Should a contractor have an emergency fund?

What is an emergency fund?

An emergency fund should be treated slightly differently to savings.

Savings are usually for specific things, such as a holiday or an expensive piece of furniture for example, and can potentially be dipped into when you’ve saved enough or you decide to spend the money on something else.

An emergency fund needs to be taken more seriously and shouldn’t be touched unless there’s an actual emergency and you have no other way of paying for it.

Should a contractor have an emergency fund?

Unfortunately, being self-employed means not knowing how much you’ll be taking home each month. This is the life of a contractor – some months you may find yourself working all hours, others you might not have anything on at all.

You could become seriously ill and unable to work for some time, or as we all witnessed first-hand, there could be an event such as a pandemic.

For many self-employed workers, the Covid-19 pandemic was catastrophic – businesses shut down and social distancing rules meant many were unable to work, and, to top it off, while the government furlough scheme was put in place for employed staff, financial support for self-employed workers was both delayed and, in some cases, sparse.

Everyone has bills to pay and if you find yourself in a position where you don’t have enough money to pay your basic monthly outcomes, then you’re going to wish you’d put money aside.

This is what you need an emergency fund for.

How much do I need to put into an emergency fund?

It’s usually recommended that the amount in an emergency fund should be able to see you through for three months if you had no income.

So, whatever your monthly bills are, times that by three and you have your figure.

Of course, not everyone will have that sum of money straight away, and the thought of accumulating that amount can be overwhelming, but building it up slowly is better than not putting anything away at all.

It’s worth looking into a good savings account with high interest rates to help top it up as you go along.

We hope you found this page helpful. Our team of experts are available to answer any questions you may have, so either contact us via online chat, call us on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.