The Entrepreneur’s Emergency Fund Essentials
Author: Nicole Chaitan-Kissoon
Granny used to say, ‘save some money for a rainy day’. The professionals call that an Emergency Fund and its purpose is to keep you cash flow positive when emergencies and unexpected expenses come up.
Savings can feel like a luxury when you’re starting a business, but the pandemic has shown us that an emergency fund is a need, not a want. So, here are the basics for getting your savings right as you transition from salaried pleb to solopreneur.
Saving money is like drinking water 🥛= 💵: You know it’s good for you, yet still, even while you’re reading this, you’re probably more than a little dehydrated. How much water should you drink every day? I bet you answered around 8 glasses a day. You don’t know why it’s 8 glasses – it’s a Rule of Thumb. Truth is, some people need less, some need more but, generally, 8 glasses would keep Tom, Dick and Harrylall reasonably healthy. 💪
That kind of rule of thumb works for an emergency fund too. The goal is to have an emergency fund equal to 3 to 6 months of your expenses. For most types of businesses and most unforeseen circumstances, this would keep you afloat. In fact, very few people would be ok with less (we’re talking solopreneurs with no debt, no picknie, multiple incomes and maybe a fairy godmother on speed dial). 🧚♀️📱
Bigger is better
Straight talk – if you’re a one-person business operation, you need more. There is debate about how much more, but a 12-month emergency fund has advantages for a small business. Now that your profit is your income, you don’t have a guaranteed minimum amount coming in. Covid has been the mother of all monsoons when it comes to money – you need enough for more than just a rainy day. The more uncertain your income is, the more you’ll need an even bigger emergency fund because if something goes wrong, without having guaranteed earnings, the more likely it is that you’ll be swept under by it all.
2 Funds are better than 1
Wait, what? 🤔 Yes, you read that right: you need 2 emergency funds. One for your personal expenses and one for your business expenses. The same rule of thumb applies for how much – 3 to 6 months of your operating expenses. That should be roughly 10% of your annual revenue. Separating them will give you more stability and prevent commingling.
To get your emergency fund going, numbers are a good place to start – take a fixed percentage of every payment you earn and put it into your fund before you spend a cent. That’s Step 1 in this helpful list of tips for establishing an emergency fund for your business.
It won’t be all numbers though. Some considerations are business-specific. Lastly, once you’re saving, be sure you also decide what situations will cause you to spend from your private and business emergency funds.
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