6 Bad Money Habits And How To Break Them
By Katie Morell – Contributor
Entrepreneurs start businesses with an idea and a lot of energy. Especially in the beginning, hectic schedules can lead to less-than-stellar financial management practices and as a company grows, business owners can find themselves unknowingly establishing bad money habits.
Here are a few common habits and how to break them.
1. Lack of financial records
When is the last time you filed away a receipt? If you can’t remember, it’s time to start keeping track.
Business owners can write off a good portion of expenses if they keep proof of payment. Denise Winston, founder of Money Start Here, a financial education company in Bakersfield, California, recommends creating processes to capture all expense receipts.
“If you aren’t organized with your receipts and expenses, money could whip through your fingers come tax time,” she says.
Cash flow is another issue in need of attention.
“Many people don’t stay on top of their cash flow,” says Barbara Weltman, a New York-based small business consultant and author of J.K. Lasser’s Small Business Taxes 2011: Your Complete Guide to a Better Bottom Line.
Solution: Winston recommends carrying a receipt envelope with you at all times and designating a place in your office to capture expenses.
Cash flow can easily be tracked by financial and accounting software, such as QuickBooks.
2. No spending filter
Every time Winston wants to buy something expensive, she gives herself 24 hours to think about it, and recommends business owners do the same.
According to Losey, it is important to distinguish needs from desires and often asks his clients this: :By borrowing money, are you okay with spending away future earnings?”
“They usually reevaluate when I put it that way,” he says.
Solution: Take your time and evaluate the situation, Winston suggests.
“When times are good, you should be banking that money because you never know how long it will last—give yourself a few months before making major spending decisions,” she says.
3. Failure to consider tax implications
You hire someone and—BAM!—you’re hit with a barrage of taxes from payroll to unemployment and beyond.
In addition, tax laws are constantly changing and not staying on top of them can hurt your bottom line.
Solution: If employee-related taxes make your stomach turn, Weltman suggests hiring independent contractors or temporary help. If you still need full-timers, make sure to meet with your CPA or financial adviser on a regular basis.
“You should be meeting at least quarterly; they can also help you stay on top of tax legislation and make sure you are compliant,” she says.
4. Not managing your credit score
This can seriously hamper your plans for the future. Just one late bill payment is reported on your credit store. Asking for a loan can also push down your number.
“I recommend not applying for loans more than twice a year; you need to look like you don’t need credit to get credit,” Winston says.
Solution: Winston recommends checking your credit score annually (do it for free on AnnualCreditReport.com) and reviewing it for accuracy. If you find incorrect information, dispute it, but make sure to have a clean slate by the time you are asking for a loan.
“It can take up to 90 days to clean up errors on your credit report; if you wait to check it and apply for a loan, it could be too late,” she says.
5. Combining personal and business expenditures
This is incredibly easy to do. After all, it is your business. But mixing expenses can produce major headaches come tax time.
Solution: Get a business bank account and a separate business credit card.
“You can only deduct business expenses, so if you are sloppy about it and go to your accountant at the end of the year, it may be difficult to work backwards and separate what you’ve spent,” Weltman says.
6. Not delegating
This may not seem like a bad money habit, per se, but consider this scenario: you spend one hour doing a task that costs $50 to outsource when you could be spending that time on a task specific to your expertise, worth $300 per hour.
Solution: “Hire to your weakness and be honest with what your skill set is—you could be freeing up time and making money in the process,” says Winston.