An Emergency Fund For A Rainy Day

As a business owner, real estate agent, accountant, bank manager, web developer, or in any other line of work, it is very important to have a financial plan and keep to the plan to create an environment of proactivity verses reactivity. The best line of defense of creating an environment of proactivity and a barrier against being reactive in financial planning is having an emergency fund set in place. An emergency fund can cause a great amount of success from a business just starting out to an accountant living life with many different financial responsibilities.

Why an emergency fund

The emergency fund is an amazing way to become financially stress free from any outside financial influences that the world can throw out. It helps give a buffer to those influences that create hardship when financial obligations need to be fulfilled and an unexpected life problem comes up. To have the knowledge of money sitting in an account that is safe and ready to use when it is really needed instills a feeling of peace into a person or business.

How big of an emergency fund

There have been many different thoughts thrown around about the size, or amount set aside for an emergency fund for life’s, or a business’s unexpected hiccups. The one best practice of many different businesses and other financial advisors is having three to six months of annual income saved. In business this emergency fund is called retained earnings. For an example, if someone were to have an annual net income of $100,000 the emergency fund should be $25,000-$50,000. As a business owner and operating a business the retained earnings are saved from the net earnings that are not paid out as dividends. Just note the bigger the emergency fund or retained earnings, the more confidence and decreased stress that there is going through life or business unforeseen financial hardships. These financial hardships come more often to companies, or people that hold too much debt.

Related: No More Twinkies: Five Lessons for Real Estate Investors From the Hostess Bankruptcy

Where to put the money

In many ways an emergency fund is a saving grace as I spoke about above, but the money should be placed into a separate account that is not easily accessible to keep the ease of using the funds low. An advantageous place for this account would be a savings account that is linked to a debt card that only is used at the bank teller’s window and not an ATM. This strategy gives the saver, or business owner a harder time to get to the money and discourages the act of using the funds.

Related: The Simple Saving Strategies That Will Jumpstart Your Investment Account 

When to use the funds

There are very few instances that these funds should be used to solve a problem, or help in an emergency; hints the words emergency fund. In a personal emergency, the funds should be used if a close family member gets ill and needs the funds to help with medical treatment, to help fix a vehicle that unpredictably stops working for one reason or another, or even a personal illness. In a business the retained earnings should be used for similar situations, which could be anything from a main machine that runs the factory goes down unexpectedly, a massive loss to the information system the company is using to run it’s operation and a technician needs to fix the problem, or some type of natural hazard causes damage to the building that the company runs their operation in and it needs to be fixed to get production running again. These are extremes; however, the emergency fund gives the ability to maneuver through unforeseen issues without reacting to the situation by trying to come up with the money and ultimately using money that was needed to pay rent, pay an electricity bill, pay for food to eat or pay employees.

As more responsibilities crop up with anything in life, or business, the advantage of having access to an emergency fund gives people and companies more confidence in a world of many different external influences. Once responsibilities grow the outside influences grow due to more variables, and the only defense against the outside influences is the personal and business internal influence on that cash position.