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Ask Jesse: Should We Use Our Emergency Fund to Start a Business?

There have been a lot of questions coming in recently which I don’t feel qualified to answer as they involve topics which aren’t my areas of expertise. So I’m so excited that my husband, Jesse, has kindly offered to occasionally tackle these questions in my place on Tuesdays! -Crystal

We have been thinking of making the transition to my husband becoming self-employed for a while and are currently looking at all the ins and outs of that. We have no debt, a paid-for car and house, the capital needed to start up the business he is thinking of and an emergency fund which will last us 5-6 months of living expenses.

Part of me thinks that this choice to transition to self employment, isn’t really an emergency, and so we should build up another fund to allow for that transition to happen rather than using our emergency fund. On the other hand, that is going to take us literally years at our current savings rate and the potential to rebuild our emergency fund (or top up whatever we have used from it) when my husband is self-employed is greater.

What is your perspective? What should (and shouldn’t) emergency funds be used for? -Karen

Starting a business from the ground up is always an exciting and daunting prospect at the beginning. You have the thrill of realizing you can work for yourself and make your dream into a reality, accompanied by fear of the unknown and of providing for your family. How will it all work?

Well, I certainly don’t know all the answers, but what we have learned from our experience and observation, the key to starting any business is to start small. And grow when you can afford it.

Granted, this is not the make money hand-over-fist, get rich quick answer, but it is what will create staying power in this economy. We have started three businesses with $2000 each, with each succeeding business stretching that money farther each time.

Bear in mind, also, that, unless you have created a market for your business to succeed, you will probably not make a living wage after expenses and for a couple of years. This is why it is generally a better idea to start the business on the side while being employed full-time.

I know one man who did this for 10 years before jumping out on his own. He worked several nights a week and on Saturday mornings until the business was at a place where it could support his family and any new employees who needed to be hired in the transition. If your husband can at all squeeze even an hour at night or a few on the weekends and put that time into starting a business, you will be in a much better position administratively and financially to jump onto the self-employment band-wagon a few years (or months!) down the road.

As far as using your emergency fund is concerned, I would not touch it if I were in your shoes. The emergency fund is a necessary cornerstone of any financial plan, one that should not be lightly moved or reduced.

You are in a great position right now as you are debt free and have a steady, full-time income and a good cushion in savings. If you were to remove that cushion to finance the business and remove the steady income, you will have added stress and unnecessary risk that will potentially put your paid-for assets on the chopping block should the business not take off.

If you cannot run a small portion of the business on the side in the wee hours, I would suggest taking the next year to save up as much money as you can in addition to your emergency fund. If you have enough saved up so you do not have to touch that money, and can reasonably foresee being able to get the business off the ground (with a lot of sweat equity, mind you) and taking advantage of today’s technology and free internet tools, then come and jump on in. The water is nice!

Jesse Paine is a licensed attorney who owns his own law firm. He’s married to Crystal and is the numbers nerd of the team! If you have a question you’d like him to answer in a future column, you can submit it here.

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  • Lynzee says:

    Absolutely love how you answered that. My husbands friend did it the same way, worked full time and had his almost full time buisness on the side as well. He was after a few years able to leave his job and take on his buisness full charge.

  • Mary says:

    Great first post Jesse! I totally agree with this sage advice.

  • rob says:

    Great advice! BTW what are the three home businesses you have, I know Crystal talks about having home businesses but I don’t think she ever said what they are. Would be very interested in especially since the start up cost is so low! I am sure the blog is one??

  • k and b's mom says:

    Hmmm…interesting answer, but you should check to see if you can work at your own business on the side. For instance, if you wanted to start a hair salon and currently work at a salon, most salons do not let you compete with them. If you work at a law firm for salary, you cannot typically take your own clients on the side and so on. Bottom line – don’t get fired while trying to start your own business and end up with a disaster.

  • I love that answer! It sounds like a Dave Ramsey answer. 🙂

  • Vanessa says:

    I very much agree with Jesse’s advice about the emergency fund. My husband and I were feeling very confident about our finances…we have a mortgage and a small hospital bill we are paying monthly and a modest emergency fund.

    Everything was going well and we were feeling very confident financially until the transmission in one of our vehicles suddenly died and the repair job went into the thousands. We were so thankful that we had the money already set aside and didn’t have to take out a loan!

  • Danielle B says:

    Great answer! Love the husband-wife team thing going on here!!!

  • Bethany says:

    My husband is a successful small business owner and I think this is awesome advice! We first bought 1 mower with several thousand dollars we had left from moving into our house (got a bigger mortgage than we could have I guess). Then he worked at night and on weekends for 2 years before taking the leap into being a full time landscaper. Every year our business has grown and he is doing very well. Since I do the books I’m glad we took it slow – I have learned SO much. Since I have had the chance to learn as I go it’s been possible. If we had jumped right into it full time I think we’d be paying someone to do what I do for free! We did get a loan 2 years ago for a mower than was NEEDED but we have since decided we are never going to go in debt again!!

  • L says:

    Love, love, love how well you work together. When I get married I want to have that kind of relationship. 🙂

    Also, great advice money-wise. It’s great to hear from you, Jesse!!

  • Sara says:

    I loved hearing from Jesse. I’ve been wondering who the man behind Money Saving Mom is!

  • Trixie says:

    Great answer Jesse — I would really enjoy anything you can share in future columns about being self employed. My husband and I have 3 businesses between us and love learning from the experiences of others. I am still employed for someone else full time and it’s a really scary step to have both of us self employed. I’ve often wondered how you and Crystal do it. Anything you can share would be terrific!

    Thank you,

  • anonymous says:

    I would have to agree with what Jesse said. My husband went from being employed to owning his own business and, even though the customer base and everything is already built up, with the business expenses he makes less than he made as an employee and that is selling the same amount of the very same product as when he was not self-employed. If you have that emergency fund I wouldn’t touch it and I would make sure, if this is to be your only income, you have AT LEAST a year’s worth of living expenses saved up. This is a tough economy and it could still get worse.

  • BD says:

    I would have to agree with Jesse. My soon to be huby has his own bussiness that is doing very well! It takes a lot of hard work and funds to get something off the ground, there is also the risk of it could be a flop. My man worked two side jobs at first getting the funding while he started his business (he didn’t use any reserve money to start it).

  • MB says:

    Great advice Jesse. My husband owns a small-business that employs him full-time. However, it took many years before in the early years (this was before having children). Our advice is that typically, when starting a small business, count on at least 5-10 years before you can expect it to provide a full-time income consistently. Time is one of the biggest factors in the success of a small-business.

  • I think we have the next Dave Ramsey on our hands!

    And while we sort-of went against this advice (as I think will be made clear in a future guest post on MSM), we did so knowing we had a pretty good little cushion in place. I think that is key; you don’t want to blow your entire emergency fund and put your family at unnecessary financial risk.

  • As a self employed person I can say with all sincerity, this is NOT the time to go self employed if you currently have a job. I agree with all that said start the business on the side. Work both jobs, save your money and make darn sure that the new business can support you before quitting your job. Take EVERYTHING into consideration. Self employment tax, health insurance, no paid vacations and much more. Just be sure since you can’t go back. Self employment looks wonderful from the other side and for me it has been until the last few years. Now a regular paycheck sounds a whole lot more secure! And don’t touch your emergency money!!!

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