To make it easy, we’ve reduced the options down to only the types of accounts that every hard-working cosmetologist or barber must have, (with a few additional options for overachievers). Getting the right accounts open might feel painful at first, but you will be so proud of yourself once it is done! Oh, and if you need a recommendation for a great bank that values small businesses, try our friends at
Vast Bank in Oklahoma.
OPEN THESE 5 ACCOUNTS:
- Personal Checking Account
- Business Checking Account
- Emergency Savings Account (for rainy days)
- General Savings Account (for long-term goals)
- SEP IRA
- (Optional) 529 Plan
- (Optional) Additional Investment Account
FIRST UP, THE CHECKING ACCOUNT
Checking is often the first—and for some, the only—account that people open. This makes sense when you are first starting out, but once a solid financial infrastructure is built your checking account will actually be more of a “leftover” bucket—what remains after paying bills and allocating money to your savings accounts.
When choosing a checking account, try to find a bank that won’t charge fees. Some banks require a minimum balance or automatic monthly deposit. If you use ATMs frequently, be sure to find one that won’t charge for out-of-network use! Here’s
a great tool created by Nerdwallet that allows you to compare banks in your local area. IMPORTANT: make sure you get to know your banker, even if you just make an in-person deposit once a month. We saw how important banking relationships are during the “COVID quarter,” the 3 months where the coronavirus had us all tucked away and depending on government programs like the PPP and EIDL.
BUSINESS CHECKING ACCOUNT
Yes, you need to have a separate checking account just for your business income and outgo. Not only will this organization tip come in handy during tax season, but you’ll thank yourself for keeping business funds separate. Think of it as oil and water — no intermingling of funds if you can help it. As a rule of thumb, keep 6 months of retained earnings (i.e., 6 months of business income) in your account. This can come in handy when applying for a bank loan or line of credit. Showing consistent funds and deposits is a positive signal.
EMERGENCY SAVINGS ACCOUNT
Creating an account dedicated to emergency savings should be your top financial priority (along with paying down any credit cards, of course). Most financial advisors recommended that you keep six months of living expenses on hand in the event of an emergency. At the very least, start out with and always have a minimum of $1,000 or enough to cover any insurance deductibles.
SAVINGS ACCOUNT FOR EVERYTHING ELSE
What are your goals for the next one to five years? Purchase a house, or new car, refinance your mortgage, take a sabbatical around the world, etc. Regardless, it is a good idea to set up an additional savings account separate from your checking account. Historically, everyone kept savings in true savings accounts because you could earn money on interest. These days, however, interest rates are low and there’s little extra to be earned. But . . . just know that studies have shown that keeping savings in a separate account and away from the swipe of a debit card actually bolsters its success rate. So take note.
SEP IRA
A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. (SEP stands for Simplified Employee Pension.) The equivalent for someone in corporate America is a 401(k). Any business owner with one or more employees, or anyone with freelance income, can open a SEP IRA. Contributions, which are tax-deductible for the business or individual, go into a traditional IRA held in the employee’s name. Employees of the business cannot contribute – the employer does. Like a traditional IRA, the money in a SEP IRA is not taxable until withdrawal.
One of the key advantages of a SEP IRA over a traditional or Roth IRA is the elevated contribution limit. For 2020 business owners can contribute up to 25% of your net self-employment earnings or $57,000, whichever is less. DO NOT OVERLOOK THE SEP. This is the perfect retirement vehicle for the self-employed cosmetologist or barber. 😉
OPTIONAL: 529 PLAN
If you have children and want to save for their college, do it in a 529 Plan. Similar to a retirement account, a 529 plan provides a tax advantage. It’s no secret that college costs are increasing year over year—you’ll be so pleased with yourself if you start early, even if it is just a small amount each month, like $25. It all adds up with the magic of compound interest. The good news is that you can open up a 529 Plan at all major brokerage banks. Just do your research first.
OPTIONAL: ADDITIONAL INVESTMENT ACCOUNT
If all your debt is paid off (except home mortgage) and you are maxing out your SEP retirement account and want to do some additional long-term saving and investing, you may want to consider opening an additional investment account.
You can open a general brokerage account at the same discount brokerage bank at you opened your SEP IRA. A brokerage account is just like a bank account, but for stocks, bonds, funds, etc. Alternatively, you can consider using one of the new services like
Wealthfront or
Betterment. These services invest your money in a desirable “passive” strategy based on your goals and for a fairly low cost. They’re each a little different so some preliminary research is a must, but are definitely worth checking out if you want some extra long-term financial planning guidance or prefer to pay someone to do all the work for you.
