Emergency Fund – Smart Planning
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1″
Having an emergency fund for your business can be the difference between closing the doors and staying open for business. Just as in your personal life, surprise business expenses come up.
When you have an emergency fund, surprises have minimal effect on you and your monthly income. Having cash set aside to fall back means handling unexpected expenses with ease and when the emergency has passed you can resume business as usual.
But if you don’t have the cash set aside, a surprise expense can derail you. It can impact your ability to pay bills and keep your business up and running. Not to mention, it can be extremely stressful.
Imagine having to take a month off from your service business because you or someone close to you is sick. Not a fun scenario, but it happens more often then you’d think. Ask yourself what would happen to your income? If you’re unable to provide your service then you’re not making an income, and yet you’re still obligated to pay your bills.
So if you’re not bringing in any cash then you either have to turn to credit or not pay your bills. And neither is an attractive choice. On the other hand if you have an emergency fund then you can pay your bills and rest comfortably confident that you’ll be able to get back to work when you’re healthy.
Implement These Steps to Create an Emergency Fund for Your Business…
Step One: Figure Out How Much Cash You Need
The minimum you want to have in your emergency fund should equal your monthly gross. That means if you gross $1500 a month then that’s how much you want to initially get into your fund. Ideally, you’ll eventually be able to save up six to nine months worth of emergency fund savings. Since that number can seem overwhelming at the outset start with a month of income.
Step Two: Decide Where You’ll Save It?
One very easy way to build an emergency fund is to establish automatic weekly or monthly deductions from your main account into another account. The money shouldn’t be too easy to get to but it also shouldn’t be impossible to access. Consider an online savings account. They have low fees and automatic transfers and deductions are easy.
Step Three: Set Up Your Savings Plan for Your Emergency Fund
The next step is to take a look at your budget and decide how much you can set aside each week or each month. For example, can you save $25 a week? If so, you’ll be able to save approximately $100 a month. Look at items in your budget where you may be able to cut back. You can also take a look at your income plan to see if there are easy ways you can increase your income.
Whenever you come into extra income (you get your tax return or you have a particularly profitable month, for example) set a little bit aside for your emergency fund.
Step Four: Set it and Forget It
Once you have your emergency fund with at least six month’s worth of income, you can stop paying into it. Just set it and forget it. If you have the money in an interest earning account, you’ll earn a little extra each month. That’s just icing on the cake.
Step Five: When You Use the Money
You will use the emergency fund money eventually. When that happens, you’ll want to reinstate the monthly deductions to replace the money you used. For example, say you have $5000 set aside in your account and you need to replace your computer. You use $1000 to buy a new computer. You’ll want to repay that $1000 back into your emergency savings account.
Starting an emergency fund is smart business that will give you peace of mind. You can live your life and grow your business without worrying about what’s around the next corner and how you’ll afford it.
You may be thinking “But I don’t have extra money for this!”, First I would say, better safe than sorry. Second start with whatever you can, it adds up. See where you can cut back a little and divert that money towards your emergency fund. Keep referring to the steps above to keep you on track and before you know it your emergency fund will be setup and there for you for when you need it.