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Making a Safety Net Account with 2 Months’ Worth of Expenses

bank structuring financial freedom financial management Sep 23, 2021

If you’re looking to structure your business bank accounts in order to manage your cash flow, then this is for you. 

Now, you know that you need to create multiple bank accounts. The first one is your Transactions Account, then your Tax Account, and the third one is your Safety Net Account.

What is a Safety Net Account?

A Safety Net Account is your safety net funds. It holds your cash in case you experience a cash shortage or have emergencies. In short, it is your emergency fund. This refers to money stashed away that you can use in times of financial distress. The purpose of your safety net account is to improve financial security by creating a safety net that you can use to meet unexpected expenses.

How much cash should I put in my Safety Net Account?

The best size for a safety net fund depends on a number of factors, including your company’s financial situation, expenses, and debts. The most ideal amount that you should put in your Safety Net Account is at least 2-month’s worth of your company’s operating expenses. However, due to the pandemic and the economic crisis, experts suggest up to one year’s worth of expenses. This is because financial hardships and distress are unpredictable. With an unstable economy, it is important to be prepared. After all, prevention is better than cure.

How do I build my Safety Net Account?

Starting early is the key to setting up a safety net account because it helps you build up a comfortable cushion when there are unexpected emergencies later on. What you can do is set aside a percentage of your profit each month. This is especially applicable if your company’s money cannot cover a year’s worth of expenses. You don’t have to start big. Start small, and little by little, you can then create your safety net account.

More importantly, don’t keep your safety net funds in a cash savings account that gives you little to no interest. Odds are you’ll lose money due to inflation, as well as lose out on the potential growth of your savings.

Why should I create a Safety Net Account?

As stated above, the purpose of your safety net account is to improve financial security by creating a safety net that you can use to meet unexpected expenses. That’s why your safety net account is very important. It shields you from the unexpected expenses that your company might have to spend on. 

Your safety net account also acts as your emergency fund, which allows you to ride out short-term financial instability with less risk of falling into debt, and without relying on high-interest loans.

Payoff

Having a safety net account will always pay off in the future because ultimately, your safety net account is also stored money, and can be considered savings. In the end, you will still benefit from it.

Want to manage your cash flow with your multiple bank accounts? Talk to us at Stream Accounting!

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