How many bank accounts do you have? In my unofficial Instagram poll, the answers ranged from 1-10. I have 7 various accounts. And, honestly, I probably need more! Before you think I’m crazy, here’s why I have multiple bank accounts.
Over the course of the last several years, I have developed a system that works for me. It’s may not make sense to everyone. But it works for me. So how do I master the accounting with multiple house flips, an Airbnb house, and my real estate commissions? I have numerous bank accounts. Regardless of what your career is or where you’re at in life, I do believe you should have more than 1 account— even if it’s just one checking and one savings.
The 5 Simple Rules
For me, I have 5 simple accounting rules that I follow. Again, I’m the daughter of an accountant, and while my system is FAR from the system my dad uses, it works for me. My rules are simple and apply primarily to self-employed people or those with a non-salaried side-hustle. The five rules are never to get your hands on tax money, have a designated payday, don’t mix apples & oranges, the side hustle isn’t the main hustle, and you must see it to believe it. So what on earth do those rules even mean? This post is dedicated to wandering through my chaotic mind and hopefully simplifying a non-simple task.
Rule #1: Never get your hands on tax money
If you are self-employed, this is especially important to follow. You have two options of paying taxes as a self-employed individual: pay quarterly taxes or pay when you file your income tax. I choose the first option because it makes the pill easier to swallow, and by paying quarterly, I can avoid the IRS penalty that is levied if you don’t pay quarterly.
By keeping your income tax money separate, you’re helping yourself out in the future!
Everything I earn– either from real estate investing or real estate commissions from clients– is subject to income taxes. As an investor and as a Realtor, individuals are responsible for withholding taxes. And with my Dad as an accountant, I have heard the horror stories of people finding out they owe $20,000 or more on their income taxes, and they don’t have the money. They spent it. So I learned by example, never (EVER) get your hands on tax money. So how do I accomplish that? Whatever income I have coming in, I automatically withdraw taxes from the check. For example, if I get a $3,000 check, I withdraw 30-40% (depends on your income tax bracket) immediately and deposit it into a savings account I have labeled TAX SAVINGS ACCT. I literally never touch this savings account until I have to send in my quarterly estimated taxes. The money is out of sight and out of mind, and, therefore, I’m not tempted to dip into it for anything. I do not use this money to pay mortgages, to pay my car payment, to buy a new…it is ONLY used for taxes.
Rule #2: Have a designated payday
The absolute hardest part about being self-employed is that you don’t have a designated payday. How my brain works though, I HAVE to have a designated pay day. In my previous career, I was paid once a month on the 20th. I became so used to that, and I could make my budget work for that. So I have set up a system where I pay myself once a month on the 20th. The day of the month is irrelevant though. When I get a paycheck from real estate commissions only, I withdraw the 30% (see Rule #1), and the remaining balance is deposited into another separate savings account. This savings account is labeled my LIVING SAVINGS ACCOUNT. This is the money that I live off of- it pays my mortgage, it pays my car payment, it pays for groceries, gas, etc. Then on the 20th of every month, I transfer the same amount out of the LIVING SAVINGS ACCOUNT into my PERSONAL CHECKING ACCOUNT. It’s how I can create a routine, scheduled “salary” without having a salary. The PERSONAL SAVINGS ACCOUNT is just acting as a temporary holding ground for my money I need to live off of.
Whether you or someone else chooses your payday, plan on getting paid the same time every month!
The other benefit to having a LIVING SAVINGS ACCOUNT is that I can routinely look at the balance of that account and know approximately how many months of living expenses I have saved up. Sometimes it can be a year’s worth of living expenses saved up. Other times it’s 2 months. That is the reality of being self-employed and entirely commission based. When I see those living expenses get low, I get busy!
*Keep in mind the TAX SAVINGS ACCOUNT and the LIVING SAVINGS ACCOUNT are not the same, nor do they serve the same purpose.
