Divide and Conquer: Why You Should Separate Your Personal and Business Funds

This story appears in the November 2014 issue of Entrepreneur. Subscribe »

Ten years ago, Cody Limbaugh made the leap from personal trainer to business owner, starting a small gym in Portland, Ore. Ever since, his financial and emotional well-being have been tied to the performance of his business.

“I get six sign-ups one week and feel on top of the world,” says Limbaugh, affiliate owner of CrossFit Excellence. “I pay the bills. I go to happy hour with friends. But the next week, the landlord raises the rent on me. It’s demoralizing.”

Sound familiar? I know many entrepreneurs who struggle to separate the value of their business from their own net worth (and self-worth). It’s part of the entrepreneurial mindset. As business owners, your identity is wrapped up in your work, almost by definition. That’s a good thing—nobody cares more about the business than you do—but when it comes to your money, this relationship isn’t always sustainable or financially healthy.

To keep some semblance of sanity, the first thing to do is maintain the wall between your personal and company bank accounts. This allows you to stay calm when your business is in a rough patch, because at least you’ve got money in the bank. 

Accordingly, don’t overinvest in your business with your own dough. That’s what happened to Tammy Jata of Blueberry House Tutoring, based outside of Portland, Ore. She started the tutoring business in her home, and it was so successful that she spent $20,000 of her own money to lease and renovate a larger space in a nearby business park. Unfortunately, she lost more clients than she gained during the move. Now she wonders whether she should pump more of her personal savings into a sinking ship. (I hope she doesn’t.)

Such dilemmas underscore why it’s vital for entrepreneurs to save for an uncertain future. When business is booming, smart owners save first. They’ll sock away 20 to 30 percent of their net income, working toward building up reserves that will get them through at least six months of personal—not business—expenses for themselves and their families. 

It’s crucial to plan for all outcomes. Every business owner I know talks about the best-case scenario, but truly savvy entrepreneurs are those who prepare for the worst. Limbaugh says his biggest regret was not having a backup plan when he was starting out. 

“If I had a second job, I could still bring in a little cash even when times are tough at the gym,” he says, admitting that at the beginning he refused to consider Plan B because it struck him as an expectation of failure. But he has since changed his attitude. 

“I think it’s more like a safety net,” he says. “If I had a backup plan, things wouldn’t look so bleak right now.” Indeed, working a side job or doing extracurricular contract work isn’t an admission of failure; it’s a smart move to keep food on your family’s table.

I realize that most entrepreneurs believe they need to live their business 24/7 in order to succeed, but that’s not sustainable over the long run. Worse, it stops you from making objective and rational decisions that are in your best interests—not just those of your company.