I know what you’re thinking, “Hold up Andi. How do you expect me to pay my bills, pay my taxes, pay MYSELF, and save in my business? Is that really a thing?”
Yes, my dear business owner, it really is a thing. And I’m about to share my step by step guide to building your business emergency fund so that you don’t have to stress out whenever your clients pay you late or if you get hit with an unexpected expense.
Quick note: This post contains affiliate links to products that I use, know, and love! Affiliate links mean that if you sign up for something through my link I receive a small commission. I only recommend products that I have tested, use for myself or for my clients.
What is an emergency fund?
A business emergency fund is just like a personal emergency fund. It’s money you set aside in your business savings in the event that you can’t work. Many of us have recurring and ongoing expenses in our business. If you can’t work or have a sudden dip in income, you definitely want to be able to cover those expenses.
A business emergency fund is not the same thing as a general business savings account. A business savings account is for investments that you’re saving for, like a new laptop, website redesign, or hiring contracted help. Your business savings has an end goal- usually something you’re going to spend money on.
Your business emergency fund is ONLY to be used when you absolutely need it. This could be if you’re sick, injured, don’t get paid by a client before your bills are due, or have an unexpected major expense. It’s the last resort and should only be used in case of emergencies.
Another thing to know: saving for your taxes is different than building your business emergency fund. Your taxes shouldn’t be an emergency- they should be something that you’re planful about year round. Unless there’s a drastic change in your tax situation, your business emergency fund shouldn’t be paying your taxes.
Building your emergency fund
Now that you know what a business emergency fund is, let’s talk about HOW to build one.
Step 1: Figure out your essential monthly expenses
How much money do you need in your business emergency fund? That depends on your business and your personal finances. Your business emergency fund should cover, at the very least, your essential fixed monthly expenses.
Fixed monthly expenses are expenses that you are obligated to pay every month. Essential expenses are expenses that you absolutely need in order to keep your business operational.
Essential fixed monthly expenses are expenses that you absolutely need and you are obligated to pay every month.
That includes things like:
- Software subscriptions
- Employee wages
- Website domain and hosting
- Insurance expenses
Not all of your business expenses are essential. If you’re not sure how to tell if an expense is essential or not, check out my post How to Do A Spending Audit for Your Business, which goes in depth about the difference between essential and non-essential expenses.
Your business emergency fund should also cover your business liabilities- in other words, debt payments that you must make. This will include things like:
- Business loan payments
- Monthly credit card minimums
The last thing your business emergency fund should cover depends on your personal financial situation. If you have a personal emergency fund already in place, you can skip this one. If you don’t have a personal emergency fund, then you’ll also need to build your owner pay into your business emergency fund.
Let’s do an example.
Let’s say your essential fixed monthly expenses are $1,200 a month, you have a monthly minimum credit card payment of $250 a month, and you need your business to pay your $3,000 a month. One month of emergency fund savings is $4,450.
So, how many months of saving should you save?
Even though everyone goes on and on about having 3 months of emergency savings, focus on having one month of savings at first. Emotionally, it will feel more doable and one month is still enough to bail you out of some tough situations!
Step 2: Fund Your Account
Now that you know how much you need to save, it’s time to fund your accounts. This is what most people feel the most overwhelmed by.
There are different methods for funding your business emergency fund. I recommend trying several methods at once. This will accelerate your emergency fund growth and take the strain off any one area of your business finances.
Instead of trying to save at the end of every month, when your finances are exhausted, put small chunks of money aside every week. For example, if you decide you want to save $100 month for your business emergency fund, put $25 a week into your business savings. You’re WAY less likely to miss $25 than $100 and you’ll hardly notice that it’s gone.
Set up a recurring weekly transfer at your bank and let your emergency fund build.
Save in small daily digital increments
A savings app, like Qapital and Digit, quietly save money for you in the background. The point of these apps is to save small bits of money on a daily basis, which adds up over time. Digit and Qapital work a little bit differently.
Digit analyzes your income and spending habits and uses its algorithm to figure out what you can afford to save and transfers it into your Digit savings account. Basically, it makes savings decisions for you, before you can bail out and splurge on something you don’t really need. It also has a no-overdraft guarantee so you don’t have to worry about Digit draining your bank account.
This is a great option if you’re prone to spending instead of saving and have trouble holding yourself accountable for savings.
Qapital is another saving app where you can create rules that trigger savings. One of my favorite rules is the Round Up rule, which rounds up the change in your spending to the nearest dollar (or even $2 if you want to go wild!) and transfers it to your Qapital savings account.
You can also create rules based on other behaviors, like buying a cup of coffee at Starbucks or posting on social media. It’s really fun to come up with ways to force yourself to save!
Regardless of what app you use (or if you decide to use both like I do!) the idea is the same. Save in increments so small, you don’t even realize that you’re saving.
Save your income from a single product or service
If you’re worried about not having enough money to start saving, create a product or service and only use the income earned for savings. This way, your savings aren’t dipping into your regular revenue and affecting your ability to pay your bills.
Here are a few ideas:
- Create a small digital product to sell online and every time you make a sale, transfer that money into your emergency fund.
- Offer a short-term, low-cost service that doesn’t take you very long. Every time you’re paid, transfer that to your emergency fund.
- Take on an extra project one-time or every quarter and use that money to jumpstart your savings.
Let’s put it all together so you can see how quickly you can build your business emergency fund! Let’s say you’re going to do all three methods and you need to save $4,000. Here’s how your monthly savings could breakdown:
- Recurring weekly savings transfer: $25 a week which equals $100 a month
- Round up savings using Qapital: $50 a month
- Digit savings: $75 a month
- Digital product sales just for savings: $80 a month
- On-time project to jumpstart your savings: $1,000
In this scenario, your monthly savings equals $305 a month. After you apply your jumpstart saving of $1,000, the total amount you need to save is $3,000, which can be accomplished in just 10 months! That means in less than a year you can have one month of your business emergency funded saved.
Step 3: Keep savings until you have three months of emergency funds saved
This step is a funny one because it’s basically to keep doing what you’re doing. Once you’ve figured out the methods that work for you, keep going until you have three months of your essential monthly business expenses saved.
Step 4: Move your money to a high-interest savings account
Once you have a sizeable amount of money saved, consider moving it into a high-interest savings account. Since your business emergency fund is ONLY supposed to be used in emergencies, our goal is that it will sit undisturbed, for years to come. While it’s sitting, why not let it make money?
A typical savings account has an average annual interest rate os 0.01%. High-Interest savings account annual interest rates iare 2-2.5%. That’s a huge difference!
For example, if you move $12,000 into a high-interest savings account with a 2% interest rate, in the first year your money will earn $240! That’s money that will be added to your emergency savings account and you’re literally doing nothing! If you kept it in a regular savings account with a 0.01% interest rate, you would only earn $1.20.
Hopefully, I’ve convinced you that building your business emergency fund isn’t as hard or scary as it sounds. It’s totally DOABLE!
Want to get your hands on a bunch of cheat sheets and checklists for your small business? Download my free Biz Finance Survival Kit and take your finances to the next level!