Does Your Employer Have An Emergency Fund?

by MB on April 22, 2008

If you are reading this blog, you are probably a financially savvy person.  Therefore, you already know the benefits of having an emergency fund set aside for unforeseen financial emergencies.

Many financial experts, including Dave Ramsey recommend that you set aside money in an easily accessible account of, at least, three to six months of expenses.  You should probably increase this amount if your income may be irregular (i.e.  You earn a large percentage of your income from commissions, or you, or your spouse, is self-employed).

That’s very sound advice, that I think everyone should follow.  But, if you have steady employment and believe you can set aside your emergency funds at a slow, but steady pace, there’s something else you need to consider:  Does your employer have an emergency fund?

The items I am going to list below will vary greatly by the size and industry of your employer, but I think they are all very important in making sure you have a strong personal finance plan. 

Here are some questions to consider:

  1. Is your employer highly leveraged?  By leveraged, we mean is the company dependent on borrowed funds to operate.  In an economic slowdown, like we are currently experiencing, banks tend to tighten their lending standards.  If you business is dependent on that source of cash to operate, it may have to drastically scale back, or cease, operations should the bank refuse to continue lending.
  2. Is your company in a "consumer discretionary" business?  For instance, during hard economic times, consumers will cut back on non-essential purchases such as dining out, or purchasing jewelry.
  3. Is your company facing up to International competition?  Virtually all manufacturing businesses in the US are facing tough competition from other parts of the world with lower labor costs and less regulation.  If you are in one of these industries, has your employer made the necessary adjustments needed to compete?  If not, they will eventually need to, or go out of business.
  4. Does a large percentage of your company’s profits come from a single customer?  If so, your company could find itself in dire financial straights should their number one customer cut back on its spending.

If you answered yes to any one of these questions, you need to find out – in a non-pushy way – whether management has set aside an "emergency fund" for the company.  You can consider a company to be similar to a person in that cash comes in, and goes out, every month.  You know that when times are good, it’s easy to spend the windfalls, but being prudent you set aside a portion of your income for the times aren’t so good.  Similarly, a prudent management would realize that good economic climates should be used to stockpile some capital in order to survive, or even thrive, in economic downturns.

If your company’s management is spending like business will never have bad periods, you should consider cutting back on non-essential spending in order to aggressively build your emergency fund.   As Warren Buffett says: "The time to build Arks is before it starts raining."

In summary, building an emergency fund is an essential piece of any smart personal finance plan.  If you are employed by a company, it is essential for to understand where it stands financially, in order for you to have confidence that you are prepared regardless of which way the economic winds are blowing.

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