Why Entrepreneurs Need an Emergency Fund

Financial planners strongly recommend that you set up an emergency fund. Resist the temptation to skip this.

If you don't have an emergency fund set up yet, get started now.Your business may have other expenses but if anything you need an emergency fund twice as badly as an entrepreneur.

Make It Cash

Ideally, you already have more than one source of income, but if you suddenly lose one of them, it might take you some time to source more funding.

You’ll be able to get through any period of uncertainty when you have an emergency fund that’s equivalent to three to six months of expenses in cash. 

Without that stockpile of cash, your entrepreneurial endeavors might be compromised one way or another — whatever money you would spend on supplies for your business would instead need to pay for basic living expenses.

Surprises Calling for an Emergency Fund

The temptation to dip into your the money that pays for your business supplies also comes up if you don’t have money set aside for any of a half dozen other emergencies scenarios like:

  1. Sickness, disability or other health surprises that you have to pay for out of pocket due to your insurance deductibl
  2. Car trouble, and specifically the cost of repairs before you meet the deductible on your automobile insurance
  3. Natural disasters and other climate-related situations may require you to spend money out of pocket repairing your home, belongings — or the first two items mentioned above
  4. A family member may become ill or fall on hard times
  5. You may need to move or relocate suddenly due to any of the above mentioned factors, the whim of your landlord, or to capitalize on a new revenue opportunity
  6. Surprise events or occurrences could arise, including pregnancy, funerals, or weddings, not in that order, of course.

No, You Can’t Pay for These Surprises with Stock

None of the above mentioned surprises will accept your stocks as a form of payment — so if you have an investment portfolio worth the equivalent of at least three to six months of your living expenses, you really shouldn’t consider these assets an emergency fund.

You might rationalize that you can sell your investments for cash when you need it but the proceeds of the sale typically take two business days to be released to you, depending on the type of investment.

Furthermore, selling your investments in an emergency might result in you not getting the best pricing for them. When you can find the best time to sell them at a high in order to free up the cash for your emergency fund, then you are much better off — as long as you remember not to touch the money until the emergency arises.

Go for High Yield

A nice compromise measure would be to put the cash in a high-yield savings account or money market — the former should enable you to withdraw the money right away if an emergency arises. This detail is something to check when you read through the fine print upon opening the account. Make sure you can pull money out quickly.

If you need to get started setting up that emergency fund from the beginning, tee up automated contributions through your bank. Budget for a recurring amount to go into the account and eventually you will have enough to count as an emergency fund.

Once you set you set up an emergency fund, you might feel some peace of mind from knowing that you have some protection against the unknown. That can have a de-stressing effect that may help you focus better on your core business.