Every business can benefit from setting aside money into a rainy day fund. In the event of a disaster, such money could help to pay for any reparations. This could include paying off a lawsuit, covering employees wages during a period of closure, replacing broken machinery or making repairs to your premises.
The following post explains in more detail why you need a rainy day fund – and how you can go about setting one up.
You can’t always plan for disasters
Preventative measures can be taken against some disasters. For instance, investing in security measures could help to reduce the risk of getting burgled or being the victim of a cyberattack. Alternatively, it may be a wise idea to invest in flood defences if you have an office based in a high risk flood zone.
Unfortunately, you cannot plan for all disasters. Just take the pandemic as an example – before 2020, few businesses would have ever predicted such an event. Those that had a rainy day fund set aside have been able to use this to keep their business alive. For businesses that didn’t have savings set aside, it’s been much harder to deal with the closures and restrictions.
In essence, a rainy day fund is a useful form of financial backup for those hard-to-predict disasters. If a surprise storm hits and you need to pay for storm restoration, it’s unlikely you’re going to have storm insurance if you don’t live in a high risk area. A rainy day fund could be a more flexible option – serving as an all-purpose form of self-insurance that you can dip into if necessary.
Saving is a better option than borrowing
When disaster strikes, some businesses simply take out a loan. However, saving up a rainy day fund has many benefits over borrowing money:
- A rainy day fund is cheaper. You won’t have to pay interest (in fact, you can earn interest by putting your money into a savings account).
- You don’t have to worry about finding a lender that will approve you. If you have a low credit score, savings are a much better option.
- When using savings, you don’t have to owe anyone. This means not having to pay back the money in installments.
How to set up a rainy day fund
Ideally you want to put your rainy day fund into a high interest savings account. This should be an account that you can still access urgently when necessary. To prevent you dipping into this money for other purposes, you may want to look into savings accounts with withdrawal penalties. You can compare business savings accounts online to find the best interest rates.
Building up a rainy day fund takes patience. Put as much money into it initially as you can and then try to contribute money on a monthly basis to build it. You should try to keep a minimum of $500 in this account so that you’ve always got some money to fall back on when disaster strikes.
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