Are you Prepared in a Cash Emergency? - Planning not Panicking is the KeyBack
The New Year often brings extra financial challenges; the distance between paydays seems longer than ever; your debtors & their accounts departments have somewhat longer holidays than most!
But no matter the time of year there are often times you need money. The roof is leaking. You have to pay a supplier and your customers have been late paying you. One of your company vehicles is out of action and you need it repaired – fast.
There are many reasons you might need emergency cash both for personal reasons and for your business. Rather than panic or use a credit card to pay unexpected bills the best plan is to have a stash of cash – an Emergency Fund.
Cash is always important to have whether it's for an emergency or to exploit an opportunity; with cash you can take the time to consider the best course of action.
I am sure the mere thought of amassing thousands of pounds can be stressful but you shouldn't let that stop you. Here's why and how you can make an emergency fund a priority.
Why an Emergency Fund?
Life is made up of "what ifs." An emergency fund will help you be prepared.
You always need to have funds available for those unexpected events. If you don't have an emergency fund you could end up increasing your debt or it could hamper your credit score or it may simply mean you may not be able to pay for really important things.
Business owners have to consider both the needs of the business and their own personal needs.
A personal cash reserve is essential if you have your own business. You may need to pay for basic living expenses if your business suffers and you have to reduce your salary to leave more money for the business's needs.
From a business perspective it's ideal to have a credit line that can be tapped for emergencies and to help level out your cash flow over time. Without a line of credit your business can build a cash reserve but this can be harder and can involve a significant amount of money depending on the size of your business and the critical payments that would be needed to keep the business moving.
Tip: organize that line of credit now when you don’t need it so it’s available when you do.
As Robert Frost famously said: “A bank is a place where they lend you an umbrella in fair weather and ask for it back when it rains.”
How Much To Save?
How much you need depends on how much you spend and the reliability of your income sources.
The general answer is that families should have between three and six months' worth of living expenses in an easy access account.
But for the business owner & their family the stability of the business must come into play.
As a business owner your income is likely to be volatile. We at Holborn usually recommend all of our clients including those who own businesses have at least one year's worth of lifestyle expenses set aside.
It is however a lot harder to calculate how much cash a business needs to keep in reserves.
Whatever amount it is should be available to not just to supplement a volatile income stream but it can also be used to allow a company to target opportunities. The extra money can simply carry a company if they're in a cyclical business.
Once you've decided how much you'd like to save you need a place to put it.
These funds are not meant to ride the stock market or earn very much in interest. The goal is for the money to be there liquid and available when you need it.
How To Get Started
If you don't have an emergency fund you need to start small.
This is one of those times when the phrase "pay yourself first" is critical to success. Set up payroll deduction or an automatic savings plan so that your emergency fund contributions are made before you have a chance to spend them.
Make it part of your budget or spending plan or consider it a non-negotiable expense by doing so your chances of success will be much higher.
To discuss any matters arising from this Briefing Note please contact Holborn Financial on 020 8946 8186 or by email.
This Briefing Note is provided for information purposes only and does not constitute any form of financial or investment advice. We believe the information to be correct at the time of going to press but we cannot accept any responsibility for any loss to any person as a result of action or refraining from action as a result of any item herein.
Printed and published by ©Holborn Financial Limited authorised & regulated by the Financial Conduct Authority. January 2017