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Money & Credit

Economic Matters: Building Up Reserves for When Things Get Tough

If you focus on building up your reserves when business is good, you'll be prepared if you face an economic downturn or unexpected expenses.


You may have heard it said that you can’t create a rainy day fund once you’re soaking wet, or purchase an umbrella when you’re standing in a monsoon. If you focus on building up your reserves when business is good, you’ll be prepared if things change, whether facing an economic downturn or unexpected expenses.

3 Steps to Build up Your Reserves

Let’s take a look at three steps to saving money for your practice.

  1. Assess your expenses. What is your monthly budget of expenses? If you think of your reserves as your rainy day fund, you should have three months of expenses as a minimum in reserves, ideally six months.

    For example, if you pay $10,000 a month in expenses, you should have $30-$60,000 on hand, or in fairly liquid products to help you get to any extra funds, such as CDs, money market funds or other high yield savings. Some come with minimums or charge fees so you’ll want to talk to your financial advisor if you need advice on investing in a high yield savings account.
     
  2. Invest any extra income. If you receive extra funds, such as through selling equipment or receiving an income tax return, this is a great opportunity to build up reserves or pay down debt. If you think about it in terms of raises in salary, always try to live one promotion behind. Don’t tie your lifestyle increase to your new income; stay within your means. This will help build up your reserves as you invest the extra funds rather than spending them.
     
  3. Create a plan with a financial advisor. There is no right way to save money; the important thing is to talk to a financial advisor who can help you set up how you would like to allocate your funds.

It can be beneficial to have different savings accounts so you can assess your expenses and have separate funds for various needs. For example, you can create accounts for your general operating expenses, emergency funds, short-term more liquid funds, reserves, children—or even a future vacation.

If You Hit a Downturn: What to Do When Things Get Tough

No one thinks they will hit a downturn, but everyone needs to prepare for it. It’s imperative to have a plan should things get tough.

What should be a part of that plan? How can you build up your reserves again if you need to tap into them?

  1. Seek out your financial advisor for advice. An advisor will help you set—and meet—your goals to build yourself back up again.
  2. Have timelines: Get to X amount by Y date. Work with your advisor to set something realistic. Bullet out specific to-dos so you know how you will get there.
  3. Share your timelines with an accountability team—your advisor, professional colleagues, trusted family and friends.
  4. Look at your expenses. See where you can reduce where you are spending money. Slow, minor adjustments are easier than doing the major thing first, but sometimes you may need to.
  5. Make tough decisions. No one wants to buckle down, but when you’ve hit tough times, you have to. Work with your advisor to look at what you can defer. Be willing to reduce or eliminate some job functions if needed.

The important thing to do in a downturn or tough times is adjust where needed in order to get yourself back on track. Short term pain will lead to long term gain.

Building up reserves can be a fluid process as you prepare for and face the unexpected—that’s why you should have a plan, surround yourself with a supportive team and continue to invest so you are able to build yourself up again.


The information in the NCMIC Learning Center is offered solely for general information and educational purposes. It is not offered as, nor does it represent, legal or professional advice. Neither does this information constitute a guideline, practice parameter or standard of care. You should not act or rely upon this information without seeking the advice of an attorney familiar with the specific legal requirements of the state(s) in which you practice. If there is a discrepancy between the site and an insurance policy you have with NCMIC, the policy will prevail.