Plus, no matter how much research you do beforehand, there’s still no guarantee your risk will reap a reward.
We’re absolutely proponents of following your dreams, but diving into the deep end is a lot easier – and less anxiety-inducing – if you have a financial safety net. When you become a new business owner, there might be long periods of time where you go without income. To cover yourself just in case, you need to have an emergency fund.
Having an emergency fund
is one of the basic tenets of personal finance, and it’s extremely important for entrepreneurs. That’s because your income isn’t always predictable. You might have one great month followed by one with terrible numbers. But no matter what, you need to take care of yourself and ensure you always stay afloat.
Emergency funds exist to cover or supplement your finances should you unexpectedly face a financial hardship such as a medical emergency, job loss, death in the family, or anything that could throw a burden on you. For entrepreneurs, they’re also there in case the first few months of starting a business provide little-to-no income. After all, even if you have nothing coming in, your bills don’t stop being due.
Great idea…so, how do you do it? Here are six savvy ways to set up an emergency fund as an entrepreneur.
1. Add Up Your Expenses to See How Much You’ll Need
Before anything else, decide how much you should ideally stash away. Most personal finance experts, including big-name financial broadcaster Dave Ramsey
, recommend having at least 3 to 6 months of expenses saved up in case of an emergency. As an entrepreneur, you’ll want to aim a little higher – try for 6 to 12 months’ worth of both business and personal expenses combined.
After all, you’re willingly forgoing a steady income for an unforeseen amount of time – make sure you’re prepared for it!
If you haven’t started your company yet, start saving for this fund before you quit your day job to start your business venture while you still have a steady income. And again, remember that this fund should cover both your personal and business expenses, since you’ll be responsible for both should anything bad suddenly happen to your business.
2. Set Up Automatic Withdrawals into a Savings Account
Once you know how much you need to save and by what date, you can set up savings goals for each week or month going forward. For example, if you want to save $10,000 for an emergency fund and make your business your sole source of income in six months, you’ll need to start putting aside about $384 a week.
To make it as easy on yourself as possible, set up a savings account for your new venture, and start a recurring deposit into a business bank account
. Your current company might even offer the ability to split your paycheck as part of their direct deposit plan.
Automating your savings is a way to “pay yourself first.” In layman’s terms, this means simply putting money into savings before you’ve even had a chance to spend it. It’s a lot easier to make sure that money is saved, not spent, when you don’t see it in your checking account. That’s essential for building up an emergency fund balance.
3. Audit Your Personal Expenses, and Work Lean for a Bit
If you don’t know how to start saving – stop spending. Starting a business takes sacrifices, right? The fastest way to grow an emergency fund is to trim down the money that you’re spending now that you could be saving for later.
Of course, anyone can tell you to just stop spending, but it’s never that simple. So, begin with a plan. Start by eliminating expenses from your budget
that are extraneous or unnecessary. This might mean cutting out spending at restaurants or entertaining, shopping, things like that – no one knows how you spend better than you.
Also, look at your monthly subscription services, and determine what services you really use. People often forget about auto-debits, and have long ago stopped using the subscriptions they’re paying for. Devote that money to emergency savings instead.
Diligently start to track your spending, and highlight some areas where you could stand to cut back. Keep doing so until you’re able to save your monthly or weekly goal amounts, and be sure to adjust your savings timeline if necessary.
4. Stow Away Anything “Extra” Before You Have a Chance to Spend It
If you’re one of the lucky Americans getting tax refunds this year, make sure that money doesn’t go toward a Caribbean getaway. Your tax refund might feel like free money – but it’s money you’ve already worked hard for, so make sure you use it responsibly. (No money is really ever free, naturally.) Tax refunds are the perfect way to add a lump sum to your emergency fund without having to adjust your lifestyle.
Of course, you may not get a tax refund, but might encounter another situation where you get a large check or an influx of cash. Regardless of whether it’s a scratch-off ticket, a health insurance reimbursement check, or a $100 bill from your great aunt, stash it away in your e-fund. It all adds up in the end.
5. Take on a Side Hustle for Extra Income
The best way to generate extra income? Start working another job. Instead of the part-time retail position you might have worked in high school, start a side hustle on your own terms. That way, you’ll earn extra at times that are convenient for you.
Side-hustles can take the form of driving on a rideshare app like Via or Lyft, or picking up a freelance writing gig. Maybe you’re thinking of launching a contracting business, and can pick up a few side jobs (it might even help get your name out there).
Entrepreneurship is tough, but picking up outside work is one of the few money-earning avenues that kicks in faster than launching a full business. Make sure that cash goes straight into your emergency savings.
6. Keep It in a High-Yield Savings Account
If you have money in a savings account, you might as well make it work for you – especially if it’s just going to hang out, (hopefully) untouched.
Consider high-yield savings accounts options, with interest rates upward of 1 percent. Several banks, including both brick-and-mortar financial institutions and online banks, offer these kinds of savings accounts that reward you for saving your money.
Even though an additional, say, 1.5 percent on top of your balance might not seem like much, anything helps in case of emergency.
Start an Emergency Fund Now, and You’ll Thank Yourself Later
Building a solid emergency fund is a crucial step on the road to becoming a responsible entrepreneur. It’s not necessarily fun, but it is important – both for your own financial security, and for the future of your business.