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How to Create an Emergency Fund

  • How much cash will you need in an emergency and where will you keep it?
  • For entrepreneurs starting and expanding their businesses
  • Help your business overcome unexpected financial events

Financial advisors urge people to set aside an emergency account to pay for unanticipated budgetary setbacks, and sometimes suggest specialized accounts to save for things like car repairs or replacing appliances. The same principle applies to running a business. Having an emergency account helps your company survive by allowing you to weather a period of reduced revenues or other cash flow problems.

How much should you save?

The size of your emergency account depends on a variety of factors, including your company structure, how many employees you have, and what your operational costs are. Saving enough to cover payroll or expenses for two or three months is often sufficient. Some companies, like those that get most of their revenues from major projects spaced over long periods, may want to save even more.

How should you establish an emergency account?

The easiest way to build up your emergency account is to regularly inject a set amount of funds, such as once every pay period, until you are satisfied with the size of the account. Review this strategy regularly and adjust it based on your expenses; you may also want to contribute more during periods of higher revenue, or add unexpected income such as funds from a legal settlement.

Where should you keep your emergency account?

Research your local banks and credit unions. Find an institution that offers high-yield savings accounts or other options that can help you accelerate your savings. You should also consider other factors, such as services that can assist your business.

When should you dip into your emergency funds?

The emergency account should be reserved for major financial shortcomings, such as a prolonged business closure or the loss of a major client. You should also consider all of your options before drawing on the account; depending on the situation, a business loan or other financing option could be more favorable. You may also need to update your budget to eliminate unnecessary expenses.

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