I stumbled across a study published last year that found that most Americans are not financially prepared for an emergency. Bankrate.com reports that a mere 24% of consumers have the recommended financial cushion of six months’ expenses set aside. What’s more: 24% of Americans have no emergency savings whatsoever. Financial experts are slightly surprised by these results, given the high rates of joblessness and unemployment that ravaged our society from 2007-2009. However, the recent challenges have made it more difficult for Americans to conserve money for unexpected expenses.
As the light at the end of the economic tunnel starts to peek through, I wonder what this information means for small businesses. Many businesses were forced to downsize or shut their doors altogether during the recent slowing (some might even say halting) of our economy. Is your business prepared to weather another economic storm?
It is smart to set aside liquid emergency funds for your small business – typically between three months (at minimum) and a year’s worth is an acceptable amount to stow away. The funds should typically be set aside for doomsday, but depending on your situation, they can be utilized to augment a somewhat unpredictable income stream or to carry seasonal companies through the off – season. An article from Yahoo! Business News points out that it might be smart to have a line of credit on hand for business emergencies – that will prevent you from panicking and taking out a high interest credit card or loan. Liquid cash, however, is always the safest option.
Another important question to ask is, are you as an entrepreneur and as a family member prepared to weather economic storms? As many entrepreneurs can attest, the personal finances of an entrepreneur and their family are quite different and much more volatile than those of a typical household. Financial planners recommend that households afforded by small businesses set aside one year’s worth of expenses, maybe even more if they rely on their business for health insurance.
It’s important that these funds, whether for business or for personal use, stay liquid – put them in a high interest savings account, a money market account, or a short term Certificate of Deposit. US Treasury Bills are also a great option. Many people find it convenient to send a percentage of their directly deposited paychecks into emergency funds online banks such as Ally.com, where they can see the savings grow but can’t instantly transfer them. (Online banks can provide higher rates instead of charging higher fees due to less overhead.) The important factor is to stash the funds where you know they won’t “sneak” into your checking account for that new office chair or that beautiful new tablecloth.
What steps have you taken to prepare your small business for a financial emergency? Has being an entrepreneur changed the way you handled your family’s finances?