Introducing The 7 Bucket System
When you are operating a small business many people tend to gloss over what they need to have to maintain an efficiently operating business. They tend to think from a minimalistic approach. They are typically only thinking of one checking account and maybe one savings account.
This is especially true when they are setting up their bank accounts. Most people think they should only have two or three bank accounts (not counting any personal accounts). They lump everything together into those relatively few accounts. They think about an operating checking account and then possibly a savings account where they put additional funds that they may need for the future.
However, when an opportunity comes forth they will hem and haw as to whether they should make the investment.
The problem with that is that if they were more efficient in their structure then making those future choices will be a lot easier.
When you have your money split up into different categories (i.e., different bank accounts) then making those decisions becomes a lot easier and will only take the effort that you should take advantage of that recent opportunity.
This means that if you have already pre-allotted monies for a specific category then decide to take advantage of that opportunity (assuming you already have adequate funds available in that category).
Types of Bank Accounts to Use
Here are the different types of bank accounts you should create. I am already assuming you have a personal checking account and savings account already established.
The percentage amounts that you put into each account will vary depending on the type of business you are operating. The numbers I am using below is only a recommendation and your business model may match or differ.
The difference between a checking account and a savings account will mainly depend upon the number of withdrawals you are making on a monthly basis. Either account can receive multiple deposits. Depending on the banking institution that you use will have a limit on the number of withdrawals you can make. Thus, you must consider just how active each of the below accounts will have for your business operation.
Remember, if you do decide to go with a savings account you can always transfer funds from that savings account to the main business operating account when you need to use those funds.
Corporate Operating Account – Checking
The first account you will need in your business is a main business operating account. Since day-to-day deposits and expenses are coming in and out of this account it needs to be a checking account. This account will handle all of the activities of your business. Since you are making frequent deposits and withdrawals this must be a checking account.
Whenever you collect a receivable from a client the funds will be immediately deposited here.
In total, about 50% of the funds you collect in your business will reside here. Your personal paycheck will come out of these funds. The remaining funds will pay for the operation of your business. All of your operational expenses come out of these funds.
Corporate Tax Account – Savings
There are two main types of tax payments businesses will typically make. You either pay on an annual basis or a quarterly basis. Because that activity will usually only occur one to four times a year then having these funds put into a savings account will be the best.
As a small business owner, you will pay taxes every year. For those new business owners switching from a corporate job where funds were already taken out of your paycheck then you usually got a refund at the end of the year. However, a small business owner is not pre-paying their taxes to the government. They need to be able to account for this though.
Thus, putting money aside from each incoming transaction is important. Without the proper tax planning you could set yourself up for a catastrophe at the end of the year.
As a small business owner, you will have deductions and write-offs that you can claim. That is a good thing so make sure you keep all receipts for everything that you are going to be writing off. However, you should always assume you will still be paying state and federal taxes.
So that you don’t set yourself up for failure, I would recommend putting at least 10% of the funds you receive into this tax savings account.
When it comes tax time you will see just how ready you were. If you see that there was not enough money saved then you will have to make an adjustment to the deposits into the account the next year. Those additional funds will have to come out of your operating account.
If you see you saved too much then you could adjust the other way or you can play it safe by still putting the same percentage the following year because you won’t know what kind of business you may be doing and the deductions you will be able to take.
Investment Account – Checking or Savings
The next account you will want to have is an account for passive investments. This can be used to buy real estate, stocks, options, bonds, cryptocurrency, or any other types of investment.
This account is to be used to have your hard-earned money to start to work for you. The type of investment could be for one of the ones above or it could be in other formats. Some other ideas could be investing in other businesses. Or maybe you can be an Angel Investor or Venture Capitalist. Maybe you play with the FOREX market. There are a huge number of different things that you could invest in.
I am suggesting that you use 10% of the funds you receive to go into this account. Depending on the account activity it could be either a savings account or a checking account. If you are investing in large items like REITs, or Venture Capital then a savings account may be good because you are making very few withdrawals since those may occur once every 1 to 6 months.
On the other hand, if you are buying more liquid endeavors (stocks, bonds, options, or cryptocurrency) then you may want to have a checking account due to making frequent withdrawals from the account when new opportunities arise.
Education Account – Checking or Savings
One of the biggest places that you need to invest in is with your yourself and your education.
Education for some people will be to keep updated on new developments in their field. People like Realtors, doctors, computer science people, and other technological fields will have to maintain Continual Education credits. This is so they can stay abreast in their relative fields or even to maintain their licenses.
When you are looking to keep yourself available for future seminars or workshops then this money will be used. If you are looking to invest in a coach or mentor then this can be used here too.
When you think you will need these funds often then you can use a checking account here. However, if the education is going to be infrequent or you want to save a significant amount of funds then a savings account can be used. I suggest 10% of the funds you receive go into this account.
This one specific account is one of the main reasons I created the 7-Bucket System. As an example, if you had $10,000 in this account and then a course can to your attention that cost $7,000 then you can very easily make the decision to invest into that course. If all of your savings were in one account and you had $15,o00 in that one account you may have to think long and hard as to whether you should invest. By having the monies already allotted for education then you can make the call much easier.
Long-Term Goal Account – Savings
The next account to set up is when you have a long-term goal. This could be a down payment on a new home or a new car. Maybe it is to refurbish the kitchen or bathrooms.
Most people have a goal that they want to purchase at some time in the future. This is something that will require saving money for some time in order to achieve it. This account is a great account to take a look at on a monthly basis as you are saving to invest in that goal. Every month you will see yourself getting closer and closer to that goal When you have reached that goal financially, then you can make the decision to use those funds for that goal or to continue saving until the right opportunity presents itself.
I suggest 10% of the funds you receive go into this account. The amount you save here may vary depending on the financial situation of your business and the goal itself.
Personal Savings Account – Savings
This account is for your normal savings and your emergency funds account. This is the money that is not being actively used elsewhere. This may typically from the paycheck you give yourself.
Typically if you are keeping 50% in your business operating account, you may be paying yourself 20 – 25% to yourself. Out of that, you may want to put 5 – 10% of your personal income into this account.
Fun Account – Checking, Cash
The last account you will want to have is a Fun Account. This is you rewarding yourself for the hard work that you are doing. This could be to have a massage, go on a long-weekend vacation, or anything of that nature.
This money needs to be spent within 3 months of getting it. When you reward yourself then that makes it all the better that you are putting in all of that hard work.
Between 5 – 10% of the funds you receive should go into this account.
If you reward yourself frequently then this could either be a checking account or as cash on hand. This may mean you use those funds for a vacation which will need to pay for the travel, car rental, hotel costs, food, and entertainment.
I typically will not only get a checking account but also get a debit card which is fun in itself. This way it may give you a little bit more pleasure when you are using that card when you are paying for a meal or just putting gas into your vehicle.
The 8th Account
There is one additional account you may also want to create. This is a “giving account” or a “tithing” account. Depending on your beliefs giving money (or time) to others who are in need is a great way of creating abundance in your universe. Some say you should give away 5 to 10% of your income to tithing.
If you believe in giving back then you may want to consider having a tithing account. If this is going to involve money then you may keep this as cash on hand and not create a separate checking or savings account.
That choice is up to you.
Having different accounts for the different aspects of your business is one sure way that you can be a lot more effective when running your business. When opportunities come up and you have your funds already allotted for that opportunity then it becomes a lot easier for you to run your business.
The last thing you want to do is to “think about it” because all of your funds are in one or two accounts. This way you know you already have allotted the funds to those possible opportunities and you can decide to move forward or not with a lot more ease.