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How to Build an Emergency Fund for Your Business

If the last year has taught us anything, it’s that life is unpredictable, and nothing is guaranteed. One year ago, no one could have predicted that we’d be under a national lockdown with strict business limitations that would continue for longer than nine months. Many businesses have burned through their emergency funds and SBA loans and are barely running on fumes. If your business is to survive the pandemic long-term, you need to know precisely how to build an emergency fund as quickly as possible.

Step 1: Keep making your payments

If you have business debts (loans, mortgages) – keep making your regular payments. Where possible, consolidate your debt with a business loan and lower your payments with today’s low interest rates. IMPORTANT: Don’t sacrifice your debt payments in order to re-build your emergency fund. You’ll ruin your business credit and compound the interest you owe.

Step 2: Calculate your operating expenses

What would happen to your business if you became hospitalized and could no longer work? Could it survive another shutdown? Your emergency fund should be enough to cover at least three months of operations which includes loan payments, rent/mortgage and utilities, salaries, and other monthly expenses.

Step 3: Set up automatic payments

Once you know your savings goal, try to reach it as quickly as possible. Set up an automatic transfer each month into a dedicated account. Don’t rely on memory to do this or you’ll inevitably miss payments (to your savings account.) This should be like any other bill you pay. Amp up your savings by enrolling in round-up services like Acorns. They take the money you spend on your business credit cards and round up to the next dollar amount. The difference is deposited in an investment account. If you buy office supplies for $45.89, your credit card bill will show $46.00 and the remaining eleven cents will be deposited into your investment account.

Step 4: Make your money work for you

Open an investment account with a diversified portfolio. In the past, money market accounts were safe places to let your money earn stable interest, but with rates so low, your money is doing nothing for you there. Stock trading is a risky move so keep your funds balanced among bonds and mutual funds that are low risk. Having an easily accessible account will prevent you from locking in steep losses when the market takes a dip.

Step 5:  Stay disciplined

If you want to upgrade your equipment, hire new employees, or stock up on inventory, don’t be tempted to use your emergency fund. Keep the emergency fund for true emergencies like when the HVAC system dies and needs to be replaced, there’s a fire and you need to make immediate repairs and can’t wait for insurance payouts, or when you have to take sick leave. Don’t dip into emergency money when you’re trying to grow the business. Save for those goals in a separate fund or take out a business loan.

By following these rules, you’ll have a safety net in place so that if your company runs into any hurdles (like the pandemic), business can continue as usual so your source of income is uninterrupted.

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