Watch Gabe’s video, Preparing for the Unexpected as a Solopreneur, where he talks about 4 ways solopreneurs can be better prepared in times of crisis. Or, if you prefer the written word, read the article below. You can see this video and others on his YouTube channel.
As a self-employed professional, you do not have an employer to help you out during times of hardship or crisis. Under normal circumstances, you’re probably fairly financially secure and don’t have to worry much about paying your bills or taking care of your basic financial responsibilities.But during times of crisis, you might experience added pressure if you’re not sufficiently prepared for the unexpected. How long can you make it if your business is interrupted?
For many solopreneurs, the business would not survive if they lost their biggest client. Many others would experience business interruptions due to unforeseen circumstances, such as a cancer diagnosis, a major car accident, or the Coronavirus pandemic.
The lessons learned under pressure can help you weather the storm and prepare for the future no matter what life throws your way.
As a financial advisor for self-employed professionals, a big part of my job is to ensure my clients are prepared for threats to their financial security. So I often help clients determine how much emergency savings are adequate for their specific solo business and how to build an emergency savings account.
How Much Emergency Savings Do You Need When You’re Self-Employed?
Everyone should have an emergency savings fund, whether they have a traditional job or they are self-employed. Even though your income may fluctuate as a business owner, I don’t necessarily think your “job” is less secure than someone who is employed full-time. While losing a big client can be a big blow, more than likely you will not lose the entirety of your income in one fell swoop like an employee who loses a job.
That said, you may not always know when your next payday is coming and you do not normally have the option to apply for unemployment. So it’s important to take building your emergency savings fund seriously.
The exact amount depends on your specific circumstances. As a rule of thumb, I advise my solopreneur clients to shoot for six to twelve months of living expenses in reserve. By having this much cash on hand in your personal accounts, this will help ensure your bills are paid in the event of a disruption.
To pinpoint the exact number, you’ll need to get clear on your monthly expenses. Make a list of all of your major bills and expenses. Next, pull out your bank account and credit card statements to get a read on what you’re spending each month on incidentals, such as going out to eat, hobbies, personal services, debt, clothes shopping, and car maintenance. You can always tighten the belt as needed, but all-too-often people underestimate an appropriate goal.
How to Build an Emergency Savings Fund
Once you know how much money you need to cover your living expenses for six to twelve months, you can begin building toward that target amount.
Open a Separate Savings Account
Put the money aside in an account, separate from the account you use daily to avoid the temptation to dip into it. As you’re socking the cash away, it should be gaining interest in a high-yield savings account. This is important because the funds will be federally insured up to $250,000, and you can withdraw or transfer it quickly as needed.
Assess Your Starting Point
Start by taking an assessment of how much money you already have saved right now that you would be willing and able to use if the need arises. This should include cash and other assets that you can liquidate quickly and easily. But it should not include assets such as retirement accounts, real estate holdings, or any investments that fluctuate in value.
Boost Your Cash Flow
Unlike your employed friends who have to wait for a pay raise, you can increase your income by improving your cash flow. The higher your income, the easier it is to accelerate your emergency fund savings. Are there any business expenses you can cut? Do you have clients that you are undercharging that are unprofitable? If so, make a plan to raise those fees and revenues. Do you have new services or add-on services that you could offer? In simple terms, think about your business and how you can make it better.
Create a Budget
If you don’t already have adequate reserves, chances are you have not prioritized budgeting or saving. Even if you are responsibly living below your means, you can probably cut back quite a bit more without even feeling the pinch. Get rid of unused subscriptions, cut back on eating out to only a few times a month rather than multiple times a week, and give yourself a set spending limit to see how it feels and adjust from there. With creative budgeting, you might be surprised at how quickly you can amass sufficient emergency savings.
Pay Your Monthly Savings Bill
Most people make the mistake of saving a portion of whatever is left over at the end of the month. After you’ve spent to your heart’s desire, even if you try to stick to a budget, there may not be much left. Instead, reverse engineer the amount you want to save against the timeframe you want to give yourself to reach the goal and create an imaginary monthly savings bill. Treat it just like a mortgage or car payment; it’s due at the same time each month and it isn’t optional. Even better, automate the transfer so you don’t even have to think about it.
If you’re self-employed, you have a lot of responsibilities on your plate and creating financial security is a big one. You can’t afford to ignore the need for creating an emergency fund. We’ve all had friends or family members that have faced unexpected hardships if we haven’t experienced one ourselves. The impact of the coronavirus on the livelihood of many people is only one example of just how much things can change overnight.
I have created a free worksheet to help you inventory and evaluate where you are at with your preparedness. Click the button below to get your free worksheet.
If you need help mastering your finances so that you can create the freedom to build the life you want, you can email me at email@example.com or schedule a consultation appointment today.
Gabe Nelson, CFP®, is the principal and founder Gabe Nelson Financial, Inc. (GNF) is a Registered Investment Advisory firm based in Sioux Falls, SD. GNF offers fee-based financial planning and investment advisory services to solopreneurs and self-employed professionals. Clients receive personal attention from a financial planner dedicated to helping them reach short and long term financial goals with specialized insight into the particular challenges and opportunities that arise in entrepreneurship. Gabe can be reached at 605.553.9180, via email at firstname.lastname@example.org, or on the web at gabenelsonfinancial.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.