Protecting Yourself: The Emergency Savings Plan

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Small business owners are so very passionate about their work. They put all of their energy into their operations. However, I get a little scared when I see these hard-working people not safeguarding their personal needs and assets. Even though you don’t have the benefits offered to you by an employer, you should have a savings plan, a retirement plan, an insurance plan, and financial professional to help you with these.

This week, we are going to focus on the safeguarding of your “now”, your future, your well-being, and your sanity… in other words… your personal financial plan:

• Now: Emergency Savings
• Future: Retirement Plans
• Well-being: Business Insurance
• Sanity: Hiring a Professional

Now, keep in mind that this is for your PERSONAL finances. This is not your business financial plan. For that, you can reference the 13 step business plan.

First things first…

I spoke with Stacy Willoughby, Financial Advisor for Waddell & Reed, and got her thoughts on how a business owner can better prepare themselves financially. Her tip is to “pay yourself first.” We often make the mistake of paying everyone else before we pay ourselves. I know I’ve even made the mistake of investing in equipment before taking a salary cut for myself. But, if I’m not paying into my personal financial needs, then my business isn’t working. After the initial start-up of your business (and hopefully during your start-up phase), you need to pay yourself a salary and pay into saving and retirement plans.

Stacy feels that it’s important to take care of your personal financial needs. Here is some great advice that she shared with me:

• Pay yourself first.
  “I know that you have heard this before, but consider how empowering it would feel to contribute to your retirement plan and emergency reserves before you pay your rent! It encourages regular savings habits.”
• Make it regular and automatic just like all of your other bills.
  “It can feel impossible especially as a small business owner! After the cost of rent, equipment, marketing, and all those other business expenses, it can feel like there is nothing left to save. It’s a matter of self-care and taking better care of you. Paying yourself first establishes you and your business as the priority.”
• Adjust for irregular income streams.
  “Many small business owners I know are reluctant to make any bill automatic because their income is irregular. Self-employed people that are paid sporadically may find it is easier to set aside a percentage of all income. For example, if you just got paid $3000 for a wedding shoot, take 10% and pay yourself first. Half of it could go towards your emergency reserves and half could go towards your retirement plan.”

The Emergency Savings Account

Before squirreling money away for the future, start saving money for the “now”. This will be your emergency plan should anything happen to you or your business. Advisors will differ on the amount recommended for savings plans. Some people advise to save money equivalent to 3 months of spending; others advise on 12 months of spending. (This is the amount that would cover you for 3 or 12 months of personal and business expenses.)

Start with something that is EASY for you to ACHIEVE. 12 months of cash flow may seem insurmountable to you, start with $500, build up to $1000, eventually to $5000 and so on. This should serve as a cushion to meet the unpredictability of the economy and of life in general.

Once you have a cushion that you feel proud of, you are ready to start thinking about retirement.  Ahhhh, retirement!  We’ll cover that in tomorrow’s post.