Rule #3: Don’t mix apples & oranges
This is one of my own personal rules, and for many investors, this rule would be ridiculous. I only live off of my real estate commissions. Any additional income via house flipping, Airbnb, or any other side hustles never goes into my PERSONAL CHECKING ACCOUNT or LIVING SAVINGS ACCOUNT. Instead, this is where I have the most bank accounts. For each property, it has its own checking account. The proceeds from any given flip, go into its own checking account labeled with the flip number (example: FLIP 7 CHECK ACCOUNT). Once I have sold and closed escrow on a flip, I then utilize the money either to invest, pay off student loans (yay! That’s over!) or other endeavors like rolling into another property. Real estate investing and Airbnb hosting is my side hustle. I never want to rely on that money to live. Instead all of my side hustles are methods to the means of purchasing an investment property in Florida.
They say millionaires have 7 streams of income. Have goals, accounts, and budgets for each of those streams!
Likewise, my real estate commissions are never utilized to finance flips, the Airbnb, etc. My real estate commissions are solely used to live off of on a daily basis. I never, ever mix apples and oranges. Why? Because I never want to run out of funds to finance a flip, or not being able to pay the utilities at the Airbnb house, and in reverse, I always want to be able to pay the mortgage at my personal home. Keeping things separate works in mind, especially since its income has very different goals. If you don’t have different goals (like you aren’t saving for another house or paying off student loans or whatever), then I guess you could mix apples and oranges- most investors do. To me, however, it becomes a slippery slope of robbing Peter to pay Paul.
Rule #4: The side hustle isn’t the main hustle
Rule 4 may sound a lot like rule 3. I keep my house flipping/Airbnb profits completely and totally separate from my real estate commissions. One is my side hustle (flipping & Airbnb), and one is my main hustle (real estate). If I stopped flipping today (well, I guess if my sabbatical became permanent) or if I sold off the Airbnb today, I want the financial freedom to do that without a financial meltdown in my day-to-day finances. It’s extremely liberating to not need that money. That money is extra. It’s the side hustle. The real estate commissions, however, are necessary and critical to my daily living.
Even if your one source of income is unpredictable or fluctuates (like mine), you can still create a budget on a chaotic income!
Regardless how many forms of income you have, for me it’s important to identify the main one. The one I’m most passionate about, & the one that puts food on the table. The main one trumps everything else. For me, that’s real estate. Until a side hustle takes off and becomes a main hustle, keep them separate so you’re never relying on any of your side hustles to eat or to have shelter. Don’t just keep them separate in your mind. Keep them separate in your bank account. Plus, it’s a hell of a lot easier come tax time when each hustle has their own account.
Rule #5: You have to see it to believe it
You might think after reading the explanation for rule 5 that I’m actually 85. Nope, but I am old school. For me and my accounting, I have to have paper bills. Between my multiple email accounts, I get bombarded with emails every day. Having bills emailed to me is risky because it’s highly possible that the email with the bill will get lost in my inbox. Instead, I have the same monthly procedure with my paper bills. I picked up a stylish, affordable mail holder at Target, and as soon as I get the bills in the mail, I drop them into the mail holder. Then right before my payday (see Rule 2), I sit down and take out all of my paper bills, and I go through and either pay online or write a check. After paying I drop each of those paper bills into my tax receipt folder to have when I file my income taxes.
If you prefer digital, that’s okay. Find a workable system for bills that doesn’t confuse or overwhelm you!
Recently, my gas company automatically turned my billing to e-bill. And after two months, I got a phone call about my late payments. I was shocked. I write a check for every bill I receive. And that’s when we figured out the problem. They had put me on e-billing, so I explained to them that I HAVE to see the bill to pay it. I absolutely can’t keep up with bills in my email– there are just too many emails I receive in a day. For most people my age, they prefer the digital method. Not me. I want a hard copy in front of me, and it also helps with record keeping and taxes– two very important aspects of being self-employed.
Your answers on my Instagram poll were fascinating! Some of you had 10 bank accounts! Some of you were already loosely following my method. I think regardless of whether you have 7 or 70, it’s important to have a manageable system that works for you. My system may not work for you. Your system may not work for me. But having a system in place for accounting is vital– whether you’re an investor or not!