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Your bank balance feels like safety right up until the month it isn't.
I have always stayed liquid in my business, and I know how much calmer a decision feels when I am not making it from a corner. But I have also seen the mistake that sneaks in: one pile of cash that is supposed to cover the company and the household, so you can never tell which one is actually in trouble. My grandmother's retirement question assumed I would be okay later. Liquidity is how I made sure I was okay on a random Tuesday.
Why do founders need two cash buffers?
Because a business and a household fail in different ways.
A slow month at the company is a revenue problem. A medical bill, a broken car or a lost client at home is a personal problem. When both come out of the same account, a rough patch in one quietly drains the other, and you only notice when you can't make payroll for yourself.
What does the data say about small business cash?
The JPMorgan Chase Institute studied the transactions of 597,000 small businesses and found the median small business held 27 cash buffer days, meaning enough cash to cover about 27 days of outflows with no money coming in.2 That study is older, from 2016, and I am citing it as a reminder of the pattern, not as a benchmark for your business. Hold your own number up against it.
What about households?
The Federal Reserve's survey covering 2023 found that 63 percent of adults would have covered a hypothetical $400 emergency using cash, savings or a credit card paid off at the next statement.1 That leaves more than a third who would not have covered it that way.
How much is enough?
It depends on how steady your income is, and nobody can honestly hand you a universal number.
Two reference points help. In the Fed's 2023 report, 54 percent of adults said they had set aside money for three months of expenses, which was unchanged from 2022 and down from 59 percent in 2021.1 And Investor.gov notes that some people keep up to six months of income in savings so they know it will be there.3
For a founder, I lean toward the longer end of those ranges, because income that comes in waves needs a bigger cushion than a steady paycheck. That is my opinion, not a rule. A licensed professional who knows your situation can help you set a number you can defend.
Count in months, not in dollars
Dollar targets go stale. A target in months of expenses stays true as your lifestyle changes.
- Total your baseline. Add up what it costs to keep the household and the business alive in a lean month: housing, food, insurance, taxes, software and anything you can't pause.
- Pick a number of months. Choose a target for each buffer. Write it down.
- Multiply. Baseline times months is your goal for each account.
- Split the accounts. Business buffer in the business, personal fund in your name. Keep them separate on paper.
- Automate the build. Move a set amount on a set day, even a small one. Consistency beats intensity.
James Shack, a UK financial planner, gave the common range in a video posted on April 8, 2024: "an emergency fund of cash typically between 3 and 9 months worth of your core expenditure."5 That is a household figure, which is why this article asks founders to hold two buffers, one for the business and one for personal life. Treat any range as a starting point for your own number.
Where should the money sit?
Somewhere boring and reachable.
Investor.gov describes savings as money kept in places that allow access at any time, such as savings accounts, checking accounts and certificates of deposit, which may be insured by the FDIC or NCUA. It also names the tradeoff: that safety and availability come with a low interest rate.3 The FDIC says deposits are automatically insured to at least $250,000 at each FDIC-insured bank.4
This money's job is not to grow. Its job is to be there. The moment you ask it to chase returns, it stops being an emergency fund and starts being an investment, and investments can lose value exactly when you need to withdraw.
What if you are starting from zero?
Start smaller than your target and make it automatic.
A first goal of one month of baseline expenses is a real milestone, and every month after that is easier to defend. If the business buffer and the personal fund both feel out of reach, build the personal one first, because a household without cash makes every business decision worse. Then add to the business buffer on the same schedule.
Do not wait until you can fund it in a lump sum. Waiting is how most owners stay at zero.
What counts as an emergency, and how do you refill the fund?
Decide before the emergency, because you will make bad calls in the middle of one.
Write the rules down
An emergency is something that threatens income or safety and cannot wait: a lost client base, an unexpected medical cost, a critical repair. A sale on equipment is not an emergency. A cash fund that gets used for wants is just a checking account.
Refill it first
When you use the fund, refilling it is your next financial job, before extras. Put the refill on the same automatic schedule you used to build it.
Do not call a credit card your cushion
The Fed only counts a credit card as cash-equivalent if you pay it off at the next statement.1 A balance you carry is borrowing, which is a different tool with a different cost. I have never used a credit card for business needs, and that rule only works because of the cash behind it. That is my personal rule and it won't fit everyone, so talk it through with a professional.
For the planning side of cash inside the business, Q4 cash discipline walks through collected cash versus booked revenue. Then come back to the Investing and Retirement hub for what to do once your buffers are in place.
Educational content, not financial, tax, legal or investment advice. Talk to a licensed professional about your situation.
Keep building.Ekai
Questions people ask
How much should a founder keep in an emergency fund?
There is no single right number. In the Federal Reserve's 2023 survey, 54 percent of adults had set aside money for three months of expenses, and Investor.gov notes that some people keep up to six months of income in savings. Founders with variable income often lean toward the longer end, so it is worth discussing with a professional.
Should my business and personal emergency funds be separate?
Keeping them separate makes each one easier to measure. A business buffer covers a slow month for the company, and a personal fund covers your household if your income stops.
Where should an emergency fund be kept?
Investor.gov describes savings as money kept in places that allow access at any time, such as savings accounts, checking accounts and certificates of deposit, which may be insured by the FDIC or NCUA. The tradeoff is a low interest rate.
Is a credit card a substitute for an emergency fund?
The Federal Reserve counts a credit card as 'cash or its equivalent' only if the balance is paid off at the next statement. Carrying a balance is borrowing, not saving.
Sources
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