We’ve all heard the saying, “Cash is King” an expression sometimes used in analyzing businesses or investment portfolios. It may refer to the importance of cash flow in the overall fiscal health of a business. 

Even more so now it is important to build an emergency fund for both personal and business. Let’s talk about this.

Personal emergency fund:

If you don’t currently have an emergency fund, now is the prime time to generate a decently sized one to kick-start your financial backup.

• Open a high interest bearing savings account or better yet, call your Investment Adviser.
• Open a 529 plan if you have children
• Invest more in you insurance policy

But if your income is stable and you don’t need the money for immediate relief, how do you use it? Donate it to charity? Save it? Spend it? And if you spend it, can your dollars work harder in one place versus another?

Maybe you can do one of these things, or—more likely—a combination of a few. Here’s a top-down look at how you can spend this money to help yourself and others:

• If you have a steady income stream but have high-interest debt: Pay it down. Paying off debt now has a clear long-term return. The more you pay off now means the more you save in interest that you’d otherwise have paid to your bank.
• If you’re financially secure and want to help the economy: Spend it at local businesses you don’t want to see close. Buy gift cards if your favorite businesses are closed. Find ways to shop even if the business is “closed.” Shift your shopping from big-box stores to local merchants. Keep your memberships to small businesses, even if you can’t currently patronize them. If you can, continue paying your house cleaner, nanny, personal trainer, hairdresser, pet sitter, or whomever you pay on a regular basis under normal circumstances. They’ve likely otherwise lost their income stream, with no one paying for their services.
• If you’re financially secure and want to help others: Donate it. There’s no one best charity to support. “Ask yourself, ‘What is most important to you? Where do you want your donation to have the most impact?’ Philanthropy is highly personal and there is no right answer.
  

Most experts agree that having three to six months’ worth of expenses in cash is a good rule of thumb. But if you can save even more in cash, you’re in an even better position. The pandemic doesn’t yet have an end date, so if you can, err on the side closer to six months for now.

Business emergency fund:

There’s no denying it. All business owners need a solid emergency fund. While you are in charge of your own income, it’s bound to fluctuate and you may have some rougher months as a result.

This is why it’s best to be prepared with a fully funded business emergency fund that you can fall back on during lower income months. The term ‘fully funding’ is subjective especially for business owners.

Most businesses fail due to a lack of preparation for the inevitable. Below are three major reasons your small business needs an emergency fund.

• Emergencies
• Cash flow issues
• Capitalize on opportunities

If you’re self-employed or run a business, how big should your business emergency fund really be to provide peace of mind and help you tackle whatever life throws your way? Here are a few questions to ask yourself to help you decide.

• How Much Cash Have You Been Using? Start by considering how much money you’ve been spending in your business over the past few months. What are your monthly business expenses? Also, what do your monthly personal expenses add up to? If your business is your sole source of income, it’s best to factor in your personal budget as it would be in jeopardy if your income decreased at all.
• How Long Would it Take You to Bounce Back? If you suddenly lost a source of income in your business, how long would it take you to bounce back and replace it? For my business, I feel confident that I could replace a lost source of income within 3 months.
• How Big Should Your Business Emergency Fund Be? I’d recommend setting aside an amount that makes you feel comfortable and brings you peace. For small business owners, it’s best to set aside anywhere from 5 months to 12 months worth of expenses and for self-employed you can start with 2 or 3 months, in my opinion.

As you embark on your journey of grounding and fortifying your personal and business by establishing a solid emergency fund, remember to start off small. Set short, realistic goals and remain steadfast. Look for ways to lower expenses and save more during high volume seasons. Be frugal and stay away from risky deals until you have reached your emergency fund goal.