Building a rainy day fund

| August 20, 2009

In recent months I’ve covered steps to help you survive the downturn in the economy:

• Set clear written goals.
• Focus on the bottom line.
• Eliminate or minimize debt.

Focusing on the bottom line requires looking at your profit and loss statement, and it’s time to do that again for the next step: Build cash reserves.

Part of reaching the bottom line goal is to examine each line item on your P&L statement and work to lower that cost. Your largest and most controllable cost is fuel. Fuel has been relatively inexpensive in recent months, but you know that fuel costs are on the rise again.

No matter the cost, if you’re not doing all you can to eliminate idling and to save fuel in other ways, you’re missing out on big savings.

As you lower fuel and other costs, use that extra money for the next goal, to eliminate or minimize debt. Once debt is gone or at a manageable level, put that extra money toward the fourth goal and start saving it.

To maximize savings, find a good Internet savings account paying an interest rate higher than your local bank. In today’s market, even the best-paying savings accounts offer a comparatively low rate. This is a competitive market and the best way to find out what’s going on at any given time is to do a Google search for high-yield savings accounts.

As I was writing this article, I did just that. Here was the best offer I came up with, which is not to say it’s still the best by the time you read this. Everbank was offering a 3.01 percent three-month bonus rate, plus a 2 percent first-year annual percentage rate for balances up to $50,000. This bank pledges yields within the top 5 percent of accounts based on the Bankrate.com National Index.

Once you open this online account, you can link it to your current checking account. Decide on how much you are going to put into this savings account each time you get paid. Start with at least 5 percent and increase it to 10 percent or more as your income increases. Then each time you’re paid, you can transfer that amount into your high-yield savings account. The hard part is trying to forget that it’s there and growing, but it needs to be treated truly as an emergency fund.

Most financial planners recommend having three to six months of basic living expenses set aside in this emergency fund. Since you are a small business owner, you should also add the cost of your highest dollar repair. For an owner-operator, that’s a major engine failure. Figure on adding $15,000 to $20,000 to your emergency fund to cover that cost on top of your basic living expenses.

You’re not going to be able to do this overnight. But set the goal, keep your head down and work through these tough times. Before you know it, you’ll reach your goals, and be in great shape to weather any storm.

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