An emergency savings account can be the difference between closing the doors on your business and continuing to thrive. Surprise expenses come up. That’s the way life works. Yet when you have an emergency savings fund, these surprises have minimal effect on you and your monthly income. You don’t even notice them because you have cash set aside to fall back on. When the emergency has passed you can resume business as usual.
But if you don’t have the cash set aside, a surprise expense can derail you. It can impact your ability to pay bills and keep your business up and running. Not to mention, it can be extremely stressful.
Imagine having to take a month off from your LNC business because you’re sick. Not a fun scenario, but it happens.
What would happen to your income? If you’re unable to provide your services then you’re not making an income, unless you have a subcontractor or two or three who can carry on while you are not able to.
And you still have bills to pay. If you’re not bringing in any cash then you either have to turn to credit or not pay your bills. Neither is an attractive choice. Yet if you have cash set aside then you can pay your bills and rest comfortably confident that you’ll be able to get back to work when you’re healthy.
Emergency Savings Fund Plan
Step One: How Much Do You Need?
Take a look at how much you make on a monthly basis. This is the minimum you want to have in your emergency savings fund. If you gross $1500 -$2000 a month then that’s how much you want to initially get into your fund. Ideally, you’ll eventually be able to save up to six months’ worth of emergency savings. However, that number can seem overwhelming at the outset. Start with a month of income.
Step Two: Where Will You Save It?
The next step is to decide where you’re going to save the money. One very easy way to build an emergency savings account is to establish automatic weekly or monthly deductions from your main account into another account.
The money shouldn’t be too easy to get to but it also shouldn’t be impossible to access. Consider an online savings account. They have low fees and automatic transfers and deductions are easy.
I recommend you use a separate saving account for the retainer checks you receive from clients. Do NOT dip into this account instead of into a savigns account. You might need to refund a portion of a retianer check if you don’t use up all the time and the case is over, or use it to pay a subcontractor.
Step Three: Setting Up Your Savings Plan
The next step is to take a look at your budget and decide how much you can set aside each week or each month. For example, can you save $25 a week? If so, you’ll be able to save approximately $100 a month. Look at items in your budget where you may be able to cut back. You can also take a look at your income plan to see if there are easy ways you can increase your income.
Whenever you come into extra income (you get your tax return or you have a particularly profitable month, for example) set a little bit aside for your emergency savings fund.
Step Four: Set it and Forget It
Once your account is funded with six month’s worth of income, you can stop paying into it. Just set it and forget it. If you have the money in an interest-earning account, you’ll earn a tiny extra each month. That’s just like a drop of icing on the cake.
Step Five: When You Use the Money
You will use the emergency savings money eventually. When that happens, you’ll want to reinstate the monthly deductions to replace the money you used. For example, say you have $5000 set aside in your account and you need to replace your computer. You use $1500 to buy a new computer. You’ll want to repay that $1500 back into your emergency savings account.
Starting an emergency savings account is smart business. It’s also good for your peace of mind. You can live your life and grow your business without worrying about what’s around the next corner and how you’ll afford it.
Pat Iyer is president of The Pat Iyer Group, which develops resources to assist LNCs in obtaining more clients, making more money, and achieving their business goals and dreams.
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