The Emergency Fund

The EMERGENCY FUND

Christine Odle

March 2020….  Who remembers where you were the day they said, “Close your doors!”  As traumatic as where were you the day of 9/11/01 or when Kennedy was shot.

Did you say to yourself, “Oh, no problem, I have a fully funded Emergency Fund!”  or “I have enough to pay rent/office space and keep paying my team for 2-3 months.” Or, “Oh, Hey, let’s take a staycation; I’ll go home and catch up on honey do’s and reading!”  Thinking, I have enough in my Emergency Fund, and Sinking Fund combined that I can close up for several months and be just fine!”

Very few were in this situation.  In fact, nationwide, the average consumer debt in the USA jumped from $68,000 to $145,000 in just one year due to this COVID-19 pandemic.  Significantly worse than the Great Recession 2009-2011 – back then, we slowed down our spending.  During the pandemic, we increased our spending…

As a professional CFO / Business Financial Coach, I am a fanatic for Emergency Funds and Sinking Funds, and even I did not think this would last this long.  So, what can we do to make sure we are ready for the next massive life Emergency?

It is time to focus on precisely what to do with each dollar that comes into our businesses.  We can only go back to see how we would like to be different for the next time, we cannot change the past, but we can certainly change the future. 

OK – So, where do we start?

The first thing to do is look at your business expenses, what I call the FOUR WALLS (you might have an octagon – 8 walls).  What are the top-line items you must pay for even if you cannot open your doors?  Typically, this would be payroll (at least for you, the business owner), rent/utilities, insurance, taxes, building payments.  These are the items that will keep your ability to stay open or reopen quickly in an emergency and if a shut-down happens again. 

Second, based on that number for your FOUR WALLS, how many months will you need to give you some security.  Take the number of months times the amount you need – and this is the basis for your Emergency Fund.  The best way to get you there is to start making monthly payments to the Emergency Fund as if it is already an emergency and get that account built up quickly. 

Then, in an Emergency, we switch into Emergency Mode when needed – all other business expenses STOP.  Even if you have Credit Card payments or other monthly expenses, these are not emergencies.  Yes, you might get behind, but you will keep your doors open so that you can continue to earn an income.  After the Emergency is over, you can go back and bring those payments current.  Don’t get me wrong, I’m not a fan of not paying your bills – but I’m also not a fan of you not eating because you are paying a credit card bill.