Whether you realize it or not, your personal finances do affect your business. Generally speaking, if your personal finances are well-managed and strong, you will likely take the same care with your business's spending and cash. However, beyond just the correlation between how you manage your personal and business budgets, a strong personal financial situation can help you buy a business, augment your existing venture's ability to withstand downturns or invest in future growth.
For this reason, while most financial advisors stress a personal emergency fund, it is just as important that you maintain a business emergency fund. If you have an emergency savings account, you can rely on that money to help you out of a financial situation without having to miss out on growth opportunities, bids, or technological upgrades.
Types of Emergency Funds
You need to be able to access your emergency fund, so you want to be sure you don’t put it in an investment that you won’t be able to liquidate should you find yourself in need. There are two types of emergency funds you should start:
Opening a separate checking account is a good way to start saving for your short-term emergency fund. With a checking account, you will be able to use a debit card or write a check depending on your needs. Be sure your bank is FDIC-insured.
Investing your long-term low-risk emergency fund in bonds or CDs will be beneficial for bigger disasters such as a court settlement or future investment in property, plant or equipment. You need to be able to access the funds at a planned date, and as long as you have that short-term emergency account, you won’t be left penniless while you wait for the larger funds to become liquid.
What Should Be Considered an Emergency?
A desire for a new corporate car lease isn’t a disaster; your emergency fund shouldn’t be used so casually. To make sure that money is there when you need it, you should be able to identify what makes a real emergency. A real disaster leaves you needing money immediately; it is a situation that can disrupt operations indefinitely or destroy your business.
How Much Should Be In Your Emergency Fund?
Ideally, you should have at least six months’ worth of expenses in your emergency fund; although, nowadays, a financial crises or recession can last much longer. To figure out how much you need in your business's emergency fund, calculate your monthly budget and multiply by 12. Include all expenses such as rent, essential employees, utility costs, insurance, inventory or direct materials required, etc. Be sure to account for critical marketing initiatives to earn business.
If you are personally living in debt or mostly paycheck-to-paycheck, save more in your personal and business accounts. Pick an amount to build up to and once you’re there, work on getting out of debt. Pay off high interest credit card debt, avoid new car loans, lead a healthy lifestyle to avoid medical bills, etc.
However, there are things you can do to lower your existing expenses. For example, car insurance is mandatory in the United States – compare companies and rates to lower your bill. If you have credit card debt, consider taking advantage of a balance transfer for 12 months of no interest payments. If you still have student loans, consider private student loan consolidation to lower your payments. If you're considering an MBA to learn how to run a business, re-think whether the cost of an MBA program is worth it. Once you’re out of debt, you can accelerate the accumulation of your emergency fund.
How to Start Building Your Emergency Fund
It can be frustrating and stressful trying to build an emergency fund, especially when thinking about how much money must go into it. Remember, the money doesn’t have to be saved overnight – it's a gradual process that requires you to save on a monthly basis until you achieve your goal.
Here are some ideas on how to start building your fund:
- Set your emergency fund goal, figure out how much you are able to contribute to it monthly, and determine how long it will take to reach your goal. Aim to save at least a year's worth of expenses for both your personal life and business. Then, aim to save at least 10% of your gross income or profit every month.
- Use any left over money. Studies show that most people lose about 10% of their income monthly from waste. If you are overspending on food, utilities, entertainment, or luxurious spending, figure out where you are wasting money and decide to save it instead.
- Use electronic payments. Set up your checking account to make automatic payments to your fund so you won’t have to think about doing it every month. The other benefit is that, if the money is sent to your savings account, you won't see it in your checking and feel the need to spend it.
- Use dividend stocks. Along with other things you’re doing to build up your emergency fund, add to it by depositing dividends from stocks, mutual funds, or ETFs you may own.
- Save spare change. Keep an empty water jug or coffee can to deposit the change from your pockets every day. Contribute that money to your emergency fund at the end of each month. This is just a supplemental idea, not one that will help you reach your goal by itself.
Building an emergency fund will give you peace of mind and ensure that you will not be financially ruined should you find yourself in the middle of a personal or professional disaster. It takes consistency and deliberate examination of your expenses to keep your fund growing steadily. Set your goal and follow through with your plan.