Last week, we talked about the importance of managing both your personal and business cash flow. We think it’s a concept worth discussing more because it’s important to have the right strategies in place. When you own a business, you need to have a certain amount of cash on hand to pay the bills and cover expenses. Likewise, your personal accounts should be managed the same way to keep your finances healthy.
Then, there is the argument that you can actually have too much cash tucked away in one of your accounts. Some might say there’s no such thing as too much liquidity, while others will contend that you could use some of that excess cash for other investments, retirement savings or paying down debts.
The way we see it, your goal should be to strike that ideal balance between making sure you always have enough cash available (along with a little extra to cover emergencies), but not so much that those extra funds are wasting away in a low-yield account.
First, it helps to know what you and your family earn and spend each month. Then, you should set a goal of keeping double that full monthly amount as a cushion in your personal checking account. In other words, if you spend $5,000 a month on bills and standard living expenses, then you should aim to keep $10,000 in your personal checking account at all times. You never know when you’ll have a “bad month,” so the cushion can go a long way and make sure you are never short on personal cash.
The recommendation for personal savings is somewhere between 6 months or even a year of monthly cash flow in your savings account. Most people aim for around 5-7 months. Though you hope to never need it, you’ll want a health amount in your savings in case of emergency and to help cover large personal expenses. With anything beyond this amount, you will want to start thinking of other ways to invest your excess money.
Managing your business checking account is similar, yet ultimately quite different than managing a personal checking account. Obviously, you will want to track your expenses and budget carefully to know your average monthly operating costs. Then, you should aim for keeping three times your monthly cash flow in the business checking account. A business will naturally have more ebbs and flows throughout the year, so you want the cushion to be more.
Managing a business savings account can be tricky. This is where you really find a dilemma between having enough available to cover emergencies and having too much money that could be invested elsewhere. The recommendation here is to keep two months worth of the monthly expenses in the business savings account. If you know you might have some bigger expenses coming up (large equipment, new hires, seasonal bonuses/raises, etc.), then you might want to stash some more to cover those costs ahead of time.
Every situation is different and what you do with any excess cash will also make a significant difference in the financial health of your business. In addition, your investments and retirement savings will also impact your ability to achieve financial independence from a personal perspective.
This is where it’s vital to have an experienced financial advisor like Illumination Wealth on your side who can help you manage your cash flow, retirement plans, investment portfolio and all your finances. To learn more about how we can help you and your business thrive, contact Illumination Wealth today!