Why You Need a 'Freedom' Fund
When I took a leave of absence from Harvard Business School to launch LearnVest, I knew it was a risky move. So before I started putting my business plan into action, I made sure to stash nine months of living expenses--accrued during my few years of working on Wall Street--in a savings account. That money wasn't operating capital for the business. It was money I could tap to pay for any unexpected bills that cropped up in my personal life.
Having that cushion played a huge role in those early days. It liberated me. Knowing I had fallback savings allowed me to stay laser focused on building LearnVest. The last thing I wanted to be thinking about was--and still is--my own financial issues. Four years in, even though LearnVest is growing rapidly, my personal "freedom fund" remains a valuable strategic asset for me. I'm confident that when--not if--one of life's unexpected expenses crops up, I'll be safe and secure. That safety net gives me more confidence navigating the daily high-wire act of entrepreneurship.
That said, I understand not everyone has emergency savings today. A few years ago, a national survey found that about two-thirds of Americans didn't have $1,000 set aside to cover unforeseen expenses. Another study reported that nearly one in four respondents with income from $100,000 to $150,000 said they probably couldn't come up with $2,000 in 30 days to cover an unexpected expense. There seems to be an unwritten code of entrepreneurship that suggests every available penny be invested in building and expanding your business, so the emergency savings rate for business owners could be even worse than that of the general public.
As an entrepreneur and a Certified Financial Planner, I'd encourage anyone who doesn't have a freedom fund to consider its power to help you run your business better. Knowing you have the cash to cover unexpected large bills can be an important stress reducer. And there's a more sobering reason to create such a fund. While I believe if you give 110 percent to your company many good things will come, about half of businesses survive five years and about one third make it 10 years. As unnatural as it may feel to invest precious dollars in yourself and not your business, those survival rates make a strong case for why a freedom fund can be essential. If your business ultimately fails, it may take you longer than you expect to find a new job or launch a new venture. Your freedom fund can be a bridge during a transition to help cover your essential bills. And it will let you sleep at night.
If you're single, I recommend you create a freedom fund that covers up to nine months of living expenses, and if you're married, up to a year. If you have children, consider saving more. Yes, those targets are well above the three to six months you may have heard about. That can make sense for folks who work for someone else. But it may not make sense for you.
If you've got the cash handy to set aside in a freedom fund, that's great. Otherwise, think about making the commitment today to start saving. An easy way to do this can be to set up regular automatic transfers from your checking account into a separate savings account. Treat your freedom fund as a monthly utility bill. I'd argue this isn't a luxury; it's a necessity.
Generally speaking, you'll want this money to be 100 percent stable and available at a moment's notice. Consider a federally insured deposit account at a bank or credit union. These accounts yield almost no interest, but that's irrelevant. Safety and liquidity take priority. As your deposits build, my hope is you'll experience a valuable payoff--peace of mind that, in turn, may allow you to put even more energy into your biggest assets, you and your business.
Exactly How to Structure Your Emergency Fund