Have you ever wondered how people weather the worst of financial storms and still come out with their bills paid? The answer is by having business savings in the form of a business emergency fund.
What is an emergency fund?
A business emergency fund is just like a personal emergency fund. It’s money that you set aside in your business savings in the event that you can’t work. Many of us have recurring and ongoing expenses in our business. If something happens to you, and you can’t work, or if you take a sudden dip in income, you definitely want a way to be able to cover those expenses.
A business emergency fund is not the same thing as a general business savings account. A business savings account is for investments that you’re saving for, like a new laptop, website redesign, or hiring contracted help. Your business savings has an end goal- usually something you’re going to spend money on.
Your business emergency fund is ONLY to be used when you absolutely need it. This could be if you’re sick, injured, don’t get paid by a client before your bills are due, or have an unexpected major expense. It’s a last resort and should only be used in case of emergencies.
One thing I want to point out is that saving for your taxes is different than building your business emergency fund. Your taxes shouldn’t be an emergency- they should be something that you’re planful about all year round. Unless there’s a drastic change in your tax situation, your business emergency fund shouldn’t be paying your taxes.
Step 1: Figure out your essential monthly expenses
How much money do you need in your business emergency fund? That amount depends on your business and your personal finances. Your business emergency fund should cover, at the very least, your essential fixed monthly expenses.
Fixed monthly expenses are expenses that you are obligated to pay every month. Essential expenses are expenses that you absolutely need in order to keep your business operational.
Essential fixed monthly expenses are expenses that you absolutely need and you are obligated to pay every month.
That includes things like:
- Software subscriptions
- Employee wages
- Website domain and hosting
- Insurance expenses
Your business emergency fund should also cover your business liabilities- in other words, debt payments that you must make. This will include things like:
- Business loan payments
- Monthly credit card minimums
The last thing your business emergency fund should cover is optional and depends on your personal financial situation. If you have a personal emergency fund already in place, you can skip this one. If you don’t have a personal emergency fund, you may want to consider building it into your business emergency fund. It is YOUR monthly owner draw, in other words, YOUR pay.
Step 2: Keep savings until you have three months of emergency funds saved
This step is a funny one because it’s basically to keep doing what you’re doing. Once you’ve figured out the methods that work for you, keep going until you have three months of your essential monthly business expenses saved.
Step 3: Move your money to a high-interest savings account
Once you have a sizeable amount of money saved, consider moving it into a high-interest savings account. Since your business emergency fund is ONLY supposed to be used in emergencies, our goal is that it will sit undisturbed, for years to come. While it’s sitting, why not let it make money?
For example, if you move 120,000 into a savings account with a 2% interest rate, in the first year your money will earn 2400 That’s money that will be added to your emergency savings account and you’re literally doing nothing!
Hopefully, I’ve convinced you that building your business emergency fund isn’t as hard or scary as it sounds and that it’s totally DOABLE for you! Which of these saving methods are you going to try?
Step 4: Fund your Account
Now that you know how much you need to save, it’s time to fund your accounts, which honestly is what most people feel the most overwhelmed by. Let’s discuss some different methods of funding your business emergency fund. I recommend that you try several methods at once. This will accelerate your emergency fund growth and take the strain off any one area of your business finances.
Instead of trying to save at the end of every month, when your finances are exhausted, put small chunks of money aside every week. For example, if you decide you want to save 100,000 month for your business emergency fund, put 25,000 a week into your business savings. You’re WAY less likely to miss 25,000 than 100,000 and you’ll hardly notice that it’s gone.
Set up a recurring weekly transfer at your bank and let your emergency fund build.
Save your income from a single product or service
If you’re worried about not having enough money to start saving, create a product or service and only use the income earned for savings. This way, your savings isn’t dipping into your regular revenue and affecting your ability to pay your bills.
Here are a few ideas:
- Create a small digital product to sell online and every time you make a sale, transfer that money into your emergency fund.
- Offer a short-term, low-cost service that doesn’t take you very long. Every time you’re paid, transfer that to your emergency fund.
- Take on an extra project one-time or every quarter and use that money to jumpstart your savings.