Keep emergency fund in business account?
I work as a self employed IT contractor in the UK. I'm sole director of my limited company.
I always leave a few months' worth of running costs and salary in that account, so that if / when I don't have work for a period it's there to pay my salary. I want to have an emergency fund on top of that too. Given interest rates are virtually non-existent, is there any reason to withdraw emergency fund money from my business account? If I didn't have a business account I would use a separate bank account just as a psychological hack to keep it out of sight out of mind, but maybe my business account can serve that purpose. Interested to hear any thoughts on pros / cons of this or what others have done.
I have a brilliant accountant who does payroll, files tax returns etc but I like having a YNAB budget for my ltd company income & expenditure alongside the valuable service I get from my accountant.
A couple of thoughts come to mind. First, you should be clear about what is business and what is personal. I would not recommend keeping a personal emergency fund in a business. If you keep it in the business you can easily lose the sight of it because it is not in your personal budget. I do like the idea of keeping a few months of $ in the business to help fund the business in times when it may be necessary. It is always a balance for how much but if you have figured out what an average month of expenses is including salary, you can use that when you figure out how many months is reasonable.
Another reason not to keep the emergency fund in your business is that it becomes nebulous and the money doesn't have a job. One of the things I am realizing through reading other posts is that an Emergency Fund needs to be defined. Is it income replacement? maybe not as much if you have the ability to control it a bit through your company.
If I didn't have a business account I would use a separate bank account just as a psychological hack to keep it out of sight out of mind
It's an illusion of you think that money is any safer in a separate account, presumably off-budget. If you overspend, but still need all the Budgeted funds where they are currently budgeted, then hopefully you can guess what must take the hit.
Making informed decisions based on CATEGORY balances is what keeps your categories safe from being used for lower priority spending. The emergency fund should be just another category that slots somewhere into the priority hierarchy.
Thanks for the replies :)
Purpose of fund: personal, unforeseen emergency, distinct from the few months worth of £ kept for when there's a gap between contracts. So most likely it would be income replacement if A) no contract secured for a loooong time or B) my husband were to be made redundant or could not work for some other reason. Emergencies are unpredictable though. So it's just that - a fund to provide for when the unpredictable emergency happens.
Clarity on what's personal vs what's business: the money belongs to the business until I pay it to myself through payroll, at which point it becomes personal.
Separate accounts vs categories: totally agree on category balances. Like I said it's just a kind of psychological back up thing to use a separate account. Nick True does the same, he says in one of his videos.
If interest rates weren't so low, it would potentially be profitable to withdraw funds from business account to keep in a savings account. I guess that answers my question really - I may as well just use the business account. I fund the account for several months into the future which covers A) unexpected contract termination and B) not securing a new contract following expected termination. That's for running costs as well as salary. A separate category balance shows emergency fund above and beyond that.
Emergencies are unpredictable though
I disagree here, if I might be so bold. Emergencies are often quite predictable. In fact, you list one such possibility -- income replacement is one such emergency-made-non-emergency if you are planning for it (predicting). You can actually cover quite a lot of territory of potential emergencies by planning for them, making them less emergency-esque. But I think I'm mostly preaching to the choir here, as you're already planning for an emergency by having an emergency fund, making it a somewhat predictable expense. I'm just suggesting that you name the emergency fund something specific, or break it into specific categories and name them. Otherwise, "emergency" can seem as nebulous as "savings" and can get used up multiple times.
Also, we have an LLC and we keep an emergency fund in it -- we name it "one-month buffer". It is to be used only if we were unable to make income during a one-month period. It would cover businesses expenses, including payroll. We have another category in our personal budget for a one-month income replacement (again, named as such). We can be quite sue happy here in the US, and we had been told by an attorney that the $$ would be slightly safer against possible litigation if it were in our personal rather than business account. I don't know how true that might be but it made sense to us at the time, so we opted to keep income replacement in our personal budget/account.
the money belongs to the business until I pay it to myself
That means it's a business emergency fund, possibly to fund payroll. If interest rates were better, you should consider a higher rate (a.k.a., a savings) account for the business.
Something that I am planning to do this year is to start allocating funds into future months. I use to just move the money to an account called “cushion” in a Savings Goals category. It was my way of padding my account and not losing the dollars because they were accounted for. Since I have several annual expenses that arise during different months and there are enough funds to cover them, this year I want give those dollar more specific jobs. The money is just sitting in my business bank account so I can assign the dollars to the expenses that come up this year and then set goals to allocate funds each month to have them covered again by next year. Unless I am missing it, I think that this is a part of how we age our money.