wrap my head around it is to track the number of trips that you have that are business related and then do the math on the tolls, then make a payment directly to your personal account for that amount each month. If you're tracking mileage it shouldn't be that difficult to do.
I drive a LOT for my small business (my mileage expenses for 2019 are over $16,000!), and the way I keep track is using a calendar. I have all of my trips tracked in my google calendar, then I print it at the end of the month for my records, and use that to total up my miles. Since I am always going to the same places, I have the distances written down, so I just add the number of visits and the mileage and calculate the federal travel rate and then get my total from there. It would be pretty easy to do something similar and just note which trips have tolls on them, and add in the totals for the tolls. I would keep a copy of the ezpass statement with my records for my business, maybe highlight the trips that were biz vs personal, and that way you've got it recorded.
And to another point you mentioned - I don't think you can have 2 transponders in your vehicle anymore. We used to do things like that as well, and now I believe the transponders are linked specifically to a single vehicle, so you can't swap them out on the dash like you used to (at least that's what's happened here in MD). And besides, I could see myself easily forgetting to grab the "right" one when I'm flying down in the toll lane!
This is assuming you want to be that particular... an accountant can help you sort all of that out, and is money well spent in terms of getting the best return back.
To answer your initial question - I would separate the budgets, and record any transfers as income into your personal with the specific business as the payer. I also strongly suggest using separate credit cards or some other means of payment for business expenses vs personal expenses. It makes it SO much easier to show records when you know that there isn't anything that is mixed up. I always think that god forbid, if I were to get audited, I want to be able to drop all of my records (I keep a crazy amount of records) in the auditor's lap and know that everything is really clear cut.
I use YNAB for my Airbnb side business and have started to separate my personal and business accounts, which makes things so much easier. Everywhere I look they say to keep your business and personal accounts separate now that I'm looking, but I never did that before because I didn't really think of myself as a business person. I know I will have further deductions at the end of the year because some things are paid out of personal funds that are deductible (fractions of my phone, mortgage interest, property taxes, plus depreciation), but this is just icing on the cake. It really has made it easier to budget for business expenses.
Another helpful tool I have started using is Profit First accounting, which is implemented really easily with YNAB without as many accounts as he recommends in the book. I highly recommend checking it out.