You should build emergency savings. Here’s how you can make it work

If you have been in the self-employment arena for some time, you are more than aware of the constant financial ups and downs. This sort of volatility is even more intense in the early stages. The company’s finance directly reflects on the owner’s personal finances. Thus, an emergency fund is essential for an entrepreneur.

For many of us that work in the multifamily industry know that cash flow is a nightmare. Most places require at least 30 days to make a payment. And sometimes, things fall through the crack, and invoices are not paid for over 60 days. 

Before jumping ship from your day job, ideally, you would have already built a rainy day fund. But that is rarely the case. In fact, according to a survey from Bank of America found that having an emergency fund is a top priority for 64 percent of millennials; and yet, most Americans do not have enough savings to cover an unexpected emergency. 

Americasaves.org claims that an emergency savings fund could start with as little as $500, and it can be built over time. Scheduling automatic transfers to a savings account – or an account that is not readily accessible – is the ideal way to save for this fund. Nearly forty percent of Americans would not be able to cover a $400 expense with either cash or savings.  

Why should you build an emergency savings fund?

As the name implies, emergency savings are funds allocated to unexpected events. For some, it might be a car repair bill or a job loss. For entrepreneurs, the concept of setting cash aside is more than just a good idea; it is a lifeline. 

Most small businesses experience seasonal or cyclical economic fluctuation. Additionally, cash flow or money management is the most challenging problem owners face. A study conducted by US Bank indicates that 82 percent of small businesses failure is related to money or lack thereof. 

Where to put an emergency fund? 

It is essential to understand that emergency funds should be cash that is not exposed to risks. Due to the unpredictability of stocks, buying them would not be the preferred form to store your emergency funds. It is highly suggested to create a separate bank account – such as a savings account. 

The best location to keep your emergency fund is at home locked up in a safe. While experts disagree with this practice, such funds are for unexpected situations. If your money is sitting at a high-yield savings account, it is likely that your bank will charge for withdraws, which will almost certainly undermine your earnings. Additionally, having the cash readily available gives you extra peace of mind.

How much emergency fund do you need?

It’s impossible to determine a standard amount. Each person has to analyze personal needs and take appropriate action to suffice the demands. However, as mentioned above, you can start with as little as $500. Ideally, you would save enough money to cover about 3-6 months worth of your monthly expenses. Once you reach the desired goal, you can funnel the savings to other financial milestones.

For business owners, it is crucial to establish the proper amount and save as fast as you can. Unless your business maintains contracts with monthly payments, you might not know when your next paycheck will be available.

Should the emergency fund be used for a business emergency?

Resounding NO. Your personal finances ought to be one hundred percent separate from your business. Even if you are a self-employed running a sole proprietorship. You should also build an emergency fund for your company as well.

How can you build your emergency fund?

Your goal is to build this fund as soon as possible. If you are trying to pay down debt, you should suspend it for this period of time, and allocate all extra funds to attain the necessary minimum amount. The question still unanswered, how can you save this money in a fast manner?

1. Create a budget

First, you must identify, in detail, all of your monthly expenses. When listing all your bills, pay close attention to charges that are not on a monthly basis, for instance, some insurances are paid quarterly. Other factors are easily overlooked, such as car maintenance, and smaller subscription bills. If you are self-employed, this exercise will also help you conclude how much you need to bring home every month.

Once you have listed your expenses, it is time to consider your income. You should have a set amount to bring home regardless of what your business netted for the month — that’s another subject on its own.

By the time your budget is done, your balance should be zero. In other words, all the money should be allocated, including how much you are adding to savings.

More about budget

5 Steps to Create a Successful Budget

2. Using automatic transfers

In the previous step, you identified how much money you would be able to save, and now it is time to materialize the fund. If you are using a savings account, it is advised to set up an automatic transfer.

Due to irregular paydays, this option might not be as appealing to a business owner. However, this is an excellent choice to assist you to get in the habit of saving regularly. Additionally, some financial institutions, especially credit unions, offer low or no balance option.

3. Acorn

What is Acorn? It is an app that you can connect to your debit card and anything you purchase using the connected cards, the app will round up the change. It offers several options on portfolios and recurring deposits. 

This is one of my favorite ways to save because the amount of money it takes goes almost unnoticeable. In just one year I had saved a little over one thousand dollars.

4. Financial priorities

As I mentioned before, building a fund can be very difficult when you have to juggle competing financial priorities. One way to address this issue is to put everything on hold and pay the bare minimum while allocating the additional money into savings.

While paying down debt is important, building an emergency fund takes precedence as it is essential to avoid going deeper into debt.