The importance of emergency funds for the self employed
We all know just how important emergency funds are to protect yourself against any future financial headwinds that life may throw at you. After spending most of my working life as a self employed person though, I honestly feel that emergency funds should be a huge consideration in future financial planning. Perhaps even more so than they are for employed people. I say this because of the increased risk that you’ll need to dip into it should you fall ill or if work should dry up for a while.
When you’re employed then your main focus for building an emergency fund would likely be for unexpected expenses or a job loss. If you fall ill for a short time, there is the safety net of sick pay from your employer for the short or even the long term. Even if the sick pay from your job isn’t as much as you would normally receive, at least you have something in the short term. When you are self employed though, an illness – whether short term or sustained – could quite literally wipe your income out overnight depending on how reliant your business is upon your ability to work. Then we have the point about work drying up. If you’re employed, at least there is a chance of some kind of redundancy pay should you lose your job. No such luck if your self employed income dries up.
Yes, there are insurance policies – accident, sickness and unemployment – that you can take out to pay a set monthly or one-off amount in the event of injury or illness, but these often require you to be ill or injured for a certain length of time before they will pay out and even when they do pay out, these policies have different criteria as to how much they will pay as a percentage of your income. The policy I had for example only paid out up to 50% of my monthly income and that was 50% of my net profit figure as a pose to my gross profit. Something to watch out for if you go for this type of insurance, you can contact an ASU advisor from this page.
The first time I had to make a claim on one of these policies this information all came as quite a shock to me, not so much the deferred payout period but more the 50% of your income part. I was only young at the time and I hadn’t really read the fine print. When I took out my ASU policy I had to state how much I wanted to be insured for. As the amount I wanted to be insured for increased, so did the premium payable. I assumed that I would automatically be insured for the amount stated on the policy but when it came to claiming it turned out that – as I’ve mentioned already – I was only entitled to 50% of my net profit, which hit me quite hard at the time as I hadn’t planned for it. It also meant that I’d been paying a higher premium for my insurance each month than I really needed to, I was over-insured.
So you can see how important it is to have a healthy emergency fund as a self employed person. I know some people who have fallen into the trap of not having an emergency fund because they are self employed and feel that they don’t have to worry about losing their job. With the sometimes unstable nature of self employment and the factors we’ve already mentioned though, I’d say that this is quite dangerous reasoning. An emergency fund is just as important, if not more important for the self employed. So if you don’t have one already, be sure to start building your emergency fund today.
Hope you have a great weekend everyone. I’d just like to give a quick shout out to the following carnivals for including Money Bulldog recently, it’s much appreciated:
Lifestyle Carnival 83rd Edition