Small Business Emergency Funds for Freelancers and Solopreneurs

It's often thrilling to be your own boss and pursue your dreams. Who doesn't want to wake up every day and do what they love for a living? But pursuing your dreams comes with unpredictable income. Running a small business is risky; a single financial emergency can spell disaster. This harsh reality became clear during the COVID-19 pandemic when more than 34% of American small businesses shut their doors for good.

The problem is simple: Most small businesses operate on razor-thin margins. Even a short disruption in cash flow can leave you feeling unsteady. That's why having an emergency fund is so critical. It's the difference between surviving a crisis and losing your livelihood altogether. With reserves to draw from, you have time to recover from those financial blows.

But creating and maintaining an emergency fund is easier said than done. Putting money aside when you have a million productive things you could do with it is one of the hardest things to do. And yet, the peace of mind it provides is invaluable. Here's a detailed guide for creating an emergency fund for self-employed individuals.

What is an emergency fund, and why do small business owners need one?

An emergency fund is the money you set aside for unexpected events. Unlike money you save for business expenses, such as taxes, you only dip into it when absolutely necessary. So, what could be considered an emergency? 

• Income fluctuations: If you're self-employed, your income can feel like a rollercoaster—exhilarating highs one moment, daunting drops the next. An emergency fund takes the weight off your shoulders because you have a buffer for those slower months.

• Losing a major client: Losing any client can be jarring, especially a large one. An emergency fund provides a much-needed runway while you work to replace the client or explore new revenue opportunities.

• Unpaid invoices: You might grapple with unpaid invoices, and you aren’t alone. Independent Economy Council research reveals that 74% of freelancers don't receive their dues on time. Your emergency fund means your operations won't grind to a halt even when you're chasing those late payments.

• Health emergencies that keep you from working: When you are your business, health scares can disrupt your business’s operations and income. Your emergency fund covers expenses, providing you with a stress-free recovery.

• Unexpected significant expenses: Equipment crucial to your operations can break down. For instance, let's say you're a graphic designer, and your computer suddenly crashes. Unless you have a backup, you can't do your work. Replacing the computer can cost up to $3,500. Your emergency fund covers these costs without disrupting your business cash flow.

Steps for building an emergency fund for self-employed individuals

Emergency funds are incredibly valuable, but that doesn't mean they're easy to build. These steps will help you as you build your financial safety net.

1. Calculate how much you need in your emergency fund

When you set a goal, it’s important to keep in mind that you won’t be able to save for it all at once. But when you break it down into smaller, manageable milestones, you’ll find it easier to achieve.  

Even more important is how much you need to save for an emergency. Experts recommend having an amount equivalent to three to six months of expenses. Of course, the more you save, the better prepared you'll be. You can do this by looking at your business bank account. Check your spending over the past few months to see how much you're spending on average each month.

2. Decide where to keep your emergency fund

Choosing the right place to store your emergency fund is important for separating your emergency fund from your everyday account. Otherwise, you might be tempted to dip into it. Despite what movies may make you think, a suitcase under your bed isn't the best place (and less safe than you think!).  

By definition, emergencies are unplanned events that require quick action. You want an account that allows you to withdraw your money whenever needed to deal with emergencies quickly. You want to be sure that funds will hit your account when time is of the essence.

3. Automate savings to your emergency fund

After you’ve set your savings goal, the next thing you should do is decide how often you want to save. You have two options: whenever you get paid or once a month. Next, contact your bank or use its online banking system to set up automatic transfers from your checking account to your emergency fund savings account. You can specify the amount you want to save and how often.

Now and then, though, you should check how your emergency fund is growing. If you start making more money or have new expenses—you can adjust the automated transfers if your situation changes. On the other hand, if you have dipped into it for an unexpected expense, you may need to spend some time rebuilding it.

4. Trim unnecessary expenses and save more

It takes time to build up to the savings goal. A great way to kick start that is to trim unnecessary expenses and funnel that money to the emergency fund. There are several things you can do to reduce your costs:

• Review your spending: Open your bank account and scroll through your expenses, such as purchases. Are there any non-essentials you can eliminate? It might mean cutting back, but it's worth it.

• Consider cheaper alternatives: Regardless of your industry, you probably use several business tools or services. But are there more affordable or free options providing the same value? Are there more affordable plans with your current provider? Does your current provider offer add-ons you could use? For example, suppose you're using Found as your business bank but not using its contractor management features. You can cancel your 1099 payroll software subscription and use Found for your contractor management since it's free!

• Negotiate with suppliers: Don't hesitate to renegotiate contracts with your suppliers or service providers. Chances are they'd rather offer a discount than lose a customer. The worst they can say is "no." It never hurts to ask, and you stand to make significant savings if they say "yes."

5. Save money from unexpected windfalls

Treat financial windfalls as opportunities to grow your emergency savings faster. Unexpected financial gains, like a lucrative project or a tax refund, are golden opportunities for savings. It may be tempting to splurge on a vacation or buy the latest iPhone you’ve had your eye on—after all, you've certainly earned it. But disciplining yourself to save even a portion of these surprise funds will benefit you in the long run.

6. Explore additional income streams

A surefire way to save more money is to make more money. Best of all, this additional income isn't just padding your emergency fund. It also diversifies your income sources, making you less reliant on any stream. Consider exploring freelance opportunities, online tutoring, or even selling handmade products.

Create an emergency fund with Found

When growing your emergency fund, remember it's a marathon, not a sprint. Even small, regular contributions can snowball into a hefty safety net over time. Don't stress if you're starting small—what matters is the habit of consistently setting aside a portion for emergencies.

That's where Found and our pockets feature comes in. Pockets give you total control over your spending and saving, so you always know exactly what you have and what you owe. With pockets, you can create a dedicated emergency fund that won't get mixed in with your daily operational funds. Think of Pockets as your digital piggy bank, helping you set aside funds for a rainy day, no matter how sunny it looks right now.

Ready to take control of your financial future? Sign up for Found and start creating your emergency fund with pockets today.

This material has been prepared for informational purposes only.