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How Much Should Your Business Keep in Emergency Funds?
Determine how much of a financial hedge your business needs to stay afloat

Life is unpredictable at best. While you can hope for the best for your business, unforeseen circumstances like market slumps or personal injuries might get in the way. Discover just how much your business should set aside for an emergency fund and glean some helpful tips as you head toward your financial goals.

Aim for at least a three-month minimum

A great starting place for an emergency fund is three months’ worth of business expenses. That might seem like a lot of money, but considering how unpredictable life is, it’s best to be prepared. Unforeseen circumstances like natural disasters, personal injuries or low monthly sales are just a few of the factors that might call for alternative money sources.

If you haven’t started an emergency fund yet, the first step is to simply get started. Julia Chang, contributor to Forbes.com’s Personal Finance section, advises putting aside whatever set monthly amount you can afford. Nancy Jackson, contributor to Bankrate.com’s Savings section, recommends starting your emergency fund with the purpose of saving $1,000, then working your way up to cover three months’ worth of operating expenses.

Head toward a six-month ideal

Although three months of overhead is a significant first milestone for your business’s emergency fund, experts recommend an ideal emergency fund amount that totals six months’ worth of operating expenses. Depending on the nature of your business, you might need a minimum of six months’ overhead saved up rather than the recommended three months’ minimum.

According to Bigcommerce.com, if any of the following criteria applies to your business you should work toward having six months’ overhead saved:

  • Your business is subject to more government regulation than the average business;
  • Your business is high-risk in nature, the demand for your product is seasonal or volatile;
  • You cannot secure insurance coverage for potential disasters or liabilities. 

Tips for getting started

It is best to keep your business’ emergency fund in a separate account to minimize the chances that you’ll dig into it. Avoid putting it in a growth account like a CD or stock market fund—you want the emergency money to be easily accessible when you need it. Bigcommerce.com recommends opening a high-interest accessible savings account to house the emergency fund money.

Make your emergency fund part of your business plan. Write down a measurable goal for your emergency fund (i.e. three or six months of overhead) then map out practical steps to get there. After all, you can only measure success if you have specific attainable milestones along the way. 

Consider setting up a direct debit. With the modern convenience of autopay, there is no excuse to not put money towards your emergency fund each month. By hooking up your emergency fund to automated technology, you make it easier to consistently contribute to it. You can set it up once and then forget about it.

By applying these insights and strategies, you will guide your business toward greater financial stability.

 


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Published by East Boston Savings Bank
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All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.  


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