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Why should I set up an emergency fund exactly and how much money will you need to store in it? According to some experts, it should cover at least €1000,- if it’s your personal finances. But in most cases, this will not be sufficient for business owners. Not one business owner is the same, and it can depend entirely upon your own situation how much money you need to store in it.
In most cases, you will need to have more than 1000,- in an emergency fund because your business income can be less consistent than when you work for someone else. If you’ve just started out, however, don’t worry about this too much if you can’t immediately put in a lot of money in your emergency fund. This will build up over time. The most important goal of an emergency fund is that it will minimize unexpected expenses and maybe even harmful consequences on the finances of your business. Even when you start small this could possibly prevent you from very severe consequences.
But that said – having enough in your emergency fund is for sure a more soothing prospect. When there’s not enough you will need to get creative and find other ways to make more money (or you can be lazier and read our blog on Earning A Little Extra For A Rainy Day). All of this is eventually to avoid that you need to get back to your old traditional job.
The amount you should keep is not an exact science. But when you take the starting point of 1000,- for personal finances, this is usually made up of a couple of months’ worth of expenses. We would, therefore, recommend that when it comes to your business, in an ideal situation, you should set aside between three months’ and a year’s worth of expenses. Determining how much you need (because this is still broad), depends on your type of business, your industry, and your company’s culture. In some cases, it may be more likely you’ll encounter unforeseen financial damages.
Hopefully, you’re convinced that an emergency fund is not a luxury but a necessity. While the idea of having a lot of money stored away for some event that might be happening in the future may not be very appealing, it will be extremely welcome once you’re facing more difficult times.