Building an emergency fund is essential in both your business and personal finances. You can use this pot of cash as a cushion if you find that you are faced with an emergency expense so that you can stay out of financial difficulty. Unfortunately, you may need to pay for repairs, medical bills, or repairs to be done that your budget will not have accounted for. If you can’t make your budget stretch to cover them – your business will suffer. But not if you have an emergency fund. If you haven’t managed to save a lump sum yet, an emergency loan could help, but it is always best to have your own money available, so you can avoid debt.
Why should you save for an emergency?
Having funds set to one side to help you deal with an emergency that may crop up is essential – whether that’s as a cushion for your business’s finances or your personal cash flow. You should make sure that you set an amount of money aside each month. From this, it will mount up and be there to help you should you need it. You never know what’s just around the corner, whether that’s costly repairs that need to be made to a piece of equipment or software that your company cannot run smoothly without, or to help your business through difficult economic times, when income may not be promised. Generally, having a pot of savings means that you can get survive through difficult economic times without harming your cash flow.
How to get started
If you’re a new business, you may be wondering how you can get started – thankfully, it is simple! Think about how much money you have coming in each month after you’ve subtracted all your outgoings. Choose an appropriate amount from the profit you’ve made to be transferred into a separate savings account each month. It doesn’t have to be a large chunk; a small amount will soon mount up. Automate this process so that you don’t have to do it manually each time – this means you are more likely to stay consistent! As your business grows along with your profit, you can decide whether you want to increase the payments into your savings. After a little while, you will have created a cushion to help you out if your business falls on hard times.
Where to keep your emergency funds
So, when you’ve started saving, it helps to know where is best to keep your emergency funds. Many of us will simply keep them in a savings account that we can open with our banks – however, this is not always the best option. Here are a few of the best places to keep your emergency funds and the benefits that come with each.
High-yield savings account
A high-yield savings account is a better option than your standard, run-of-the-mill savings account. You can open one of these with your bank or do a bit of research online to find the best option for you. This type of savings account allows you to make interest on the money you deposit, so you will benefit from a little extra each time you transfer money into your account. They are beneficial not only because you can make money on your savings, but you can access your money whenever you need it.
Money market accounts
This is another great option when it comes to keeping your emergency funds safe. Money market accounts are similar to high-yield savings accounts as they allow you to make money on the cash you save. You can keep an eye on your account through online banking, and you can withdraw money easily. One of the setbacks that come with money market accounts is that they will come with fees that could have an impact on the money that you’re making in terms of interest. When looking for the most suitable money market account for your emergency fund, you should shop around to ensure that you’re choosing an option with the best deal.
Certificates of deposit
This type of account is quite different to the first two we’ve mentioned. Certificates of deposit or CDs are opened for a certain length of time, depending on what suits you best. It could be anything from a month to a few years. Over this time, you will earn a fixed rate of return on your deposited money, but you will not be able to withdraw it before your chosen period is up. If you do need to withdraw, you will incur a penalty fee – which defeats the point of making money on your deposits! However, you can compare various lenders and CD terms to get an account with better rates.