An Emergency Fund is, in principle, an “insurance” that is created with the purpose of protecting our personal or business finances from unforeseen events on rainy days. Said fund is born from a saving or reserve of money that does not have a specific destination, but a specific way to use it: cover those expenses that are not planned and that must be attended urgently in time.
Why have an emergency fund?
There are moments in your life when everything goes well for you, and both the personal and the professional accompanies you. But the truth is that there are aspects, moments and circumstances that are beyond our control, and that end up breaking with this well-being. You lose your main client, a new tax, a new material to buy… having an emergency fund can mean that this type of unforeseen -but common- situations does not become a big problem.
In addition to that, it helps to avoid getting too much debt, since if it is used in a time of need, the company will not be forced to take out a loan to cover debts.
It will also prevent company shares from being sold at bad times in the general economic environment, gaining time for the market to rise and they can be sold at a better price.
How to calculate an emergency fund?
Building an emergency fund requires a high level of commitment and perseverance. The first exercise is to define the size of this reserve, which will be proportional to the size of your risks and the impact they have on your finances. For this reason, it is important to identify what these possible risks of the company are and, in parallel, have a good income and expense budget. The result of the size of your fund will be calculated by subtracting the expenses from the monthly income.
Regarding the amount to be available in said fund, experts recommend accumulating money equivalent to between three and six months of normal expenses, that is, enough to pay all expenses during that period of time. Keep in mind that this period may vary according to your personal circumstances, therefore, if you have staff under your charge, you should add three months of covered expenses for each team member who reports to you.
Remember that building a fund takes time and that good habits will help you have better control and perseverance. The main enemy of saving is ourselves, therefore it is important to have mechanisms that protect our savings from mismanagement, temptations and expenses that are not really urgent.
Since using the money you have in your checking account can be very tempting, open a savings account and establish a fixed monthly amount that you will allocate for that purpose. In this way you will have separate funds for emergencies, and those for travel, leisure, etc. Discipline, perseverance and preparation are the specific qualities needed to carry out this heavy task and make it as successful as possible.