As a small business owner, you always look for ways to improve your company's bottom line. Sometimes you may be so focused on helping the business succeed that you forget your own needs. Be prepared for unexpected financial challenges, give your family peace of mind, and reduce stress by saving an emergency fund. It's an important part of your financial portfolio.
What is an Emergency Fund?
- Your biggest client sells the company and stops placing orders.
- Your husband discovers termites in the basement.
- Your son needs oral surgery that's not covered by insurance.
These emergencies are a few examples of unexpected expenses that affect your finances. You could withdraw from your 401(k) or IRA, take out a loan, or borrow from your business, but those steps can cause penalties now and in the future. With an emergency fund, you can weather these challenges with fewer long-term consequences.
How Much Should you Save in an Emergency Fund?
Everyone's needs are different. Use these guidelines as a starting point for deciding how much money your emergency fund should have.
- At minimum, save three months of living expenses. These expenses include your mortgage, utilities, insurance, food, entertainment, debt repayment, school tuition, clothing, and other daily living costs. For example, save $9,000 if your monthly living expenses total $3,000.
- If you have dependents, including a spouse, children, or aging parents, save six months of living expenses to protect your loved ones and accommodate higher costs.
- If you're a high wage earner or are concerned about your business's financial future, save 12 months of living expenses to give you greater peace of mind.
Where Should you Invest Your Emergency Fund?
Because you need your emergency funds accessible, don't invest them in accounts that penalize withdrawals. Consider a short-term certificate of deposit or a regular savings account at an online bank, and shop around for the best interest rate. For broader information on insurance and personal finance topics, see Insurance & Personal Finance: Investments, Emergency Funds, Business and Insurer Risk.
How Can you Boost Emergency Fund Savings?
It can be intimidating to save thousands of dollars in an emergency fund, but you can do it one dollar at a time. Start saving money automatically from every paycheck, give up a coffee or two each week, and look for other ways to cut expenses. Consider selling unused items as you build your emergency fund. For small businesses and organizations that run events, you may also review coverage options such as Fund Raisers Insurance.
Saving an emergency fund gives you a cushion in case something happens to your business or at home. For more details about how much you should save, talk to your financial advisor or accountant or talk to an agent.
Frequently Asked Questions
How much should a small business owner keep in an emergency fund?
A common recommendation is three to six months of living expenses, and up to 12 months if your income is unstable or you have many dependents.
Can I use my emergency fund for business shortfalls?
Yes; emergency funds can cover temporary business shortfalls, but keep some funds separate to cover personal living expenses as well.
Where is the safest place to keep my emergency savings?
Keep emergency savings in liquid, low-risk accounts such as an online savings account or short-term CD that allows penalty-free access when needed.